Fall 2012 BAR ESSAY WRITING SYLLABUS _______________ Sec. 2, Tues.

s., 3pm 4:50pm, Room 202 Greg Hardmon, J.D., Instructor

Phone: 713.313.1394 Email: gchardmon@tmslaw.tsu.edu Office: Library Basement B30 (A) Hours: TWTh 12noon - 3pm and by appointment

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Ms. Bledsoe, Academic Support Assistant, 713.313.4270, mbledsoe@tmslaw.tsu.edu is located in the receptionists area, second floor.

I. GRADING The final letter grade is based on the following: 1. In-Class Essays 50% 2. Essay Rewrites 20% 3. Participation 4. Half Day Mock Exam 10% 20%

II. ATTENDANCE Class attendance and punctuality are essential to your performance in this class and as such are mandatory. (See Students Rules of Matriculation for details on absences and grade reductions.) Excessive absences (three or more) will result in a reduction of your final grade by one full letter grade. III. CLASS ETIQUETTE 1. 2. 3. 4. 5. In keeping with the professional school environment, students should remember to respect their fellow classmates and the Instructors at all times. Please refrain from excessive side conversations or other distracting conduct. Please remember to turn off all cell phones. Please refrain from coming to class late or departing during class instruction. It is disruptive, and disrespectful to other students. Please refrain from using personal computers in class for anything other than class materials. Students requesting accommodations may do so through the Office of Student Affairs. IV. CLASS PARTICIPATION Students should be routinely prepared to participate in the class discussion which will focus on learning outlines, outlining essays, debriefing assignments, and discussing individual answers. V. COURSE DESCRIPTION AND OBJECTIVES The main objective of this course is to prepare each student to pass the essay portion of the Texas bar exam. The course will address essay development and organization, sentence structure, topic 1

specific verbiage, and relevant rule templates. Specific emphasis will be given to the highly tested topic areas on the Texas bar exam. VI. THE TEXAS BAR - DAY 3
Taken in part from the Texas Board of Law Examiners, http://www.ble.state.tx.us/exam_info/tbe_instructions2.htm.

The Texas Essays include two essay questions on each of the following subjects: 1) Uniform Commercial Code; 2) business associations (including corporations, agency and partnerships); 3) family law (which includes community property); 4) wills, estates administration; 5) Texas real property (including Oil and Gas), and one essay question on each of the following subjects: 1) trust or guardianship; 2) consumer law. Essay questions are not identified by subject matter. While subjects covered by the MBE are not emphasized in the Texas Essays, essay subjects may involve some issues covered on the MBE. For example, the UCC essay questions may involve the chapter on sales that may be applicable in some questions concerning contracts on the MBE, and the family law (and real property) essay questions frequently involve issues concerning real property, also covered on the MBE. Students will be expected to recognize and discuss all issues raised by the facts, regardless of possible overlap among subjects. VII. STUDENT LEARNING OUTCOMES After taking this course, each student should be able to: 1. identify legal issues raised by factual situations similar to those Texas Bar Examiners employ to test entry level lawyer competence; 2. separate relevant facts from those which are not so as to competently resolve specific issues; 3 construct legal templates that represent the fundamental legal principles relevant to the probable solutions of the issues raised by the factual situations frequently posed on the Texas Bar Exam on the topics focused upon in this course;

4. present clear and concise well-organized compositions that reflect competent analyses that appropriately integrate legally significant facts and fundamental legal principles necessary to resolve those issues; and 5. understand the mechanics of competently written bar exam essay questions. VIII. AGENDA Class Overview: Generally, students will be given study outlines, rules and rule templates prior to class. This information may come in a variety of formats to accustom students to the different sources used for future bar study. Each student will also receive outlines on the highly tested areas on the bar and are required to develop a rule template (in students own words) in preparation for the next in-class exam. There will be a class review of students rules before class test. 2

 Class Instruction: Most sessions will consist of instruction on the topic of the day; reinforcement of the rules required for the in-class essay; essay writing; and debriefing. Grading: Essays will be graded and will be returned with feedback the following week. Rewrites: Students will complete essay re-writes based on class review and feedback. Students obtaining a 70% proficiency rating on the initial essay will automatically receive the rewrite points for that essay. Re-writes are due by Thursday at 5pm of the week each was discussed. Comprehensive Rules Template: Students MUST turn in a rule template of all issues and subissues tested and discussed in each class. Five bonus points will be awarded for COMPLETE rule templates. IX. SCHEDULE Week 1 Tues, Aug 21 Week 2 Tues, Aug 28 Week 3 Tues, Sept 4 Week 4 Tues, Sept 11 Week 5 Tues, Sept 18 Week 6 Tues, Sept 25 Week 7 Tues, Oct 2 Week 8 Tues, Oct 9 Week 9 Tues, Oct 16 Week 10 Tues, Oct 23 Week 11 Tues, Oct 30 Week 12 Tues, Nov 6 Week 13 Tues, Nov 13 Week 14 Tues, Nov 20 Week 15 Tues, Nov 27 Final 3.5 hrs TBA Introduction & objectives; overview of Texas essays; outlining/ coding & structure of an essay; explanation of rules & templates Class Exercise Child Custody p. 6-15 Family Law Exercise Community Property Homework Assignment Only. LABOR DAY NO CLASS Essay 1: Family Law Child Support Essay 2: Family Law Marriage Dissolution & Spousal Maintenance Essay 3: Wills and Trusts and Estates, Guardianship Wills & Estate Administration Essay 4: Wills, Trusts and Estates, Guardianship Guardianship Homework assignment TBA. MIDTERM WEEK NO CLASS Essay 5: Commercial Law Negotiable Instruments In Class Exercise TBA Essay 6: Commercial Law Negotiable Instruments Essay 7: Commercial Law Secured Transactions p. 49-58 Essay 8: Commercial Law Secured Transactions p. 49-58 Essay 9: Business Associations Partnership p. 59-63 Essay 10: Business Associations Corporations p. 63-67 Review for upcoming exam Three-hour simulation of Day 3 of the Texas bar. Students must be in their seats by 9am. No one admitted late. No excused absences. There will be six essays. p. 16-19 p. 20-22 p. 23-27 p. 28-32 p. 33-36

p. 37-48 p. 37-48

This syllabus is not a contract and is subject to change with or without notice.

GENERAL ESSAY WRITING RECOMMENDATIONS TEXAS BOARD OF LAW EXAMINERS

Carefully read the question and the call of the question (what the question asks you to do.) Pay attention to the facts presented without assuming additional facts. Include more than a mere conclusion when asked to explain the answer fully. Respond to the call of the question (what the question asks you to do) and stay on track. Practice writing in complete sentences and composing paragraphs. Organize your responses, and answer subparts, if any, in the order asked. Strive for clarity and good communication in writing. Avoid lengthy or unnecessary discussion of general or extraneous matters.

Also, you are encouraged to read and be familiar with the Texas statutes, code provisions or rules pertaining to the Texas essay and procedure and evidence exam subjects. This is recommended regardless whether you have access to commercially-produced outlines or review materials. http://www.ble.state.tx.us/exam_info/selected_answers/main_selected_answers.htm

CRAC FRAMEWORK USED FOR ANSWERING BAR ESSAY QUESTIONS CONCLUSION. Answer the call of the question directly and succinctly when stating the conclusion, see below. Note the stylistic difference (comma use and period use). Examples: Yes, IMA Thief should be charged because . . . . No. IMA Thief should not be charged because . . . . RULE. State your authority and the specific rule that is triggered by the facts, see below. When certain about the authority, cite it specifically - remember to insert a comma after you state it. Only use Under Texas Law, when in doubt about the correct authority. Examples: Under the Texas Property Code (TPC), . . . . Under the Texas Family Code (TFC), . . . . Under the Uniform Commercial Code (UCC), . . . . Under the Texas Business and Organization Code (TBOC), . . . . Under the Railroad Commission Rules, . . . . ANALYSIS. Systematically state each relevant fact and explain how it affects each specific element of the rule and explain if that element was fulfilled or not. Example: Here even though Clark and Lois rented a hotel for the night, they intended to return to the house and live there as soon as the electricity was turned on showing they had the requisite intent need to establish the house as their current residence as defined by element three of the statute. CONCLUSION. Restate briefly your conclusion and remember to make sure that your conclusion matches the first one. Examples: Therefore, because element three cannot be fulfilled, IMA thief is not guilty of burglary. Therefore, larceny charges should be brought against IMA thief. Some questions do not call for a complete CRAC framework. In these instances create a structure that answers the call of the question, and use as much of the CRAC as possible remember Lawyers always gives rules before explaining the why. Example: What are the advantages of an LLC vs. LP or LLP? The advantages of forming an LLC vs. PLLC are . . . . The disadvantages forming of an LLC vs. PLLC are . . .

Taken in part from BarBri Bar Review 2011

FAMILY LAW TEXAS CUSTODY MANAGING AND POSSESSORY CONSERVATORS In any divorce action involving a couple with minor children, custody and support of the children and visitation rights of the noncustodial parent are paramount issues. The Texas rules governing these issues are fairly straightforward, although the terminology employed is somewhat unusual. When the Family Code was codified, the terms "custody," "custodian," and "visitation rights" were supplanted with new terminology on the theory that this would encourage courts and lawyers to disregard prior case law concerning these issues. Thus, the parent who is awarded custody of the child is designated the sole managing conservator ("MC"). The parent who is given visitation rights is called the possessory conservator. If the parents are awarded joint custody, they are called joint managing conservators ("JMCs"). 1. Rights, Duties, and Powers of Conservator. If both parents are appointed as conservator of the child (i.e., one parent is appointed managing conservator and the other is appointed possessory conservator, or both parents are appointed joint managing conservators), the court must specify which rights, duties, and powers are to be retained by both parents and which are to be exercised exclusively by one parent. In all cases, each parent retains the right to receive information from the other parent concerning the child's health, education, and welfare and, to the extent possible, the right to confer with the other parent before making a decision as to these matters. Likewise, each parent has a duty to inform the other parent in a timely manner of significant information concerning the child's health, education, and welfare. Except as limited by court order on a finding that it would not be in the child's best interest, a parent appointed as conservator has the following rights, duties, and powers: a. Rights of Conservator Parent. Each parent appointed as conservator has the right of access to the child's medical, dental, psychological, and educational records (including the right to consult with the child's physician, dentist, or psychologist), the right to consult with school officials and to attend school activities, the right to be designated as the person to be notified in case of emergency, and the right to manage the child's estate to the extent that the estate was created by that parent or his family. b. Rights and Duties Exclusive to Sole Managing Conservator Parent. A parent appointed as sole managing conservator has the following exclusive rights and duties: the right to designate the child's primary residence; the right to the child's services and earnings; the right to make decisions concerning the child's education; the right to consent to marriage or enlistment in the armed forces; the right to consent to medical, dental, and surgical treatment involving invasive procedures, and psychiatric and psychological treatment; the right to receive child support payments and disburse them for the child's benefit; and, except where a guardian ad litem or attorney ad litem has been appointed, the right to represent the child in legal actions and to make other legal decisions concerning the child. c. Rights and Duties During Period Conservator Parent Has Possession of Child. During the period that the parent has possession of the child, a parent appointed as conservator has: the 6

right to direct the child's moral and religious training; the duty of care, control, and reasonable discipline; the duty to support the child; and the duty to provide medical and dental care not involving an invasive procedure. d. Duty to Provide Information of Relationship with Sex Offender . If a conservator resides with for at least 30 days, marries, or intends to marry a person who she knows is a registered sex offender or is currently charged with an offense that, on conviction, would require registration, she must inform the other conservator. e. Rights, Duties, and Powers of Managing Conservator Who Is Not Child's Parent. A managing conservator who is not the child's parent has all of the above rights, duties, and powers except the duty to manage the child's estate and the duty to provide medical care. At first blush, this latter provision seems against the child's interest; shouldn't the managing conservator see to it that the child's medical needs are met? However, the purpose of this provision is to ensure that if the TDFPS is appointed managing conservator, the state does not have the financial duty to provide medical care, a cost currently borne by county government. 2. Sole Managing Conservator. Section 153.005 authorizes the appointment of "a parent, a competent adult, an authorized agency, or a licensed child-placing agency" as MC in any SAPCR. However, the vast majority of MC appointments are made in a SAPCR attendant to a divorce, and one of the divorcing parents is appointed MC. a. Best Interest Test. The best interest of the child is the primary consideration of the court in determining questions of managing conservatorship, possession, and support of and access to the child. The statute gives little further guidance, leaving it to the courts to develop the factors to be considered. Among the factors: the desires of the child; the present and future emotional and physical needs of the child; the emotional and physical dangers to the child now and in the future; the parental abilities of the person seeking custody; the programs available to assist in promoting the child's best interest; the plans the person has for the child; the stability of the home environment; and the acts or omissions of the person that may indicate that the existing parent-child relationship is not an appropriate one. b. Strong Preference for Appointment of Parent. Absent special circumstances, the court must appoint a parent as MC (or both parents as JMCs). "The presumption that the best interest of a child is served by awarding custody to a natural parent is deeply imbedded in Texas law." [Lewelling v. Lewelling, 796 S.W.2d 164 (Tex. 1990)] However, this rule does not prevent the appointment of a nonparent as joint managing conservator with a natural parent. For example, the fact that a grandparent shares custody with a parent does not detract from the fact that one of the child's parents does have custody. 1) Exception-Appointment Would Impair Child's Health or Emotional Development. A parent need not be appointed MC if the court finds that such an appointment would substantially impair the child's physical health or emotional development. 2) Exception-Parent Voluntarily Relinquishes Possession and Control of Child for One Year. A nonparent may be appointed MC if the parents (or the only parent) have 7

