The Case of the Disputed Deere Analysis


The Case of the Disputed Deere
At a farm auction in Georgia, Dick Perez and Anna Lara bid against each other on a Deere II tractor, and Dick bought it for $65,000.  At a second auction the same day, Dick bought some equipment that he wanted to add to the tractor.  He again encountered Anna, and the two agreed that Anna would install the new equipment. Anna took the tractor to her place of business to work on it.
Later, Dick came to the shop and paid $6,000 for Anna to do the work.  Anna, in fact, was a dealer in farm machinery.  She regularly bought such equipment at auctions, then repaired and sold it. Dick testified though that Anna’s shop appeared to him to be a  repair shop and not a sales store.
Jorge’s Auction Services had done business with Anna in the past on a regular basis.  Jorge’s wanted to buy the Deere II tractor in Anna’s store for the next auction.  Anna executed a standard pre-auction document declaring that she owned the Deere II tractor. The state of Georgia does not require ownership papers for a tractor.  Jorge’s bought the Deere II tractor from Anna for $30,000.  When Dick learned of this, he demanded the tractor back, but Jorge’s refused.
Dick argued that Jorge’s never acquired good title to the Deere II tractor as Anna was never given title to the tractor.  Anna was entrusted with the tractor for the purpose of repairs. Jorge’s argued that they had frequently purchased equipment from Anna under the same terms and conditions as when they bought the tractor.  Therefore, they owned the tractor.
Who owns the Deere tractor at time of trial?
Why? What is the legal theory(ies) used to win the case?
Is there anything the loser in this case could have done differently at the time of the transactions that might have made them the winner?

29 Formation and Ownership of a Corporation LEARNING OUTCOMES Conflict Presented The five Learning Outcomes below are designed to help Edward and Fiona wish to form a corporation to market improve your understanding of apps designed to find goods and services for sports fans and the chapter. After reading this chapter, you should be able to: participants in unfamiliar locales. They know that all corporations 1 Summarize incorporation need to have an online presence to compete effectively in today’s business procedures. climate. The corporate name should therefore be one that can be used as the 2 Describe basic corporate business’s Internet domain name.

Edward and Fiona would like to do business powers. as Digital Synergy. An existing corporation already uses that name, however. 3 Explain the methods of Q Can Edward and Fiona use the same, or a similar, name for their corporation? corporate financing. 4 Define insider trading. 5 Explain how a shareholder’s A corporation is recognized by law as a “person”-an artificial, legal person- derivative suit can help a corporation. and enjoys many of the same rights under the law that natural persons enjoy.

For instance, corporations have the right to be heard in court, and they enjoy the same constitutional guarantees as U.S. citizens. corporation Corporations are generally formed under state law, which can vary from state to A business recognized by law as a single entity. state. When an individual purchases a share of stock in a corporation, corporation, that person becomes a shareholder and an owner of the corporation. A board of directors, stock elected by the shareholders, manages the business. Normally, however, day-to-day An equity or ownership operations are overseen by corporate officers.

Interest in a corporation. In this chapter, we examine how corporations are formed and financed. In addi- tion, we explore the ownership roles of a corporation’s shareholders. ♡ 29-1 Formation of a Corporation A corporation is a legal entity created and recognized by state law. Most often, corpo- rations can be formed online by businesspersons or by attorneys. When a businessper- son wants to form a new corporation, he or she must complete all of the appropriate state’s incorporation procedures and adopt the new corporation’s bylaws. 29-1a Incorporation Procedures Each state has its own incorporation procedures, which most often can be found on the secretary of state’s website. There are four basic steps, however, that all incorporators generally must follow. LEARNING OUTCOME 1 Summarize incorporation procedures

Step 1: Select a State of Incorporation For reasons of convenience and cost, businesses often select to incorporate in the state in which the corporation’s business will be primarily conducted. UNIT 6 Business Organizations 382

Step 2: Secure the Corporate Name Most state statutes require a search to confirm that the chosen corporate name is available. A new corporation’s name cannot be the same as, or deceptively similar to, the name of an existing corporation doing business within the state. All states require the corporation’s name to include the word Corporation (Corp.), Incorporated (Inc.), Company (Co.), or Limited (Ltd.). articles of incorporation The document filed with the appropriate governmental agency when a business is incorporated.

Step 3: Prepare the Articles of Incorporation The primary document needed to incorporate a business is the articles of incorporation. The articles must include the corporation’s name, the number of shares it is authorized to issue, its registered agent, and the names of its incorporators. Other information can be included as well, such as the names of the initial members of the board of directors and the corporation’s duration and purpose. In essence, the articles serve as a primary source of authority for the corporation’s future organization and business operations. Step 4: File the Articles of Incorporation Once the articles of incorporation have been prepared and signed properly, they are most often filed with the secretary of state’s office, along with the required filing fee. Once this occurs, the new corporation officially exists. bylaws A set of governing rules or regulations adopted by a corporation. 29-1b Adoption of the Bylaws After the incorporation procedures are completed, the first organizational meeting must be held.

Usually, the most important function of this meeting is the adoption of the bylaws. Bylaws are the corporation’s internal rules of management. If the articles of incorporation named the initial board of directors, then the directors, by majority vote, call the meeting to adopt the bylaws and complete the company’s organization. If the articles did not name the directors (as is typical), then the incorporators hold the meeting to elect the directors, adopt the bylaws, and complete the routine business of incorporation. 29-1c Defects in Corporate Formation If the procedures for incorporation are not followed precisely, others may be able to challenge the existence of the corporation. If a corporation seeks to enforce a contract against a third party, for instance, that party may attempt to avoid liability on the ground of a defect in the incorporation procedure. To prevent injustice, a court may attribute corporate status to an improperly formed corporation by holding it to be a de facto corporation or a corporation by estoppel.

Sometimes, a court will also “pierce the corporate veil” when a corpora- tion is used to shield persons who commit fraud or other illegal activities. of a De Facto Corporations In some states, courts recognize de facto (actual) corporate status. In these states, the corporation may be held to legally exist in spite defect in formation if the parties have made a good faith attempt to comply with the relevant state statute and have already undertaken to do business as a corporation. A corporation with de facto status cannot be challenged by third persons, only by the state. Corporation by Estoppel Under the doctrine of corporation by estoppel, if a business says it is a corporation and a third party deals with it as a corporation, neither party can question the validity of the business’s corporate status.

The estoppel doctrine most commonly applies when a third party contracts with a business that claims to be a corporation but has not filed articles of incorporation. It may also apply when a third party contracts with a person claiming to be an agent of a corporation that does not exist. 383 CHAPTER 29 Formation and Ownership of a Corporation pierce the corporate veil To disregard the corporate entity and hold the shareholders personally liable for a corporate obligation Piercing the Corporate Veil Occasionally, the owners of a corporation use the corporate entity to perpetrate a fraud, circumvent the law, or in some other way accomplish an illegitimate objective. In these situations, courts will ignore the corporate formation and structure and pierce the corporate veil to expose the shareholders to personal liability.

The following are some of the factors that cause the courts to pierce the corpo- rate veil: 1. A party is tricked or misled into dealing with the corporation rather than the individual. 2. The corporation is set up never to make a profit, or it is too “thinly” capitalized—that is, it has insufficient capital at the time of formation to meet its prospective debts or other liabilities. 3. Statutory corporate formalities, such as holding required corporation meetings, are not followed. 4. Personal and corporate interests are commingled (mixed together) to such an extent that the corporation has no separate identity. Highlighting the Point Farah operates her dog-training school at a facility she leases from Creed Properties, Inc. Jerry Creed is the company’s sole shareholder. Following a flood, Farah notifies Jerry that the property is not commercially usable. Jerry assures Farah that his insur- ance policy will cover the damage, but he does nothing to restore the property.

To save her business, Farah spends $40,000 to repair the damage. Meanwhile, Creed Properties receives $40,000 from its insurance company for the flood repair, but Jerry does not pay Farah back, Instead, he uses the money to pay his personal credit-card debts. Farah sues Jerry for reimbursement of the $40,000. Can a court pierce the corporate veil of Creed Properties to accomplish justice for Farah? Yes. Jerry is the sole shareholder of Creed Properties, which has no purpose other than to collect the rent on properties that he owns. In effect, Creed Properties and Jerry are one and the same. In addition, Jerry commingles his corporate and personal interests by using corporate funds to pay personal debts. 29-2 Corporate Classifications, Powers, and Liability When forming a corporation, owners must decide how to classify their new busi- ness entity. Once a corporation is created, the express and implied powers necessary to achieve its purpose also come into existence.