voluntarily relinquished possession and control of the child to that person for a period of one year or more, a portion of which period was within 90 days preceding commencement of the action to be appointed Me. c. Which Parent Appointed-Other Factors to Be Considered 1) Neither Parent to Be Favored on Account of Gender or Marital Status. In determining which parent to appoint as sole MC, the court considers the qualifications of the respective parents without regard to the sex or marital status of the parent. [ 153.003] While the statute directs the courts to be even-handed in custody determinations, the reality is that the mother is designated as sole MC in the great majority of cases, especially when small children are involved. 2) Evidence of Past Domestic Violence. In determining which parent to appoint MC, the court may consider evidence of the intentional use of force by a parent against his spouse, the child's other parent, or any child during the preceding two-year period. The court may not appoint JMCs if there is evidence of a history or pattern of past or present child neglect or physical or sexual abuse by one parent against the other parent, a spouse, or a child. It is a rebuttable presumption that the appointment of a parent as sole MC of a child or as conservator with exclusive right to determine primary residence of a child is not in the child's best interest if there is a history or pattern of such abuse. 3) Evidence of False Report of Child Abuse. Evidence that one party to a SAPCR made a knowingly false report alleging child abuse by the other party is admissible in an action regarding the conservatorship of a child. d. Agreement of Parties Regarding Appointment of MC. If (as occurs in a majority of divorce suits) the parties enter into a written agreed parenting plan encompassing custody and support agreement, the court must appoint the MC agreed to by the parties, unless the court finds that such appointment is not in the child's best interest. (Instances in which the court has vetoed the parties' negotiated agreement are rare.) e. Strong Preference Against Split Custody. When a couple has two or more children, conservatorship of the children should not be divided (i.e., mother named sole MC of one or more children, father named sole MC of the other children) unless there are clear and compelling reasons for the split custody arrangement. "Where it is possible for all the children to be kept together and reared as a family of brothers and sisters, it is not in the best interest of the children that custody of one or more be awarded to one parent, and the balance to the other." 1) But Paramount Test Is Best Interest Test. The paramount test, however, is the best interest test, and the "no split custody" rule "yields to that custody, which in the sound discretion of the trial court, is in the best interest of [each] child." 2) Exception-Children from Another Marriage. The rule requiring clear and compelling reasons for split custody applies only if the children are of the same 8

marriage. If some of the children are from a prior marriage, the best interest of each child is the only governing test. f. Interview of Child in Chambers. In a nonjury trial, the court on its own motion may interview the child in chambers to ascertain the child's wishes as to conservatorship or as to the person who shall have the exclusive right to determine the child's primary residence. On the motion of either party, the court must interview a child age 12 or over, and may interview a child under age 12. The results of the interview are not binding on the court. But note: In a jury trial, the court may not interview the child in chambers. g. Death of Managing Conservator-Surviving Parent Entitled to Possession of Child The death of an MC terminates the court's conservatorship order, but does not terminate the SAPCR court's continuing exclusive jurisdiction over the child. The surviving parent has a superior right to possession of the child in the absence of evidence of imminent danger that would outweigh that right. 3. Joint Managing Conservators. "Joint managing conservatorship" means the sharing of the rights, privileges, duties, and powers of a parent by two parties, ordinarily (but not necessarily) the child's parents, even if the exclusive power to make certain decisions may be given to one party. Unless there is a history of family violence, there is a rebuttable presumption that appointment of the parents as joint managing conservators is in the child's best interest. a. Does Not Require Equal Possession. Joint managing conservatorship does not require the award of equal or nearly equal periods of physical possession of, or access to, the child to each JMC. Ordinarily, the best interest of the child will require the court to designate the home of one of the parties as the child's primary residence. b. When Established by Parties' Agreement. If the parties seek to establish a joint managing conservatorship by agreement, the court shall appoint them as JMCs if it finds that the agreement was voluntarily entered into, is in the child's best interest, and covers certain basic issues. 1) Designation of Child's Primary Residence. An agreement for JMCs need not designate the conservator who has the exclusive right to designate the child's primary residence. The agreement need only specify the geographic area in which the child's primary residence will be. 2) Avoid Disruption of Child's Schooling and Daily Routine. The agreement must include provisions designed to minimize disruption of the child's schooling, daily routine, and association with friends. 3) Determination of Parents' Rights and Duties. The agreement must set out the rights and duties of each party as to the child's care, support, and education, and all of the other rights, privileges, duties, and powers of a parent. c. When Established by Court. If the parties have not agreed to a joint managing conservatorship, the court may appoint them JMCs if the appointment is in the best interest of the child. The decree appointing JMCs must set out the same details governing the relationship 9

as are required when the parties agree to a joint managing conservatorship. Additionally, the decree must specify the rights, privileges, duties, and powers that are to be exercised exclusively by one parent and those that are to be exercised jointly. In determining whether the appointment of JMCs is in the child's best interest, the following factors are to be considered: 1) Physical and Emotional Needs of the Child. The court examines whether the physical, psychological, or emotional needs of the child will benefit from the appointment of JMCs. 2) Ability to Reach Shared Decisions. The ability of the parties to reach shared decisions in the child's best interest is another factor to be considered. 3) Positive Relationship Between the Parties. Whether each party can encourage a positive relationship between the child and the other party, and whether both parents participated in child rearing before the suit was filed, are also taken into account. 4) Geographic Proximity of Parties. The geographic proximity of the homes of the parties is a factor. The court order designating a joint conservatorship must either establish the geographic area in which the conservator shall maintain the child's primary residence or specify that the conservator may determine the child's primary residence without regard to geographic location. 5) Preference of Child Over Age Twelve. If the child is 12 years of age or older, the court may consider the child's preference as to whom should have the right to designate the child's primary residence. d. When Court Cannot Appoint Joint Managing Conservators-Abuse. The court cannot appoint JMCs if there is evidence of a history or pattern of child neglect or physical or sexual abuse directed against the other parent, a spouse, or a child. e. Duty of Support Not Affected. The appointment of JMCs does not impair or limit the court's authority to order child support, including payments by one JMC to the other. If the split of possession is roughly equal and the parties are relatively equal in their financial circumstances, an order of child support may not be warranted. If, on the other hand, a greater time of possession is awarded to one party and the other party has greater financial resources, the level of support could be as high as if a sole managing conservatorship had been ordered. 4. When Grandparent or Other Relative May Be Appointed Managing Conservator. A grandparent or other relative may bring a SAPCR seeking appointment as managing conservator if one of the following circumstances is established: (i) The child's present circumstances would significantly impair the child's physical health or emotional development, (ii) Both parents, the surviving parent, or the MC consents, or (iii) Both parents are deceased. 5. Possessory Conservator. In nearly all cases, the functional definition of possessory conservator is "noncustodial parent with visitation rights." The court may set the time and

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conditions for possession of or access to the child by the possessory conservator and others, and may prescribe any additional rights and duties of the possessory conservator. a. Standard Possession Order. To eliminate widespread variations in possessory conservator orders from county to county, the legislature has mandated a one-size-fits-all "standard possession order," which must be incorporated into the decree unless: (i) the parties mutually agree to different provisions, or (ii) the court determines that the standard order would not be in the best interest of the child. 1) Standard Provisions. Thus, the Standard Possession Order is a default order that is entered if the parties cannot work out their own mutually satisfactory agreement for possession of and access to the child. In many cases, the parties do agree on a visitation schedule. If, however, the parties do not reach such an agreement, and in the absence of a finding that the Standard Order is not in the best interest of the child, failure to issue the order is an abuse of discretion. For a child age three or older, if the parents live within 100 miles of each other, the order gives possession to the noncustodial parent: (i) from 6 p.m. Friday to 6 p.m. Sunday the first, third, and fifth weekends each month; (ii) from 6 p.m. to 8 p.m. every Thursday during the school year; and (iii) 30 days in the summer. More flexible rules apply if the child is under age three; different rules apply if the parents live more than 100 miles from each other. 2) Rebuttable Presumption. The statutory guidelines create a rebuttable presumption that the visitation prescribed is the minimum possession that would be in the child's best interest. However, a court is not forced to give every possessory conservator the same visitation. A court may consider the circumstances of both the child and the parents when determining a visitation schedule that is in the child's best interest. b. When Parent Can Be Denied Access to Child. The court may not allow a parent to have access to the child if a history or pattern of family violence during the two years preceding the filing of the suit is shown by a preponderance of the evidence, unless the court (i) finds that awarding access will not endanger the child's physical health or emotional welfare and is in the child's best interest, and (ii) enters a possession order that is designed to protect the safety and well-being of the child and any person who has been a victim of family violence. c. Possession of or Access to Child Cannot Be Conditioned on Payment of Child Support. A court cannot enter an order that conditions the right to possession of, or access to, a child on the payment of child support. [153.001(b)] This provision reflects that support and custody are independent rights and duties. d. Make-Up Visitation to Compensate for Denial of Possession. The court may order additional periods of possession or access to a child to compensate for the denial of courtordered possession or access. The possessory conservator is entitled to determine the time of the additional possession or access, as long as it is of the same type and duration as the possession or access that was denied.

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6. Electronic Communication with Child by Conservator. If a conservator requests the court to order periods of electronic communication with a child, the court may award the conservator reasonable periods of electronic communication with the child (via telephone, email, instant messaging, videoconferencing, or webcam) to supplement the conservator's period of possession of the child. In determining whether to award electronic communication, the court must consider (i) whether it is in the child's best interest, (ii) whether equipment necessary to facilitate the electronic communication is reasonably available to all parties subject to the order, and (iii) any other factor the court considers appropriate. a. No Effect on Child Support or Access to Child. The court may not consider the availability of electronic communication as a factor in determining the amount of child support, and the availability of electronic communication is not intended as a substitute for physical possession of or access to the child. 7. Each Conservator Must Give Sixty Days' Notice of Change of Address. To prevent the frustration of visitation rights by a "surprise move," an MC or possessory conservator must give the other party written notice (in person or by registered or certified mail) of an intent to move at least 60 days before the move. A copy of the notice also must be delivered to the SAPCR court. The new address and phone number must be provided. (The court may waive the notice requirement if such notice may expose the child or the conservator to abuse or injury.) The statute does not provide a penalty for failure to give notice, but such a failure might support a motion to modify the custody order. a. Can Children Be Moved to Another State or Country? Whether the MC can move with the children to another state or a foreign country is a fact-specific issue, and each relocation case must be evaluated on its own unique facts. Example: In a nonjury trial, factors in support of the MC's desire to move to Hawaii included travel and leisure opportunities, the desire of the older son, stability of the post-divorce family unit, and financial stability -- MC's second husband, with whom she had two children, had been offered a job in Hawaii that provided a substantial increase in salary. However, the trial court did not abuse its discretion in modifying the custody order to restrict the children's primary residence to Fort Bend County and contiguous counties. The father met his burden of establishing that the domicile restriction was in the best interests of the children for reasons such as enabling the father to maintain frequent and continuing contact with the children, promoting relationships with grandparents and relatives, providing a stable environment after nine residence changes in eight years, and fostering the younger child's emotional and mental wellbeing. Compare: In Len: v. Lenr, mother was allowed to move to Germany with the children. However, Len: involved a jury verdict. In a jury trial, the standard for review of the jury verdict is the no evidence rule. In a nonjury trial, the standard on review is whether the trial court decision was an abuse of discretion. 8. Modification of Order Establishing Conservatorship or Possession and Access. The following rules govern the modification of all three types of conservatorship.