This section provides an overview of corporate classifications, powers, and liability. domestic corporation In a given state, a corporation that does business in and is organized under the laws of that state. 29-2a Corporate Classifications How corporations are classified may depend on their location, purpose, or owner- ship characteristics. A list of important corporate classifications follows: 1. Domestic, foreign, and alien corporations—Any corporation incorporated under a state’s laws and conducting business there is called a domestic corporation. A corporation formed in one state but doing business in another is referred to in that other state as a foreign corporation. A corporation formed in another country but doing business within the United States is called an alien corporation.

foreign corporation In a given state, a corporation that does business in the state but is not incorporated there. alien corporation A corporation formed in another country but doing business in the United States. 469 CHAPTER 36 Personal Property 36-2 Property Ownership- LEARNING OUTCOME 2 Rights of Possession Ownership of property-both real and personal property can be viewed as a bundle lease, or other means. The right of ownership in property is often referred to as title. of rights, including the right to possess the property and to dispose of it by sale, gift, Identify different types of property ownership. 36-2a Fee Simple fee simple A form of property ownership entitling the owner to the entire bundle of property rights. prop- A person who holds the entire bundle of rights to property is the owner in fee as he or she chooses during his or her lifetime. On death, the interest in the simple.

The owner in fee simple is entitled to use, possess, or dispose of the property EXAMPLE 36.2 Emily owns stock in ETC Mobile and Dickson Entertainment. Based on Emily’s ownership of ETC stock, she exercises her shareholder’s right to vote in an election for the directors. Later, she decides to sell half of her ETC shares and use the proceeds to increase the number of her shares in Dickson. On Emily’s death, her interest in the stock of the two companies will pass to her heirs. erty passes to his or her heirs. 36-2b Concurrent Ownership Persons who share ownership rights simultaneously in particular property are con- tenancy in common Co-ownership of property in common and joint tenancy . A Tess common type of concurrent ownership exists when owners hold community property. Tenancy in Common In a tenancy in common, each co-owner owns an undivided, fractional interest in the property.

The fractional interests do not need to be equal. undivided interest that passes When one tenant dies, that party’s interest passes to his or her heirs. to his or her heirs at death. Real Case Rex Woodward entered into a contract with Thomas DeVito-an original band member of the Four Seasons—to ghostwrite DeVito’s autobiography. Before it was published, Woodward died, and his interest in the copyright passed to his heir, Donna Corbello. Later, DeVito granted two former band mates the right to use the autobiography to develop a musical about the Four Seasons. The musical, titled Jersey Boys, was a success. Actors and others partly attributed their inspiration to DeVito’s autobiography.

Claim- ing to be a concurrent owner of the autobiography’s copyright, Corbello filed a suit in a federal district court against DeVito. Corbello wanted an accounting of the musical’s profits. The court issued a judgment in DeVito’s favor. Corbello appealed. As Woodward’s heir, was Corbello entitled to an accounting of the profit earned from the autobiography’s use in Jersey Boys? Yes. In Corbello v. DeVito, the U.S. Court of Appeals for the Ninth Circuit reversed the judgment of the lower court.

Woodward and DeVito had a tenancy in common in the autobiography’s copyright. As Woodward’s heir, Corbello was a concurrent owner of the work’s copyright and was entitled to an accounting of the profits from Jersey Boys. -777 F.3d 1058 (9th Cir.) CHAPTES 37 Echibit 37.1 Catda keep the car and place to be pay for the repairs Yes Edison has the right to be compensated for its work Phoebe continues to refuse to pays Edison can follow the states statutory process for foreclosing on the Nen and Benefit unt. Po SLIGHT selling the car to recover what is owed agreeg 37-2d The Right to Limit Liability of co the In an ordinary bailment, a bailee can limit his or her liability. To be effective, the limit must be called to the attention of the bailor.

EXAMPLE 376 A sign in Nikolai’s cellphone repair shop states that he is not responsible for any loss due to theft, fire, or vandalism.” Whether the sign is enough to constitute notice depends on the sign’s size, its location, and any other circumstances aftecting the likelihood that instance, refuse to enforce exculpatory clauses, which limit a party’s liability for Of course, a limit on liability cannot be against public policy. Courts may, for its own wrongful acts. EXAMPLE 37.7 Spencer’s Parking Garage (a bailee) disclaims liability for any damage to parked cars, regardless of the cause. Because Spencer’s has attempted to exclude liability for its own negligence, the clause will likely be customers will see it. – unenforceable. 37-3 The Duties of the Bailee The bailee has two basic responsibilities: (1) to take appropriate care of the prop- erty and (2) to surrender the property to the bailor or dispose of it in accordance with the bailor’s instructions at the end of the bailment. EARNING OUTCOME 3 entify a bailee’s basic ponsibilities. 37-3a The Duty of Care The bailee must exercise reasonable care in preserving the bailed property. What constitutes reasonable care in a bailment situation normally depends on the nature and circumstances of the bailment.

Generally speaking, there are three types of ordinary bailments, and each calls for a different level of care. 1. A bailment for the sole benefit of the bailor exists for the convenience and benefit of the bailor. Basically, the bailee is caring for the bailor’s property as a favor. In this type of bailment, the bailee need exercise only a slight degree of care and will be liable only if grossly negligent in caring for the property. . 2. A bailment for the sole benefit of the bailee exists for the convenience and benefit of the bailee. Typically, this sort of bailment arises when the bailor lends an article to the bailee. Because the bailee is borrowing the item for her or his own benefit, the bailee owes a duty to exercise the utmost care and will be liable for even slight negligence. 3. A bailment for the mutual benefit of the bailee and the bailor, the most common type of bailment, involves some form of compensation for storing items or holding property.

Here, the bailee must exercise ordinary care, which is the care that a reasonably careful person would use under the circumstances. If the bailee fails to exercise reasonable care, he or she will be liable for ordinary negligence. Exhibit 37.1 illustrates these concepts. 37-3b The Duty to Return Bailed Property At the end of the bailment, the bailee normally must hand over the original prop- erty to either the bailor or someone the bailor designates, or must otherwise dispose of it as directed. This is usually a contractual duty arising from the bailment 483 CHAPTER 37 Bitments Exhibit 37.1 Degree of Care Required of a Bailee Ballment for the Sole Benefit of the Bailee Bailment for the Sole Benefit of the Bailor Mutual-Benefit Bailment DEGREE OF CARE REASONABLE GREAT SLIGHT Srcement. Failure to give up possession at the time the bailment ends is a breach of contract and could result in the tort of conversion or an action based on conversion The wrongful taking or using of another’s personal property. the bailee’s negligence.

Highlighting the Point American Cranes, Inc., lends a crane to Builder Brothers, LLC, to encourage the con- tractor to buy it. When the parties cannot agree on a price, American Cranes asks for the crane to be returned. Before Builder Brothers returns the crane, however, it is damaged while in use at a construction site. Builder Brothers moves the crane to another location and bills American Cranes for transportation and storage costs. Is Builder Brothers liable for conversion? Yes. The transaction between American Cranes and Builder Brothers is a bailment. The contractor’s failure to return the crane after the owner demands its return is conversion. 37-3c Liability for Lost or Damaged Property If the bailed property has been lost or is returned damaged, a court will presume that the bailee was negligent.

The bailee’s obligation is excused, however, if the property was destroyed, lost, or stolen through no fault of the bailee (or claimed by a third party with a superior claim). Real Case Pavel and Aise Zissu lived in an apartment in Chicago, Illinois, owned by 1H2 Property Illinois, L.P. IH2 obtained an order from an Illinois state court allowing it to evict the tenants. IH2 entered the apartment and moved the Zissus’ personal property outside. While outside, the property was stolen, and the Zissus filed a suit in a federal district court against IH2. The tenants alleged that IH2’s taking possession of their property had been a bailment and that the company had been negligent in its care of the property. IH2 filed a motion to dismiss the suit. Could IH2 be held liable for the damage and loss of the Zissus’ personal property?

Yes. In Zissu v. IH2 Property Illinois, L.P., the court denied the motion to dismiss. A duty of care arises when a landlord chooses to act as a bailee with respect to a tenant’s property. IH2’s taking possession of the apartment’s contents–the Zissus’ personal property- was a bailment. The Zissus alleged sufficient facts to state a claim for negligence. -157 F.Supp.3d 797 (N.D.II.) UNIT e Property 484 37-4 Special Bailments In some special types of bailment transactions, the bailee’s duty of care is extraor- dinary, and the bailee’s liability for loss or damage to the property is absolute. companies also have special responsibilities but are liable only for loss or damage Such situations usually involve common carriers and hotel operators.

Warehouse LEARNING OUTCOME 4 Outline special types of bailments. resulting from negligence. 37-4a Common Carriers Common carriers provide transportation services to the general public. They are required to carry all passengers or freight as long as there is enough space, the fee is paid, and there are no reasonable grounds to refuse service. (In contrast, a private carrier provides service to a select clientele, not to every person or business.) per (bailor) and the carrier (bailee). With respect to the goods, the carrier is subject liable for any loss or damage unless it is caused by a natural disaster or war. Com- to a higher standard than just reasonable care. The carrier is ab…

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