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a. Jurisdiction. A court order appointing a conservator can be modified only by filing a motion in the court of continuing jurisdiction under the SAPCR. If the child has moved to a new county and has resided there for at least six months, upon motion by either party, transfer of the SAPCR to the new county is mandatory. b. Grounds for Modification. The court can modify an order that provides for the appointment of a conservator of a child, the terms and conditions of a conservatorship, or the terms governing possession of or access to a child, if modification would be (i) in the best interest of the child, and (ii) one of the following three tests is met: 1) Changed Circumstances. The circumstances of the child, a conservator, or other party affected by the order have materially and substantially changed since the earlier of the date the order was rendered or the date that a settlement agreement was signed. The courts are divided on whether remarriage of one of the parties qualifies as a material change in circumstances. [see In re S.R.O., 143 S.W.3d 237 (Tex. App. 2004)-remarriage is a sufficient change in circumstances, but movant must also establish that requested modification is in child's best interest; but see In re P.M.B., 2 S.W.3d 618 (Tex. App. 1999)-remarriage not a sufficient material change to warrant modification]; 2) Child Age Twelve or Older Requests Change. The child is at least 12 years old and has expressed in chambers to the court the name of the person whom the child prefers to have the exclusive right to determine the child's primary residence; or 3) Relinquishment of Possession of Child for at Least Six Months The conservator who has the right to establish the child's primary residence has voluntarily relinquished the primary care and possession of the child for at least six months. This section does not apply to one on military duty who relinquishes. c. Modification of Right to Determine Primary Residence Within One Year of Order to Be Modified. To discourage repeated litigation over the child's primary residence, if a motion to modify designation of the person having the right to designate the child's primary residence is filed within one year of the order to be modified, the person filing the motion must execute and attach an affidavit alleging one of the following: (i) The child's present environment may endanger the child's physical health or significantly impair the child's emotional development; (ii) The person who has the right to designate the child's primary residence consents to the modification and modification is in the child's best interest; or (iii) The person who has the right to designate the child's primary residence has voluntarily relinquished the primary care and possession of the child for at least six months and modification is in the child's best interest. This section does not apply to one on military duty who relinquishes. d. Modification of Order on Conviction for Child Abuse or Family Violence. The conviction or an order of deferred adjudication of a conservator for the offense of abuse of a child or for an offense involving family violence is a material and substantial change of circumstances that justifies modification of an order relating to the appointment of a conservator, the terms and conditions of a conservatorship, or possession of or access to a child. 13

e. Limitation on Temporary Orders. While a suit for modification is pending, the court may not enter a temporary order changing the designation of the person who has the right to determine the child's primary residence unless one of the following three tests is met: (i) A temporary order is necessary because the child's present environment may endanger the child's physical health or significantly impair the child's emotional development; (ii) The person designated in the order to be modified has voluntarily relinquished the primary care and possession of the child for at least six months and modification is in the child's best interest; or (iii) The child is at least 12 years old and has filed with the court the name of the person whom he wants to have the exclusive right to designate his primary residence and a temporary order designating that person is in the child's best interest. f. Increased Expenses Because of Change of Residence. If a change of residence results in increased expenses for a party having possession of or access to a child, the court may allocate the increased expenses on a fair and equitable basis, taking into account the cause of the increased expenses and the best interest of the child. The payment of increased expenses by the party whose residence is changed is rebuttably presumed to be in the child's best interest. 9. Military Duty and Conservatorship. If a conservator is ordered to military duty that involves moving a substantial distance from the conservator's residence, so as to materially affect the conservator's ability to exercise his rights and duties in relation to a child, either conservator may file for a temporary order regarding child support or possession of or access to the child. The temporary order may grant rights to and impose duties on a designated person during the conservator's military duty, except the court may not require the designated person to pay child support. a. Appointing Designated Person with Exclusive Right to Designate Primary Residence of Child. If the conservator ordered to military duty has the exclusive right to designate the primary residence of the child, a designated person may be appointed to temporarily exercise this right in the following order of preference: (i) the conservator who does not have the exclusive right to designate the primary residence of the child; (ii) if appointing the conservator in (i) is not the child's best interest, a designated person chosen by the conservator on military duty; or (iii) if appointing the persons in (i) and (ii) is not in the child's best interest, another person chosen by the court. b. Appointing Designated Person to Exercise Visitation. If the conservator ordered to military duty has the exclusive right to designate the primary residence of the child and the conservator without that right is appointed to temporarily exercise that right under section 153.703, the court may award visitation with the child to a designated person chosen by the conservator on military duty. The periods of visitation are the same as the visitation to which the conservator without the exclusive right to designate the primary residence of the child was entitled under the court order in effect before the temporary order was rendered. If the conservator on military duty does not have the exclusive right to designate the primary residence of the child, the court may award visitation with the child to a designated person chosen by the conservator on military duty if the visitation is in the best interest of the child.

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c. Enforcement. These temporary orders may be enforced by or against the designated person to the same extent that an order would be enforceable against the conservator on military duty. d. Additional Periods of Possession or Access. Within 90 days of the date a conservator without the exclusive right to designate the primary residence of the child concludes military duty, the conservator may petition the court to compute the periods of possession of or access to the child to which the conservator would have otherwise been entitled during the conservator's military duty and request additional periods of possession of or access to the child to compensate for the "lost" periods.

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FAMILY LAW - TEXAS I. DIVISION OF MARITAL PROPERTY UPON DIVORCE A. COURT-ORDERED ALIMONY NOT VALID IN TEXAS Court Decree Imposing Alimony Obligation Is Void "The statutes and public policy of this state do not sanction alimony for the wife after a judgment of divorce has been entered." [Francis v. Francis, 412 S.W.2d (Tex. 1976)] Except for limited spousal maintenance (discussed below), Texas is the only state in the country that does not permit the award of alimony. B. LIMITED SPOUSAL MAINTENANCE In several legislative sessions, attempts have been made to overturn the no-alimony rule. The proponents of change met with partial success in 1995, with the enactment of legislation authorizing spousal .maintenance (alimony by another name ) in very limited circumstances, Spousal maintenance is intended "as a temporary rehabilitative measure for a spouse whose ability for self-support is lacking or has deteriorated through the passage of time while the spouse was engaged in homemaking activities ... Spousal support should be terminated in the shortest reasonable time ... in which the former spouse is able to be employed or to acquire the necessary skills to become self-supporting." [H.B. 1863, 1 0.01 (741h Tex. Legis. 1995) (uncodified purpose clause)] 1. Prerequisites for Receiving Spousal Maintenance The court may order periodic payment from the future income of one spouse for the support of the other spouse only if: (i) The duration of the marriage was 10 years or longer (ii) The spouse seeking maintenance lacks sufficient financial resources (including property awarded to the spouse in the divorce proceeding) to provide for her minimum reasonable needs, and (iii) The spouse seeking maintenance is (a) unable to support herself because of an incapacitating disability, or (b) the custodian of a child from the marriage, of any age, who requires substantial care because of a disability, making it necessary that the spouse not be employed outside the home, or (iv). Lacks earning ability adequate to provide support for her minimum reasonable needs. [Tex. Fam. Code 8.051 (2); see Marriage of Hale, 975 S. W. 2d 694 (Tex. App. 1999) fact that the wife (who was pursuing a G.E.D.) had a job that paid the federal minimum wage did not preclude an award of spousal maintenance]. a. Exception to Ten-Year Rule: Other Spouse Convicted of Family Violence Within Past Two Years. The court may order spousal maintenance even though the parties were not married for 10 years, if the spouse from whom maintenance is sought was convicted of (or received deferred adjudication for) family violence either within two years before the divorce or annulment action was filed or during the pendency of the action. [Tex. Fam. Code 8.051(1)) b. Disability After Divorce Not Grounds for Maintenance. To be eligible for an award of maintenance by reason of disability, the disability must have existed before the decree of 16

divorce or annulment was entered. A physical or mental disability that occurs after the divorce or annulment is not grounds for the institution of spousal maintenance. [Tex. Fam. Code 8.057(d)]. 2. Spousal Maintenance Cannot Exceed Lesser of $2,500 Per Month or Twenty Percent of Monthly Earnings The maintenance award is in the amount needed to provide for the minimum reasonable needs of the spouse, taking into account property received in the divorce proceeding and any separate property owned by the spouse, but not counting Veterans Administration disability compensation, Social Security benefits, or worker's compensation benefits. However, the maintenance award cannot exceed the lesser of (i) $2,500 per month or (ii) 20 % of the obligor spouse's average monthly income. [Tex. Fam. Code 8.055] a. Factors to Be Considered in Setting Amount of Maintenance. Subject to the above limits, the statute sets out a laundry list of factors to be considered in fixing the amount of the maintenance award, including the duration of the marriage; the age, employment history, earning ability, and physical and mental condition of the spouse seeking maintenance; the time needed by that spouse to acquire sufficient education and training to become employable; contributions of the spouse as a homemaker and to the education and earning ability of the other spouse; property brought into the marriage by either spouse; the ability of the other spouse to meet his own personal needs and child support obligations; and any marital misconduct by the spouse seeking maintenance. [Tex. Fam. Code 8.053] b. Spouse Must Have Exercised Diligence in Seeking Employment. Unless the spouse seeking maintenance is physically or mentally disabled, or is the custodian of a physically or mentally disabled child from the marriage of any age, the statute raises a presumption that maintenance is not warranted unless the spouse, during any period of separation or during the pendency of the divorce action; has exercised diligence in seeking suitable employment or in developing the necessary skills to become self- supporting. [Tex. Fam. Code 8.053] 3. Maintenance Order Cannot Continue More than Three Years Duration of the maintenance order is limited to the shortest period of time that will allow the spouse to obtain appropriate employment or develop an appropriate skill, unless the spouse's ability to gain employment is diminished because of disability, duties as custodian of a young child, or some other impediment to gainful employment. In any case, the maintenance order cannot remain in effect for more than three years. [Tex. Fam. Code 8.054(a)] a. Exception Disabled Spouse or Child. The three-year limit does not apply if the spouse is unable to work because of physical or mental disability or because the spouse is the custodian of a physically mentally disabled child of the marriage. In either of these situations, the court can order maintenance for as long as the disability continues. [Tex. Fam. Code 8.054(b)] C. THE "JUST AND RIGHT" DIVISION POWER In the property settlement attendant to a divorce proceeding, the starting point (but not necessarily the ending point) is that each spouse is entitled to his separate property, but the community property is divided equally between the spouses. 17

1. Trial Court May Divide Community Estate as it Deems "Just and Right" The "equal division of community property" rule is subject to section 7.001 of the Family Code: "The court shall order a division of the estate of the parties in a manner that the court deems just and right, having due regard for the rights of each party and any children of the marriage." Unequal divisions of community property can be made (and frequently are made) in cases where the trial judge deems this appropriate. a. Factors that may Be considered in Making "Just and right" Division. "In exercising its discretion the trial court may consider many factors, and it is presumed that the trial court exercised its discretion properly". [Murff v. Murff, 615 S. W. 2d 699 (Tex. 1981) ] In Murff, the Supreme Court listed the following factors that the trial court can take into account, making it clear that the list is illustrative and not exclusive. (Note that most of the factors relate to the parties' relative economic status.) (1) Disparity of incomes and earning capacities, as well as the parties' probable respective needs for future support; (2) The spouses' business opportunities and relative financial conditions and obligations; (3) The spouses' educations, capacities, and abilities; (4) Each party's relative physical condition; (5) Disparity of ages; (6) Size of the separate property estates of the parties; (7) Nature of the property (e.g., whether it is readily divisible, whether it is one spouse's sale management community property); (8) Benefits that the party not a fault would have derived from continuation of the manage; (9) Length of the marriage; (10) Which party was at fault in the breakup of the marriage; and (11) Whether one party has wasted or depleted community assets. b. Community Obligations - Also Subject to Just and Right Division In making a "just and right" division, the trial court can make an unequal allocation of the responsibility for payment of community liabilities. Example: Trial court gave W more than half the community property and required H, a doctor, to assume all community debts. Held: The trial court was entitled to consider the fact that [H's] earning capability would likely increase a his practice grew and that [W] might be unable to obtain a substantial increase in the amount of her earnings [as a dental hygienist] ... The community indebtedness which [H] was required to assume had for the most part been incurred by him in furtherance of his medical practice.... The trial court considered it just and fair that [H] assume the primary obligation for payment of this indebtedness and under the facts and circumstances in the record we cannot say that it has abused its discretion in making this order." [Goren v, Goren, 531 S. W. 2d 897 (Tex. Civ. App. 1975)] c.Tax Consequences May Be Considered. In making a "just and right" division, the court may consider whether a specific asset will - be subject to taxation (e.g., potential capital gain tax on a highly appreciated asset), and, if so, when the tax will be required to be paid.

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d. Can Fault in Breakup of the Marriage in a No-Fault Divorce-Action? As noted above (a. 10), supra), fault in the breakup of the marriage can be considered in making a "just and right" division of the community estate. [Accord, Young v. Young, 609 S. W.2d 758 (Tex. 1980)] As a result, it has been widely assumed that, in a no-fault divorce action based on insupportability, fault can be considered in making a "just and right" division. One court of appeals decision has so ruled. [Eikenhorst v. Eikennorst, 746 S.W.2 d 882 (Tex. App. 1988)] Another court has ruled to the contrary after pointing out that the Supreme Court has never explicitly ruled on the issue. [Phillips v. Phillips, 75 S. W. 3d 564 (Tex. App. 2002)] The court noted that in Young v. Young, the divorce was granted on a fault ground, and the divorce in Murff v. Murff was based on both fault and no-fault grounds (adultery, cruel treatment). "It was the intent of the legislature to make a decree of divorce mandatory when a party to the marriage alleges insupportability and establishes the statutory elements, regardless of who is at fault. By reasonable and logical extension,. when dissolution of marriage is sought solely on the ground of ins up portability, evidence of 'fault' becomes irrelevant as an analytical construct and may not be considered by the trial court in its 'just and right' division of the community estate." e. Support Needs of Disabled Adult Child May Be Considered. Section 7.001 authorizes the court to make a 'just and right" division, "having due regard for the rights of each party and any children of the marriage." The reference to "any children" makes it clear that the statute is not limited to minor children. Thus, in making a property division it was permissible for the court to consider the fact that the wife had assumed responsibility for the care of a child who had become disabled as an adult (multiple sclerosis). [Young v. Young, supra] f. Presumption that Trial Court Properly Exercised Discretion. It is the duty of the court of appeals to indulge every reasonable presumption in favor of a proper exercise of discretion by the trial court in dividing the property of the parties. [Garrett v. Garrett, 534 S. W. 2d 381 (Tex Civ. App. 1976)] Even where the division of property is greatly disproportionate, appellant has the burden on appeal to show that there is no rational basis for the division made by the trial court. The burden of proof rests upon appellant to show from the record that the division was so disproportionate as to be manifestly unjust: [Law v. Law, 517 S. W. 2d 379 (Tex. Civ. App. 1975)] the case will be reversed only where there is a clear abuse of discretion. [Wilkerson v. Wilkerson, 515 S. W. 2d 52 (Tex. Civ. App. 1974)] However, the record must show the circumstances that justify the unequal division that was ordered. [Thomas v. Thomas, 525 S. W. 2d 200 (Tex. Civ. App, 1975)]

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CHILD SUPPORT - TEXAS SEPARATE PROPERTY A spouse's separate property consists of: (1) the property owned or claimed by the spouse before marriage; (2) the property acquired by the spouse during marriage by gift, devise, or descent; and (3) the recovery for personal injuries sustained by the spouse during marriage, except any recovery for loss of earning capacity during marriage. COMMUNITY PROPERTY Community property consists of the property, other than separate property, acquired by either spouse during marriage. 3.002. GIFTS BETWEEN SPOUSES If one spouse makes a gift of property to the other spouse, the gift is presumed to include all the income and property that may arise from that property. 3.005. INTENTIONAL UNEMPLOYMENT OR UNDEREMPLOYMENT If the actual income of the obligor is significantly less than what the obligor could earn because of intentional unemployment or underemployment, the court may apply the support guidelines to the earning potential of the obligor and may award a higher amount of child support. 154.066. AMOUNT OF CHILD SUPPORT -- STATUTORY GUIDELINES The legislature has promulgated guidelines that are to be followed in determining the proper amount of child support. The amount of support is determined without regard to whether the child was born in wedlock. The guidelines apply unless the parties agree on some other amount. The parties can always agree upon a suitable amount of child support (subject to the court's approval). APPLICATION OF GUIDELINES REBUTTABLY PRESUMED IN BEST INTEREST OF CHILD. (a) The amount of a periodic child support payment established by the child support guidelines in effect in this state at the time of the hearing is presumed to be reasonable, and an order of support conforming to the guidelines is presumed to be in the best interest of the child. 154.122. FACTORS TO BE CONSIDERED In determining the proper level of child support, the court is directed to consider the statutory guidelines, the needs of the child, the ability of the parents to contribute to the child's support, any financial resources available for support of the child, and the amount of possession and access to the child. (Thus, the trial court can take visitation or joint conservatorship into account when establishing a support order.) 154.123.

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FIXED PERCENTAGE OF "NET RESOURCES" DEPENDING ON NUMBER OF CHILDREN The guidelines key the suggested amount of child support to a fixed percentage of the obligor's "net resources," taking into account the number of children involved. There is a rebuttable presumption that a support order tied to these percentages is reasonable and in the child's best interests. The court must make specific findings in order to deviate from the prescribed percentages. [154.122] 1 child: 20% of obligor's net resources. 2 children: 25% of obligor's net resources. 3 children: 30% of obligor's net resources. 4 children: 35% of obligor's net resources. 5 children: 40% of obligor's net resources. Over 5 children: Not less than amount for 5 children. GUIDELINES APPLY IF OBLIGOR'S NET RESOURCES ARE $7,500/MONTH OR LESS The statutory guidelines apply to the obligor's first $7,500 of net resources. If the obligor's net resources exceed $7,500/month, the court may order additional support depending on the income of the parties and the proven needs of the child, "but in no event may the obligor be required to pay child support in excess of 100% of the proven needs of the child." 154.126(b). SPECIAL NEEDS To justify child support in excess of the percentage guidelines, evidence of a child's special needs are required. APPLICATION OF GUIDELINES TO MULTIPLE FAMILIES If the obligor parent has children in more than one household (e.g., two children by previous marriage and one child by this marriage), in applying the guidelines the existence of the other children is taken into account pursuant to a very complicated formula involving a "child support credit." 154.128. For bar exam purposes, it is enough to know that all of the children to whom the obligor owes a duty to support are taken into account in determining the amount of child support to be ordered. NET RESOURCES -- CASH FLOW REVENUE FROM ALL SOURCES (LESS DEDUCTIONS) The concept "net resources" is far more expansive than either net income or "take-home pay." The objective of the guidelines is to include all sources of cash-flow revenue, including earned income (salary, wages, overtime pay, self- employment income, commissions, tips, and bonuses), passive income (dividends, interest, capital gains, royalty income, and net rental income), and any other income (Social Security, unemployment, disability and workers' compensation benefits, pensions, annuities, trust income, and capital gains). However, AFDC payments are disregarded in calculating net resources. 154.062(b).

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DEDUCTIONS In computing net resources, deductions are limited to FICA (Social Security taxes), union dues, expenses of health insurance coverage for the obligor's children, and the income tax withholding that would be allowed for a single person claiming one personal exemption and a standard deduction. In most cases, this will be considerably less than the actual withholding from the obligor's paycheck. The purpose of this rule is to have a standard, uniform method of calculating income tax withholding, without having to go into the details of a particular taxpayer's itemized deductions and exemptions. STATUTE OF LIMITATIONS -- FOUR YEARS AFTER CHILD BECOMES ADULT OR SUPPORT OBLIGATION TERMINATES The court retains jurisdiction to enter a judgment for arrearages if the motion is filed within four years after (i) the child becomes an adult or (ii) the child support obligation terminates. 157.005(b).

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FAMILY LAW TEXAS SUIT AFFECTING THE PARENT CHILD RELATIONSHIP (SAPCR) 1. In General. The Family Code authorizes a unitary action, a "suit affecting the parent-child relationship," in which all of the issues affecting a parent and child can be adjudicated in a single lawsuit, including custody, visitation rights, child support, adoption, paternity, and termination of the parent-child relationship. Such an action is referred to in the lega1literature and in practice as a SAPCR. a. SAPCR Must Be Joined with Dissolution Action. In any suit for divorce, annulment, or to declare the marriage void, if the parties are parents of a child, the S4-PCR must be joined with the suit for divorce, etc., and is not maintained as a separate action. However, issues relating to the child are dealt with separately and are not merely ancillary to the divorce. b. Habeas Corpus Is an Independent Action. A suit for habeas corpus is an independent action and is not brought as a SAPCR. 2. Persons Who May Bring SAPCR. Section 102.003 sets forth a detailed list of the parties who may bring or intervene in a SAPCR, including: a parent; a guardian; the child (through a representative authorized by the court); a governmental entity; an authorized agency; a licensed child placing agency; a person other than a foster parent, who has had actual care, control, and possession of the child for at least six months ending not more than 90 days before the petition is filed; and a foster parent of a child placed in the person's home for at least 12 months ending not more than 90 days before the petition is filed. Notwithstanding the "foster parent" time requirements, a person who is the foster parent of a child may file a suit to adopt a child for whom the person is providing foster care at any time after the person has been approved to adopt the child. a. Grandparent, Other Person. A grandparent or other relative within the third degree of consanguinity may file an original suit seeking appointment as managing conservator under limited circumstances, but may not file an original suit requesting possessory conservatorship. However, a grandparent or other person seeking possessory conservatorship may be granted leave to intervene in a pending SAPCR if deemed by the court to have had substantial past contact with the child. b. Alleged Father of Nonmarital Child-Paternity Action Only. An alleged father of a child can bring a paternity action to establish that he is the child's parent, but cannot bring any other SAPCR. 3. SAPCR Joined with Divorce Action-Divorce Venue Controls. When a SAPCR is joined with a divorce action, the venue rules governing the divorce action control. a. Other Cases-Venue Lies in County Where Child Resides. Except for a SAPCR tied to a divorce action, a SAPCR is brought in the county where the child resides. In the ordinary case, a child is deemed to reside in the county where her parents (or living parent) reside. 23

b. Determining County Where Child Resides-Unusual Cases. If the parents live in different counties, the child is deemed to reside in the county where the parent having custody and control of the child resides. If a guardian has been appointed or if the child is in the custody and control of some other adult, the child is deemed to reside in the county where the guardian or foster parent resides. Finally, "if it appears that the child is not under the care and control of an adult, the child resides where he is found." c. Venue Rules Cannot Be Modified by Parties' Agreement. The venue rules of the Family Code remove SAPCRs from the operation of the general venue statute and cannot be altered by an agreement between the parties. Example: Mother, named managing conservator in the divorce action, sought an order transferring the SAPCR to a new county, where the children had resided for more than six months. Father resisted the transfer, pointing out that the parties' agreement incorporated into the divorce decree contained this provision: "Venue of suits: All acts contemplated by this Agreement shall be performed in EI Paso, Texas, and all sums of money payable under this Agreement shall be payable in EI Paso, Texas." Held: The Family Code provision governing removal controls and cannot be altered by the parties' agreement. A contrary result would permit "forum shopping by contract." 4. Court Has Continuing Exclusive Jurisdiction. Upon entry of a final decree in a SAPCR, the court retains continuing and exclusive jurisdiction of all parties and matters in connection with the child. No other court has jurisdiction of a SAPCR with regard to that child except on transfer. The continuing jurisdiction permits the court to modify all aspects of its decree, including managing custody, visitation, possession of and access to the child, and child support. a. In-State Transfer of SAPCR Mandatory If Child Resides in New County for Six Months. Section 155.201 governs transfers of SAPCRs and supplants the Texas Rules of Civil Procedure transfer rules. The statute provides for mandatory transfer if a suit for dissolution of the marriage is pending or if the child has moved to a new county and has resided there for at least six months. (Note: The six-month transfer rule is frequently tested.) The six-month period begins to run when the child assumes residence in the new county. 1) Order on Motion to Transfer Interlocutory-No Appeal Allowed. Suppose that the SAPCR court denies a motion to transfer even though the six-month test has been satisfied (or grants a motion to transfer although the six-month test has not been met). The losing party cannot appeal, because a transfer order is an interlocutory decree and is not subject to appeal. Instead, the losing party should petition for a writ of mandamus seeking to grant (or bar) the transfer. b. Transferee Court Becomes SAPCR Court. After the transfer, the new court becomes the court of continuing exclusive jurisdiction. Once a transfer order is entered, the original court of continuing jurisdiction cannot exercise any further jurisdiction over a SAPCR.

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5. Long Arm Jurisdiction Over Nonresidents. Section 102.011 confers personal jurisdiction over a nonresident for SAPCR purposes when: (i) the individual is personally served with citation in this state; (ii) the individual submits to the jurisdiction of this state by consent, by entering a general appearance, or by filing a responsive document having the effect of waiving any contest to personal jurisdiction; (iii) the individual resided with the child in this state; (iv) the individual resided in this state and provided support or prenatal expenses for the child; (v) the child resided in this state as a result of acts or directives of the individual; (vi) the individual engaged in sexual intercourse in this state and the child may have been conceived by that act of intercourse; (vii) the individual registered with the paternity registry or signed an acknowledgment of paternity of a child born in this state; or (viii) there is any other constitutional basis for the exercise of personal jurisdiction. 6. Procedural Aspects. a. Court May Order Attendance at Parent Education and Family Stabilization Course The court may order the parties to attend a parent education and family stabilization course taught by a mental health professional or religious counselor, dealing with such topics as the emotional effects of divorce on parents and children, parenting issues at children's different development stages, stress indicators, conflict management, financial responsibilities of parenting, family violence, and spouse and child abuse. b. Guardian Ad Litem, Attorney Ad Litem, Amicus Attorney. In most SAPCR cases, the court has discretion to appoint a guardian ad litem or attorney ad litem. However, a guardian ad litem must be appointed for the child in suits to terminate the parent-child relationship in suits to remove the disability of minority and in paternity actions in which paternity by estoppel is alleged (see L.3., infra). Attorneys ad litem for the child and for the parent must be appointed where the Texas Department of Family and Protective Services ("TDFPS") files a suit to terminate the parent-child relationship, and an attorney ad litem for the child must be appointed where the TDFPS seeks appointment as managing conservator. 1) Guardian Ad Litem. A guardian ad litem for a child must interview a child who is age four or over, interview every person who has significant knowledge of the child's history and condition, and encourage settlement and the use of alternate forms of dispute resolution. The guardian ad litem may conduct an investigation as needed to determine the child's best interests; review the child's medical, psychological, and school records; attend all legal proceedings in the case; and review and sign (or decline to sign) an agreed order concerning the child. The court may order the guardian ad litem to attend a trial or hearing, and shall ensure that the guardian ad litem has an opportunity to testify or submit a report giving recommendations. 2) Attorney Ad Litem. An attorney ad litem appointed for a child must follow the child's expressed objectives of representation during the course of litigation if the attorney ad litem determines that the child is competent to understand the nature of the attorneyclient relationship and has formed that relationship with the attorney ad litem.

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3) Amicus Attorney. The court may appoint an amicus attorney to provide legal services to assist the court (not the child) in protecting a child's best interest. The objective of such an appointment, if made, is to provide the court with the opinion and recommendation of an attorney who is not an adversary in the proceeding, and whose sole concern is the child's best interest. However, an amicus attorney cannot be appointed in a suit filed by a governmental agency such as the TDFPS or the attorney general. 4) Immunity from Liability. A guardian ad litem, attorney ad litem, or an amicus attorney is not liable for a recommendation made or opinion given unless the opinion or recommendation is made with conscious indifference or reckless disregard for the safety of another, is made in bad faith or with malice, or is grossly negligent or willfully wrongful. c. Temporary Orders. The court may make any temporary order for the safety and welfare of the child, including temporary conservatorship, temporary support, restraining any party from molesting or disturbing the peace of the child or another party, or removing the child beyond a geographical area set by the court. d. Social Study. The court may order preparation of a "social study into the circumstances and condition of the child and of the home of any person requesting managing conservatorship or possession of the child." The social study is made by any state or private agency or a person appointed by the court. Such a social study is mandatory in adoption suits. e. Jury Trial as to Managing Conservator, Child's Primary Residence. Either party is entitled to a verdict by jury on the issues of: (i) the appointment of a sale managing conservator or joint managing conservators; (ii) which joint managing conservator has the exclusive right to designate the child's primary residence; (iii) whether to impose a restriction on the geographic area in which the joint managing conservator may designate the child's primary residence; and (iv) what that geographic area may be. 1) Court Cannot Contravene Jury Verdict as to Managing Conservator, Primary Residence. The court cannot contravene the jury verdict on any of the above issues. The trial court's only power is to grant a motion for a new trial if the weight of the evidence does not support the jury verdict. Example: In a proceeding to modify a joint managing conservatorship, Mother, a German citizen (as was one of the children), sought to remove geographic restrictions on the children's primary residence so that she could move with the children to Germany and remarry. The jury found that the requirements for modification had been proven, and that Mother should have the exclusive right to determine the children's primary residence, with no geographic restrictions. Upholding Father's motion for a judgment notwithstanding the verdict, the trial court entered an order allowing Mother to establish the children's primary residence, but only within Bexar County, Texas. The Supreme Court reversed, holding that there was legally sufficient evidence to support the jury verdict, and the court could not contravene the jury verdict.

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2) Jury Verdict as to Support, Visitation Not Permitted. The court cannot submit to the jury questions on the issues of: (i) support; (ii) the specific terms of visitation; or (iii) the rights or duties of a joint managing conservator, other than determining which joint managing conservator has the exclusive right to determine the child's primary residence. 7. Death Abates Divorce Action and SAPCR. Neither a divorce action nor a SAPCR may continue after one of the parties dies. Example: Divorce action and SAPCR were pending when Husband died. Thereafter, the trial court entered an order regarding custody under the SAPCR. Held: Order invalid because death of Husband abated both the divorce action and its accompanying SAPCR.

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WILLS A. Requisites of a Will (a) Every last will and testament, except where otherwise provided by law, shall be in writing and signed by the testator in person or by another person for him by his direction and in his presence, and shall, if not wholly in the handwriting of the testator, be attested by two or more credible witnesses above the age of fourteen years who shall subscribe their names thereto in their own handwriting in the presence of the testator. (b) Such a will or testament may, at the time of its execution or at any subsequent date during the lifetime of the testator and the witnesses, be made self-proved, and the testimony of the witnesses in the probate thereof may be made unnecessary, by the affidavits of the testator and the attesting witnesses, made before an officer authorized to administer oaths under the laws of this State. B. Pretermitted Child (a) Whenever a pretermitted child is not mentioned in the testator's will, provided for in the testator's will, or otherwise provided for by the testator, the pretermitted child shall succeed to a portion of the testator's estate as provided by Subsection (a)(1) or (a)(2) of this section. (1) If the testator has one or more children living when he executes his last will, AND: (A) If no provision is made for any such child, a pretermitted child succeeds to the portion of the testator's separate and community estate to which the pretermitted child would have been entitled pursuant to Section 38(a) of this code had the testator died intestate without a surviving spouse owning only that portion of his estate not devised or bequeathed to the parent of the pretermitted child. (B) A pretermitted child is entitled to share in the testator's estate as follows: (i) The portion of the testator's estate to which the pretermitted child is entitled is limited to the disposition made to children under the will (ii) The pretermitted child shall receive such share of the testator's estate, as limited in Subparagraph (i), as he would have received had the testator included all pretermitted children with the children upon whom benefits were conferred under the will, and given an equal share of such benefits to each such child. (ii) To the extent that it is feasible, the interest of the pretermitted child in the testator's estate shall be of the same character, whether an equitable or legal life estate or in fee, as the interest that the testator conferred upon his children under the will. (2) If the testator has no child living when he executes his last will, the pretermitted child succeeds to the portion of the testator's separate and community estate to which the 28

pretermitted child would have been entitled pursuant to Section 38(a) of this code had the testator died intestate without a surviving spouse owning only that portion of his estate not devised or bequeathed to the parent of the pretermitted child. (C) The pretermitted child may recover the share of the testator's estate to which he is entitled either from the other children under Subsection (a)(1)(B) or the testamentary beneficiaries under Subsections (a)(1)(A) and (a)(2) other than the parent of the pretermitted child, ratably, out of the portions of such estate passing to such persons under the will. In abating the interests of such beneficiaries, the character of the testamentary plan adopted by the testator shall be preserved to the maximum extent possible. Terms Defined (c) A "pretermitted child," as used in this section, means a child of a testator who, during the lifetime of the testator, or after his death, is born or adopted after the execution of the will of the testator. (d) For the purposes of this section, a child is provided for or a provision is made for a child if a disposition of property to or for the benefit of the pretermitted child, whether vested or contingent, is made; (1) in the testator's will, including a devise or bequest to a trustee as authorized by Section 58(a) of this code; or (2) outside the testator's will and is intended to take effect at the testator's death. C. Adult Adoption Inheritance from Adopted Parents & Family For purposes of inheritance under the laws of descent and distribution, an adopted child shall be regarded as the child of the parent or parents by adoption, such adopted child and its descendants inheriting from and through the parent or parents by adoption and their kin the same as if such child were the natural child of such parent or parents by adoption, and such parent or parents by adoption and their kin inheriting from and through such adopted child the same as if such child were the natural child of such parent or parents by adoption. Effect of Adoption (a) The adopted adult is the son or daughter of the adoptive parents for all purposes. (b) The adopted adult is entitled to inherit from and through the adopted adult's adoptive parents as though the adopted adult were the biological child of the adoptive parents. (c) The adopted adult may not inherit from or through the adult's biological parent. A biological parent may not inherit from or through an adopted adult.

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ESTATE ADMINISTRATION *** D.

STATUTORY HEIRSHIP PROCEEDING

1. Serves Same Function as Muniment of Title Probate. A statutory heirship proceeding.establishes, by court order, that the person is dead, that he left no will, and that he was survived by the named persons as heirs. It also fixes the amount of their intestate shares. Bona fide purchasers who deal with the legatees under the will probated as a muniment of title or persons named as heirs in the statutory heirship proceeding are completely protected. 2. The Unexpected "Heir". An heir whose name was riot included in an affidavit of heirship may bring suit against the other heirs. E. NONSTATUTORY AFFIDAVIT OF HEIRSHIP

This is an informal procedure to clear title to a decedent's assets. When, e.g., an estate is not probated, title may be established many years later to the satisfaction of a title insurance company through affidavits of people familiar with the family stating that the.estate was not administered and naming the people who were the decedent's only heirs. F. ADMINISTRATION OF SMALL ESTATES

1. Value of Intestate Estate Does Not Exceed $50,000 Collection of Estate by Affidavit. Heirs of an intestate estate are entitled to distribution without need for appointment of a personal representative or any kind of administration where the value of the intestate estate, not including homestead and exempt personal property, does not exceed $50,000. Heirs need only file an affidavit with the court showing the basis upon which they are entitled to distribution. 2. Affidavit Procedure Can Be Used to Clear Title to Homestead If Decedent Owned No Other Real Property If a homestead is the only real property in a decedent's estate, title to it may be transferred under a small estate administration affidavit. The affidavit must be recorded, and purchasers who rely on it are protected against an heir who was not disclosed in the affidavit. 3. Estate Does Not Exceed Amount of Family Allowance-No Administration If the value of the estate, excluding homestead and exempt personalty, does not exceed the amount to which the surviving spouse or minor children are entitled as a family allowance, application can be made for the setting aside of a family allowance and an order that no administration is necessary.

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TRUSTS A. Reservation of Interests and Powers by Settlor If during the life of the settlor an interest in a trust or the trust property is created in a beneficiary other than the settlor, the disposition is not invalid as an attempted testamentary disposition merely because the settlor reserves or retains, either in himself or another person who is not the trustee, any or all of the other interests in or powers over the trust or trust property, such as: (1) a beneficial life interest for himself; (2) the power to revoke, modify, or terminate the trust in whole or in part; (3) the power to designate the person to whom or on whose behalf the income or principal is to be paid or applied; ( 4) the power to control the administration of the trust in whole or in part; (5) the right to exercise a power or option over property in the trust or over interests made payable to the trust under an employee benefit plan, life insurance policy, or otherwise; or (6) the power to add property or cause additional employee benefits, life insurance, or other interests to be made payable to the trust at any time. B. Merger (a) If a settlor transfers both the legal title and all equitable interests in property to the same person or retains both the legal title and all equitable interests in property in himself as both the sole trustee and the sole beneficiary, a trust is not created and the transferee holds the property as his own. This subtitle does not invalidate a trust account validly created and in effect under Chapter XI, Texas Probate Code. (b) Except as provided by Subsection (c) of this section, a trust terminates if the legal title to the trust property and all equitable interests in the trust become united in one person. (c) The title to trust property and all equitable interests in the trust property may not become united in a beneficiary, other than the settlor, whose interest is protected under a spendthrift trust, and in that case the court shall appoint a new trustee or cotrustee to administer the trust for the benefit of the beneficiary. C. Spendthrift Trust (a) A settlor may provide in the terms of the trust that the interest of a beneficiary in the income or in the principal or in both may not be voluntarily or involuntarily transferred before payment or delivery of the interest to the beneficiary by the trustee. (b) A declaration in a trust instrument that the interest of a beneficiary shall be held subject to a "spendthrift trust" is sufficient to restrain voluntary or involuntary alienation of the interest by a beneficiary to the maximum extent permitted by this subtitle. (c) A trust containing terms authorized under Subsection ( a) or (b) of this section may be referred to as a spendthrift trust. 31

(d) If the settlor is also a beneficiary of the trust, a provision restraining the voluntary or involuntary transfer of the settlor's beneficial interest does not prevent the settlor's creditors from satisfying claims from the settlor's interest in the trust estate. A settlor is not considered a beneficiary of a trust solely because a trustee who is not the settlor is authorized under the trust instrument to payor reimburse the settlor for, or pay directly to the taxing authorities, any tax on trust income or principal that is payable by the settlor under the law imposing the tax.

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GUARDIANSHIP - TEXAS I. INTRODUCTION A. GUARDIANSHIP CODE The Guardianship Code prescribes detailed rules and procedures for taking care of minors and incapacitated adults who do not have the capacity to take care of themselves or their financial affairs. B. OVERVIEW OF GUARDIANSHIP ADMINISTRATION 1. Guardian A "guardian" is a person appointed by the probate court who is charged with the duty of care and management of the person or property, or both, of a minor or an incapacitated adult (ward). A guardianship involves two distinct roles: a guardian of the person and a guardian of the estate. Minor A "minor" is a person under age 18 who has never been married and who has not had the disability of minority removed by court action. Incapacitated Adult An "incapacitated adult" is an adult who, because of a physical or mental condition, is substantially unable to provide food, clothing, or shelter for himself, to care for his physical health, or to manage his financial affairs. Limited Guardianships Encouraged A guardian may have full authority or only limited authority over an incapacitated person "as indicated by the person's actual mental or physical limitations and only as necessary to promote and protect the well-being of the person." If the person is not a minor, the court may not use age as the sole factor in determining whether to appoint a guardian.

2.

3.

4.

C.

GUARDIAN OF THE PERSON - RIGHTS AND DUTIES A guardian of the person has the right to take charge of the ward and to establish the ward's legal domicile. The guardian has the duty to provide care, supervision, and protection for the ward, and must provide the ward with clothing, food, medical care, and shelter. The guardian may consent to the ward's medical, psychiatric, and surgical treatment. GUARDIAN OF THE ESTATE - RIGHTS AND DUTIES A guardian of the estate is entitled to possess and manage the ward's property, enforce obligations in favor of the ward, and bring and defend suits by or against the ward. A guardian of the estate has the duty to take care of and manage the ward's estate as a prudent person would manage his own property, and must account for all rents, profits, and revenues earned by the estate.

D.

E.

GUARDIANSHIP OF THE ESTATE COMPARED TO OTHER FIDUCIARY OFFICES 1. Guardianship Compared to Trust 33

The guardianship of an estate is similar to a trust administration since both involve a fiduciary who holds and manages property for the benefit of another. However, a guardianship is subject to strict court supervision. A guardian must obtain prior court approval for all but the most routine transactions. While a trustee's powers are relatively broad, a guardian's powers are sharply limited to those authorized by statute. Unlike a trustee, a guardian of the estate must give bond to secure the performance of her duties and must file annual accountings with the probate court. 2. Guardianship Compared to Estate Administration A guardianship is generally similar to a dependent administration of a decedents estate, in that both involve court-supervised administrations. The statutes that prescribe the powers that can be exercised, and the statutes governing creditors' claims, fiduciary bonds, and annual accountings, layout almost identical rules for dependent administrations and guardianships, and the laws and rules governing estates of decedents generally apply to and govern guardianships. The major difference is that an estate administration is a short-term arrangement, whereas a guardianship is generally a long-term arrangement. As a result, a guardian is likely to be called upon to sell assets, make investment decisions, and make periodic distributions, while an estate administrator merely holds the property on hand for distribution until the estate is closed.

Exam Tip: If a question calls for discussion of a rule applicable to a guardianship and you cannot recall the rule, but you do remember the rule applicable to dependent administrations, give that rule as your answer. II. WHO MAY BE APPOINTED GUARDIAN A. GUARDIAN FOR MINOR 1. If Parent of Minor Is Living Because parents are the natural guardians of their minor children, a guardian of the person does not have to be appointed if either of the minor's parents is living. While a parent, as guardian of the child's person, does not automatically have the power to manage the child's estate, one parent is entitled to be appointed guardian of the estate. If the parents have two or more minor children, a separate guardianship of the estate must be taken out for each child. One parent can be guardian of all his children. If the parents disagree as to which parent should be appointed, the court makes the appointment on the basis of which parent is better qualified to serve. If one parent is dead, the survivor is the natural guardian of the person of the minor children and is entitled to be appointed guardian of their estates. If Minor Is Orphaned The last surviving parent may-by will or written declaration-appoint a guardian of minor children to serve after the parent's death. The court will generally honor that appointment. A written declaration must be (i) signed by the parent and (ii) either written wholly in his handwriting or attested to by two witnesses age 14 or older. If the last surviving parent did not appoint a guardian, the child's grandparent is entitled to guardianship of both the person and the estate of the minor. If there is more than one grandparent, one must be appointed, taking into account the best interests of the minor. If the child has no living grandparents, the nearest of kin is appointed. If no relative is eligible or interested, the court appoints a qualified person as guardian. A minor 12 34

2.

years of age or older may choose the guardian. B. GUARDIAN FOR PERSON OTHER THAN A MINOR The court appoints a guardian for an incapacitated adult according to the circumstances and considering the best interests of the ward. The probate court has broad discretion in the selection of a guardian. The ward's spouse is entitled to be appointed guardian in preference to any other person. If the ward is not married or if his spouse is disqualified, the nearest of kin to the ward is entitled to the guardianship. If the ward has no relatives, the court appoints the eligible person who is best qualified to serve as guardian. The court must make a reasonable effort to consider the incapacitated person's preference of the person to be appointed guardian. The last surviving parent of an incapacitated adult may appoint a guardian in the same manner as that described for minor children. DESIGNATION OF GUARDIAN BEFORE NEED ARISES An individual concerned about the possibility of becoming disabled may designate by a written and witnessed declaration the person who is to serve as guardian of his person or his estate if he later becomes incapacitated. However, the court may decline to appoint the named person. The declaration may disqualify named persons from serving as guardian and those people may not be appointed. CO-GUARDIANS NOT PERMITTED EXCEPT FOR HUSBAND AND WIFE As a general rule, only one person may be appointed as guardian (i.e., no co-guardians except for a husband and wife). Typically, the same person is named as guardian of the person and the estate of the ward. However, one person may be appointed guardian of the person and another guardian of the estate. NONRESIDENT GUARDIAN It sometimes happens that a nonresident minor or incapacitated adult, for whom a guardian has been appointed in another jurisdiction, owns property in Texas that requires administration. The nonresident guardian can be issued letters of guardianship upon filing a power of attorney appointing a resident agent to accept service of process. PRIVATE PROFESSIONAL GUARDIAN A private professional guardian is a person, other than an attorney or a corporate fiduciary, who is engaged in the business of providing guardianship services. The court may appoint a private professional guardian to serve as guardian as long as the person has registered and has been certified. PERSONS DISQUALIFIED TO SERVE AS GUARDIANS A person is disqualified from being appointed guardian if he: 1. 2. 3. 4. Lacks capacity (e.g., is a minor); Lacks experience to properly and prudently manage the estate or otherwise is an unsuitable choice; Has a conflict of interest (e.g., is indebted to the ward, has a claim adverse to the ward); Is a nonresident who has not named a resident agent; or has been expressly disqualified by a "Designation of Guardian Before Need Arises" (see c., above).

C.

D.

E.

F.

G.

Exam Tip: Under general requirements, a court may not appoint as guardian a person who, because of inexperience, lack of education, or other reason, is incapable of properly 35

and prudently managing and controlling the ward of the wards estate. III. HEARING ON APPOINTMENT OF GUARDIAN 1. Proposed Ward Must Be Present at Hearing A proposed ward must be present at the hearing to appoint a guardian unless the court determines that a personal appearance is not necessary. The proposed ward, or any other party in a contested guardianship proceeding, is entitled, on request, to a jury trial. At the hearing, the court must (i) inquire into the ability of the allegedly incapacitated adult to feed, clothe, and shelter himself, to care for his physical health, and to manage his property or financial affairs; and (ii) inquire into the qualifications, abilities, and capabilities of the person seeking to be appointed guardian. 2. Findings Required Before Guardian Can Be Appointed a. Findings that Require Clear and Convincing Evidence. Before appointing a guardian, the court must find by clear and convincing evidence that (i) the proposed ward is incapacitated, (ii) it is in the proposed ward's best interest to have a guardian appointed, and (iii) the rights of the proposed ward or his property will be protected by the appointment. b. Findings that Require Preponderance of the Evidence. Before appointing a guardian, the court must find by a preponderance of the evidence that (i) the court has venue, (ii) the person to be appointed guardian is eligible or is a proper person to act as guardian, (iii) the guardianship is not created for the primary purpose of enabling a minor to establish residency for enrollment in a school for which the minor is not otherwise eligible, and (iv) the proposed ward is either totally without capacity to care for himself and manage his property, or lacks some but not all capacity to do the tasks necessary to care for himself or manage his property. c. Dismissal of Application. A determination of incapacity of an adult must be evidenced by recurring acts or occurrences within the preceding six-month period, and not by isolated instances of negligence or bad judgment. If the court finds that the adult proposed ward possesses the capacity to care for himself and to manage his property as would a reasonably prudent person, the application for guardianship is dismissed.

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COMMERCIAL PAPER - TEXAS I. IN GENERAL A. INTRODUCTION. To facilitate a freely transferable but safe substitute for cash, a central theme of Article 3 of the Uniform Commercial Code (which governs negotiable instruments) is that if an instrument is in a special form (i.e., it is negotiable) and it is transferred in a special way (i.e., it is negotiated) to a person who takes the instrument for value, in good faith, and without notice of any defenses to or claims on the instrument (i.e., a holder in due course, or "HDC"), the person will be able to enforce the instrument subject to very few defenses. *** C. TERMINOLOGY. There are basically two kinds of instruments to which Article 3 applies: a "note" and a "draft." There are also subclasses of notes and drafts (e.g., checks) for which the Code contains special rules. 1. Notes a. General Definition. A note is two-party commercial paper. It is simply a written and signed promise (undertaking) by one party (the "maker") to pay money to another party (the "payee" or bearer). b. Maker Makes a Note. Note that the name given to the physical act of creating an instrument differs, depending on whether the instrument is a note or a draft. A maker makes a note; a drawer draws a draft. 2. Drafts. A draft is three party commercial paper. It is a written and signed instruction by one person (the "drawer") to another person (the "drawee") ordering that the drawee pay money to still a third person (the "payee" or bearer). a. Checks. A "check" is a specific type of draft, namely one drawn on a bank and payable on demand. An instrument will be deemed a check if it meets these requirements, even if the instrument is described on its face by another term (e.g., a "money order"). ***** 3. Issue. "Issue" means the first delivery of an instrument by the maker or drawer for the purpose of giving rights on the instrument to any person. The maker or drawer is the "issuer." II. FORMAL REQUISITES OF NEGOTIABILITY A. NEGOTIABILITY DEFINED. Whether an instrument is negotiable depends on its form; it must meet the very technical formal requisites of negotiability listed in the U.C.C. Therefore, the following definition of negotiability should be memorized for the bar exam. The meaning of its terms will be detailed below. A negotiable instrument means a written and signed: (i) Unconditional (ii) Promise or order (iii) To pay a fixed amount of money, with or without interest or other charges described in the promise or order, that: 37

i. Is payable to order or to bearer at the time it is issued or first comes into possession of a holder; ii. Is payable on demand or at a definite time; and iii. Does not state any unauthorized undertaking or instruction by the person promising or ordering payment. B. UNCONDITIONAL. A goal behind negotiable instruments law is to provide a convenient substitute for cash that can pass freely in commerce. To facilitate this goal, Article 3 restricts the conditions that may be placed on payment and limits placing terms relevant to payment in other documents so that a purchaser will be able to tell what he is getting merely by examining the instrument. 1. When Promise or Order Conditional. An instrument will be conditional and therefore will not be negotiable if it: (i) Expressly states a condition to payment (e.g., "I promise to pay if the Chicago Bears win the Super Bowl"); or (ii) States that the promise or order (or rights and obligations subject thereto) is subject to or governed by another writing (e.g., "This note is subject to the sales agreement between the parties dated August 1"). Note, however, that merely referring to or stating that the promise or order arises out of a separate writing (e.g., "this instrument is given as a down payment on a contract to rent a building") does not condition the promise or order. 2. When Promise or Order Not Conditional. Article 3 specifically provides that a promise or order will not be deemed conditional merely because it: (i) Refers to another writing for a statement of rights regarding collateral, prepayment, or acceleration; (ii) Limits payment to a particular source or fund (e.g., "I promise to pay out of the funds from my next wheat crop"); or (iii) Requires as a condition to payment a countersignature by a person whose specimen signature appears on the promise or order (such conditions are commonly placed on traveler's checks). ***** C. PROMISE OR ORDER TO PAY. A note must contain a promise to pay. A draft must contain an order to pay. 1. Writing Required. The U.C.C. is very liberal as to what constitutes a writing. It may be printing, typing, or "any other intentional reduction to tangible form." 2. Signature Required The U.C.C. is very liberal as to what constitutes a signature. A signature may be handwritten, typed, printed, or made in any other manner (e.g., a mark by a machine or a thumbprint). 38

D. FIXED AMOUNT OF MONEY 1. What Is Money? Money includes any medium of exchange currently authorized or adopted by a government. "Currency" and "current funds" are synonymous with money. a. Other Consideration Improper. An instrument will not be negotiable if it calls for payment with something other than money (e.g., an ounce of gold) or allows such payment in the alternative (e.g., "$400 or an ounce of gold"). 2. What Is Fixed? a. Principal Must Be Fixed. To be negotiable, the principal due under the instrument must be fixed. b. Interest Need Not Be Fixed. No interest will be due unless the instrument provides for the payment of interest. 1) Specified Interest Rate. It is not necessary that the amount of interest be fixed. A variable interest rate or indexed rate may be used. The interest rate need not be determinable from the face of the instrument; the rate may require reference to information not contained in the instrument (e.g., "3% over prime, adjusted each six months based on the then prevailing bank rates in New York City" is negotiable). 2) Unspecified Interest Rate. If the instrument says that it is payable with interest but does not state how much interest, the judgment rate (the rate on a court judgment) will be implied. E. PAYABLE TO ORDER OR TO BEARER. To be negotiable, an instrument must be payable to order or to bearer. Order paper is payable only to the person named or his order. Bearer paper is payable to anyone legitimately possessing the instrument. a. Checks Missing "Magic Words" Still Negotiable. There is a special rule for checks: -A check that is not payable to order or to bearer is still negotiable. F. ON DEMAND OR AT A DEFINITE TIME. To be negotiable, an instrument must be payable on demand or at a definite time. 1. Demand. An instrument is payable on demand if it states that it: (i) is payable "on demand" or "at sight" or otherwise indicates that it is payable at the will of the holder; or (ii) does not state a time for payment. 2. Definite Time. An instrument is payable at a definite time if it is payable: (i) on a fixed date (e.g., "April 1, 2001"); (ii) on elapse of a specified period of time after sight or acceptance (e.g., "60 days after presentment for payment"); or (iii) at some time readily ascertainable at the time the instrument is issued. Note that the time stated may be subject to rights of prepayment, acceleration, extension at the option of the holder, or extension to a further definite time either automatically or at the option of the maker or acceptor.

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G. NO UNAUTHORIZED UNDERTAKING OR INSTRUCTIONS. To be negotiable, an instrument generally cannot contain any unauthorized undertakings or promises. However, the Code explicitly permits three undertakings or instructions that may be included: Any other promise or undertaking will destroy negotiability. H. MISCELLANEOUS PROVISIONS 1. Rules of Construction. If an instrument contains contradictory terms, typewritten terms control printed terms and handwritten terms control both. Words control figures unless the words are ambiguous or uncertain (e.g., illegible), in which case the figures control. Thus, "pay five hundred dollars ($5,000)" is construed as an order to pay $500. 2. Opting Out. A promise or order that otherwise meets the requirements of a negotiable instrument will not be negotiable if when issued it contains a conspicuous statement that it is not a negotiable instrument or that Article 3 is not applicable. Note, however, that this rule does not apply to checks. Such instruments are often used in advertisements offering a discount. III. NEGOTIATION-BECOMING A HOLDER A. INTRODUCTION. The key to the protection of Article 3 is HDC status. To become an HDC, one must first become a holder of a negotiable instrument; to become a holder of a negotiable instrument requires proper negotiation. Negotiation is nothing more than the process specified by Article 3 for transferring a negotiable instrument. B. THE NEGOTIATION PROCESS. (i) Negotiation is a transfer of possession, whether voluntary or involuntary, by a person other than the issuer to a person who thereby becomes its holder; and (ii) A holder is a person in possession of the instrument if the instrument is payable to bearer; if the instrument is payable to an identified person, that person is the holder as soon as she gets possession. For exam purposes, it is best to think of a holder as a person in possession of an instrument with a right to enforce it. Holder status (and the right to enforce an instrument) and what is needed for negotiation depend on whether the instrument is bearer paper or order paper. 1. Bearer Instruments. A negotiable instrument that is issued as bearer paper or subsequently converted into bearer paper (e.g., by blank indorsement;) is negotiated simply by transferring possession of the instrument. Once the transferee has possession, she technically qualifies as a "holder. Example: Drawer writes a check payable to "Cash," which makes the check a bearer instrument. If Drawer transfers the check to Grocer, Grocer becomes a holder. 2. Order Instruments a. Negotiation to Specific Payee. An instrument that is payable to an identified person is negotiated by transferring possession of the instrument along with the indorsement of the identified person. 40

3. Types of Indorsements. There are several types of indorsements, each having certain qualities and each affecting further negotiation. Every indorsement must be either special or blank, qualified or unqualified, and restrictive or unrestrictive. a. Special or Blank 1) Special Indorsement A "special" indorsement is one that names a particular person as "indorsee" (e.g.,"pay John Smith"). The indorsee must sign in order for the instrument to be further negotiated. 2) Blank Indorsement. A "blank" indorsement is a signature that is not accompanied by the naming of a specific indorsee. Blank indorsements create bearer paper, which may then be negotiated by delivery alone. b. Qualified Indorsements. An indorsement that adds the words "without recourse" is a "qualified" indorsement. The effect is to limit the legal liability otherwise imposed on indorsers under the U.C.C. c. Restrictive Indorsements Any other language added to an indorsement creates a "restrictive" indorsement. Examples would include conditions ("pay Flora Flowers only if she has paid her daughter all the money still owing under her father's will"), trust indorsements ("pay John Doe in trust for Jane Doe"), and indorsements restricting further negotiation to the check collection system ("for deposit only," "pay any bank," etc.). *** IV. HOLDERS IN DUE COURSE A. INTRODUCTION. Whether the transferee of a negotiable instrument qualifies as an HDC affects his liability on the instrument and the claims or defenses that may be asserted against him. It is therefore important to understand how one becomes an HDC and the basic attributes of that status. The U.C.C. provides that a holder in due course is a holder who takes the instrument: (i) For value; (ii) In good faith; and (iii) Without notice that: i. The instrument is overdue or has been dishonored, or that there is an uncured default with respect to payment of another instrument issued as part of the same series; ii. The instrument contains an unauthorized signature or has been altered; iii. There is a claim to the instrument; or iv. Any party has a defense or claim in recoupment (a claim that reduces the amount payable) on the instrument. Note also that the instrument must not bear apparent evidence of forgery or alteration or be so irregular or incomplete as to call into question its authenticity. B. TWO-STEP PROCESS. As can be seen from the U.C.C. definition, determining whether a person is an HDC is a two-step process. First, you must determine whether the person is a "holder," and second, you must determine whether the person holds in "due course." 41

C. HOLDER. The first requirement of due course holding is that the person in possession of the instrument be a "holder." In other words, the transferee must have possession and a right to enforce the instrument. The instrument must be free of forgeries of those names necessary to the chain of title (the payee and any special indorsees). D. DUE COURSE. "Due course" requires the holder to take for value, in good faith, and without notice of certain defects. 1. Value. There are several things to note about "value" as it is used in the definition of HDC. a. Types of Value. Any one of five things constitutes value: (i) Performance of the agreed consideration; (ii) Acquisition by the holder of a lien or a security interest in the instrument; (iii) Taking the instrument as payment of or security for an antecedent debt; (iv) Trading a negotiable instrument for another instrument; or (v) Giving the instrument in exchange for the incurring of an irrevocable obligation to a third person by the person taking the instrument. b. Value Need Not Be Equivalent to Face Amount. It is important to note that the value given in exchange for commercial paper need not be equivalent to the face amount of the instrument. An instrument purchased for less than its face value is said to be purchased "at a discount," but as long as the full price agreed upon is given, full value has been paid. Example: Ben agrees to buy from Jerry for $2,500 a $3,000 bearer note due in two months. As soon as Ben gives Jerry $2,500, he has given full value. c. Time of Payment Important. The time that value is given is important because whether one takes an instrument in good faith and without notice is measured at the time the instrument is negotiated or at the time value is given, whichever is later. 2. Good Faith. Good faith means honesty in fact and the observance of reasonable commercial standards of fair dealing. a. Honesty in Fact. The honesty in fact component of good faith is subjective (i.e., what the actor actually believed). Thus, it has been referred to as the "pure heart, empty head" test. It is not a reasonable person standard. b. Reasonable Commercial Standards of Fair Dealing. The fair dealing component of good faith is objective (i. e., the actor must proceed fairly in light of the facts and commercial standards). Note that the standard is different from ordinary care. 3. Notice to Purchaser. The holder must purchase the instrument without notice of a number of things, as detailed below. a. What Constitutes Notice? 1) Actual Knowledge and Reason to Know. Notice includes both actual knowledge (a subjective standard) and reason to know from the facts surrounding the transaction (an objective standard). 2) Facts Constituting Notice 42

a) Instrument Overdue. The purchaser has notice that an instrument is overdue if she has reason to know any of the following (1) Any Part of Principal Overdue. Any part of the principal amount is overdue or there is an uncured default in payment of another instrument of the same series. Likewise, if the principal is payable in installments, notice that the maker has defaulted on any installment of principal makes it impossible for a subsequent purchaser to be an HDC. (2) Acceleration Made. Acceleration of the instrument has been made. (3) Demand Made. Demand has been made or more than a reasonable time has elapsed after issue. If the instrument is a check, it becomes overdue 90 days after its date; i.e., it is stale, and no taker may become a holder in due course. b) Notice of Unauthorized Signatures or Alteration. To be an HDC, a holder cannot have notice of any unauthorized signatures or that the instrument has been altered. c) Claims to Instrument. To be an HDC, a holder cannot have notice of any claim to the instrument. Thus, the holder cannot have notice that another has a property or possessory right in the instrument or its proceeds (e.g., the instrument was wrongfully taken from the other's possession) or that negotiation is rescindable (e.g., negotiation from an infant may be rescinded if other law so provides. d) Defenses or Claims in Recoupment. To be an HDC, the holder must not have notice of any defense available to the obligor (e.g., infancy, duress, failure of consideration, etc.) or claim in recoupment (i.e., a claim that reduces the amount payable) by the obligor. ************** 8) Purchase at a Discount. When the payee sells the instrument to a later holder, the latter sometimes buys the instrument for less than the face amount, the difference being referred to as the "discount." The existence of a discount does not mean that the holder has not given full value for the instrument, nor does a large discount in and of itself constitute lack of good faith or a reason to be suspicious. However, a very large discount together with other suspicious circumstances may lead courts to find lack of good faith and/or notice and thus deny HDC status to the holder. V. CLAIMS AND DEFENSES ON NEGOTIABLE INSTRUMENTS A. IN GENERAL. As stated above, the heart of Article 3 is the HDC rule-an HDC takes an instrument free from personal defenses and claims and is subject only to real defenses. The rule comes into play when a holder of an instrument attempts to collect on it from an obligated party (such as a maker, drawer, or indorser. In most cases in the real world, the obligated party will pay the holder, but that will not happen on your exam. Instead, the obligated party will refuse to pay, claiming that he has a defense to payment. Whether the obligated party will be forced to pay depends on whether the holder is an HDC and on the nature of the defenses the obligated party asserts. If the holder is not an HDC, the obligated party can successfully assert any defense that an obligor under an ordinary contract could successfully assert against a transferee (e.g., failure 43

of consideration). If the holder is an HDC, the obligated party's defenses against payment are limited-he can successfully assert only the defenses commonly called real defenses. 1. "Claim" Defined. A claim is an affirmative right to a negotiable instrument because of superior ownership. B. REAL DEFENSES. The following defenses (commonly called "real" defenses) may be asserted against both HDC and non-HDC transferees of the instrument in question. Other defenses (commonly called "personal" defenses) cannot be asserted against an HDC. 1. Forgery a. Forgery of Names Necessary to Title - Precludes HDC Status If the name of the payee or any special indorsee is unauthorized (i.e., forged or signed by a nonagent), no subsequent taker can be an HDC because no one can obtain the right to enforce necessary to qualify as a "holder." However, if the person whose name was forged ratifies the unauthorized signature or is estopped from denying it, subsequent takers can qualify as HDCs (provided they meet the other requirements for due course holding). b. Forgery of Names Not Necessary to Title - May Be HDC Subject to Real Defense of Unauthorized Signature. The names necessary to the chain of title on an instrument are those of the payee and any special indorsee. The forgery of any other name (e.g., maker, drawer, acceptor, or indorser on a bearer instrument) does not affect the right to enforce; and subsequent takers may qualify as HDCs if they meet the usual tests. Even so, a party whose name was either forged or placed on the instrument by a nonagent has a real defense of unauthorized signature unless he has ratified the signature or is estopped from denying it. 2. Fraud in the Factum (Real Fraud). Under the U.C.C., there are two kinds of fraud: real and personal. "Real" fraud (fraud in the factum) is assertable against an HDC and is defined in section 3.305(a)(1)(C) as "fraud that induced the obligor to sign the instrument with neither knowledge nor reasonable opportunity to learn of its character or its essential terms." Any other type of fraud - which would encompass most types - is a personal defense not assertable against an HDC. Example of Fraud in the Factum: Hans Immigrant, who cannot read English, signs a promissory note after his attorney tells Hans that it is a credit application. Even in the hands of an HDC unaware of this lie, the note is not enforce able against Hans if he asserts fraud in the factum. Honest John tells Cathy Consumer that the car he is selling has been driven only by a little old lady to Sunday church services. After paying for the car by check, Cathy discovers that the auto was formerly a police car and stops payment on the check. If the check is now held by an HDC, Cathy's defense cannot be asserted: She knew she was signing a negotiable instrument, so the fraud defense is personal only.

Example of Personal Fraud:

a. Requirement of Excusable Ignorance. Even where the defendant was unaware that he was signing a negotiable instrument, fraud in the factum cannot be asserted if he failed to take reasonable steps to ascertain the nature of the transaction. 44

3. Alteration of Instrument. An alteration is a change in the terms of the instrument. For example, a thief may alter the amount of a check from $10.00 to $1,000 by eliminating the decimal point. In certain circumstances discussed below, an HDC may be able to collect only the original amount, so that the material alteration is a partial "real" defense. In other situations, the HDC may be able to collect on the instrument as altered. 4. Incapacity to Contract. Under the state law, certain persons may lack the capacity to contract. For example, persons declared incompetent by judicial proceedings and corporations that have failed to take the necessary legal steps to transact business within the state may lack such capacity. Note that before such incapacity will constitute a real defense, however, state law must render the contract void from its inception, rather than merely voidable. If the obligations of the incompetent are merely voidable at the option of the incompetent, incompetency is a personal defense and cannot be raised against an HDC. 5. Infancy. Infancy is a real defense (and therefore assertable against an HDC) if it would be a defense under state law in a simple contract action. If state law does not make the contracts of an infant void or voidable, infancy would be only a personal defense (not assertable against an HDC). 6. Illegality. If some illegality in the underlying transaction renders the obligation void (as opposed to merely voidable), this is a real defense assertable against an HDC even if the HDC had nothing to do with the illegality. (If the obligation is merely voidable under state law, the illegality becomes a personal defense.) 7. Duress. Duress occurs in a contract situation where one party acts involuntarily. It is sometimes a real and sometimes a personal defense. Article 3 provides that duress is a matter of degree. If under other law an instrument signed at the point of a gun is void, then it is void even in the hands of an HDC. However, one signed under threat to prosecute the son of the maker for theft may be merely voidable, so that the defense is cut off against an HDC. 8. Discharge in Insolvency Proceedings. Insolvency proceedings include an assignment for the benefit of creditors (a state liquidation proceeding) and any other proceeding intending to liquidate or rehabilitate the estate of the person involved. 9. Statute of Limitations. If the statute of limitations has run on the instrument, even an HDC cannot enforce the instrument - the statute of limitations is a valid defense. Article 3 provides two general statutes of limitations: three years and six years. a. Three Years. Actions on unaccepted drafts must be brought within three years after the date of dishonor or within 10 years after the date of the draft, whichever is earlier. b. Six Years. Actions on notes payable at a definite time or on demand must generally be commenced within six years after the due date or demand, respectively. C. PERSONAL DEFENSES

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VII. LIABILITY OF PARTIES A. INTRODUCTION This section discusses who may be held liable on a negotiable instrument. There are a number of parties who may be held liable on an instrument simply because their names appear on the instrument, including makers, drawers, indorsers, and drawees. As a preliminary rule, remember that no one may be held liable on a negotiable instrument unless her signature or the signature of an authorized representative appears thereon. B. PARTIES WHO MAY BE LIABLE ON AN INSTRUMENT 1. Maker of Note, Issuer of Cashier's Check. The maker of a note or issuer of a cashier's check, merely by signing her name, becomes obligated to pay the instrument according to its terms at the time it was issued, or if the instrument was not issued, at the time it first came into possession of a holder. Her promise is unconditional. She must pay the instrument on the due date, although she is permitted to assert the defenses as described above. Note: If a note is payable at a bank ("I promise to pay to the order of Pete Payee at Payee National Bank"), the person entitled to enforce the note must take the instrument to the bank and present it for payment. 2. Indorser. An indorser is a person who signs his name other than as maker, drawer, or acceptor, usually on the back of an instrument, for the purpose either of negotiating the instrument, restricting payment of the instrument, or incurring indorser's liability on the instrument. An indorser can be held liable in two separate ways: for the basic obligation of indorsers (i.e., indorser's contract), or in warranty. A. Basic Obligation-Indorser's Contract. The basic obligation of an indorser arises merely from signing one's name. The obligation is to pay according to the terms of the instrument at the time of the indorsement (or if the indorser indorsed an incomplete instrument, according to its terms as completed). The obligation can be negated if the indorsement is qualified (i.e., signed "without recourse"). Generally, there are three prerequisites to the indorser's obligation (i. e., an indorser cannot be held liable unless three things happen first): presentment, dishonor, and notice of dishonor. 1) Presentment. Presentment simply is a demand for payment made by a person entitled to enforce an instrument. The demand usually is made to the drawee of a draft or the maker of a note. a) Time Requirement for Checks-Thirty Days. An indorser's liability on a check will be discharged unless it is presented for payment or given to a depositary bank for collection within 30 days after the indorsement was made. b) How Presentment Made. Presentment can be made by any commercially reasonable means, including oral, written, or electronic communication, and can be made at any contemplated place of payment (but if the instrument is payable at a bank in the United States, presentment must be made at that bank). 2) Dishonor. Dishonor occurs when the maker of a note or the drawee of a draft does not pay or accept the instrument within the allowed time after presentment. Note the following timing rules: 46

A) Checks. A check is dishonored if it is presented for payment and payment is refused. ***** 3) Notice of Dishonor. Notice of dishonor simply is notification that the instrument was dishonored. It may be given by any commercially reasonable means of communication. The obligation of an indorser is discharged if he is not given a notice of dishonor, unless notice is excused. a) Generally Not Required for Maker or Drawer Liability. Note that notice of dishonor does not have to be given to a maker of a note (because he knows that he did not pay it) or the drawer of a draft unless the draft was accepted by an acceptor. b) Timing-Thirty Days. Generally, notice of dishonor must be given within 30 days after notice of dishonor. For instruments taken for collection by collecting banks, notice of dishonor must be given by the bank before midnight on the day following the day on which the bank receives notice of dishonor. 4) Multiple Indorsers Where more than one indorsement appears on an instrument, any indorser is severally liable for the full amount to any holder or later indorser of the instrument. 5) Summary Example of Indorser Liability Dan gives Pete a $1,000 check as payment for a car. Pete owes Ivana $950 for a ring Pete purchased from Ivana, and so he indorses his name on the back of the check and gives the check to Ivana. Three things must happen before Pete will be liable to Ivana on the check: (i) Ivana must present the check for payment or deposit the check for collection within 30 days after Pete indorsed; (ii) the drawee bank must refuse to pay (dishonor); and (iii) Ivana must give Pete notice of dishonor within 30 days after she receives notice of the dishonor. B. Warranty Liability of Indorser. When an indorser transfers an instrument, the indorser becomes a transferor and can be liable for the transfer warranties discussed below. ***** 4. Drawer. Generally, if a draft is dishonored (i.e., the drawee refuses to pay), the drawer of the draft is obliged to pay the draft according to its terms when the drawer signed the instrument (or if the instrument was incomplete, according to its terms as completed, as controlled by the rules regarding incomplete instruments.] 5. Drawee a. In General. Because no one is liable on an instrument unless her signature appears thereon, the drawee of a draft cannot have any liability on an instrument unless and until the drawee signs the instrument. In other words, the drawee has no direct liability to the holder of a draft - the holder cannot force the drawee to pay unless the drawee signs. When the drawee does sign, it becomes an acceptor. 1) Common Law Liabilities. Even though a drawee cannot be liable on an instrument without having accepted it, a drawee bank might incur liability under common law principles of contract or tort law. 47

b. Rights and Duties of Parties. When a bank is the drawee (as in the case of a check), the bank may well be liable to its customer for failure to honor the check. This is because of the contractual relationship between a bank and its customer. This contract imposes various duties on the bank and the customer, and governs the relationship between the parties. 1) Duties of Drawee Bank to Customer a) Must Honor Customer's Check. The bank is obligated to honor its customer's check if there are sufficient funds on deposit to cover the draft. If the bank wrongfully dishonors the draft, the customer can recover damages for whatever harm is proximately caused by the wrongful dishonor. If a check is more than six months old, the bank may refuse to pay unless again ordered by the drawer. (1) Insufficient Funds. If the customer has insufficient funds at the bank to cover a check, the bank may nevertheless choose to honor the check. In such a case, the customer is liable to the bank for the overdraft. b) When Bank Cannot Charge the Account. The bank must honor a check as drawn. Therefore, it cannot charge the account: (i) If there is no order by the depositor (forged signature of drawer); (ii) For more money than the original order (alteration of amount by third ply); (iii) If the bank pays the wrong person (forgery of payee or indorsee's signature); or (iv) If the item is postdated, the customer gives the bank notice of the postdating, and the bank pays the item before the stated date. If the bank pays a check in violation of these principles, the customer is entitled to a recredit to her account. ***** e. Stop Payment Orders 1) Requirements of Reasonable Notice. In Texas, a stop payment order is effective for six months and is binding on the bank only if it: (i) is in writing, (ii) describes the item "with certainty" (not just "reasonable certainty" as in the official text of Revised Article 3), and (iii) is dated and signed. The customer may renew the stop payment order for additional six-month periods by written notice to the bank within a six month period of effectiveness. Of course, if the bank pays over a valid stop payment order, then it has not honored the orders of its customer and cannot charge her account. The bank must be given reasonable time to act, and is under no obligation to honor a stop payment order on a cashier's check.

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Taken in part from BarBri Bar Review 2011

COMMERCIAL PAPER SECURED TRANSACTIONS I. INTRODUCTION A. OVERVIEW OF STATUTORY SCHEME. The Texas version of Art. 9 is located in the Texas Business and Commerce Code Annotated ("Code"). Secured transactions questions generally involve credit transactions. Typically one party (the debtor) buys something from another (the creditor or secured party) but does not pay immediately. The creditor wants to be able to rely on something other than the debtor's promise to ensure payment. A security interest is that something. A security interest is a limited right in specific personal property (the collateral) of the debtor that allows the creditor to take the property if the debtor fails to fulfill the credit obligation. A security interest is effective between the parties when certain steps are taken to attach the interest. Once the interest attaches, as between the parties, if the debtor defaults, the creditor has some right to take the collateral to satisfy the obligation. However, attachment generally does not provide the creditor with superior rights over third parties who might also have an interest in the same collateral. To gain rights over such third parties, the creditor must take additional steps to perfect the security interest. Perfection basically serves as a form of notice that the creditor has a security interest in the collateral, and because of this notice, the creditor has rights in the collateral superior to certain third parties who might also have an interest in the same collateral (there are rules of priority to determine whose rights are superior). B. SCOPE OF ART. 9 1. In General. Art. 9, with the exceptions listed in C., below, applies to all kinds of contractual security interests in personal property and fixtures (i. e., personal property that is firmly affixed to real property). A security interest is an interest in personal property or fixtures that secures payment or performance of an obligation. a. Sales of Receivables. Outright sales of accounts, chattel paper, payment intangibles, and promissory notes are also treated as security interests and are covered by Art. 9. b. Consignments. In a typical consignment, the consignor (i.e., the owner of goods, such as a manufacturer or wholesaler) retains title to goods and delivers them to the consignee (e.g., a retailer) for sale to the public. If the goods are not sold, the consignee may return them to the consignor. In cases where a creditor of the consignee would have difficulty distinguishing inventory that a consignee is selling on consignment from inventory that the consignee actually owns, Art. 9 considers the consignment to be a security interest and requires the consignor to comply with its provisions to give notice to the consignee's creditors. A consignor must comply with Art. 9 to protect its interest in consigned goods against creditors of the consignee if: (i) The consigned goods are worth a total of $1,000 or more; (ii) The consignor did not use the goods for personal, family, or household purposes (e.g., a person's consignment of his old clothes would not be covered by Art. 9); and (iii)The consignee is a person who: i. Deals in goods of that kind under a name other than the consignor's; ii. Is not an auctioneer; and 49

iii. Is not generally known by her creditors to be substantially engaged in selling the goods of others (i.e., the goods are not being sold at a "consignment store"). ***** D. SECURITY INTERESTS. Security interests generally relate to financing. There are three major types of financing: consumer, business, and agricultural. Art. 9 contains rules that apply generally to all three methods of financing and special rules that relate to each specific type. 1. Typical Security Interest. In a typical Art. 9 security interest, one party (the creditor) gives another party (the debtor) something of value in exchange for the debtor's giving the creditor an interest in the debtor's personal property or fixtures (the collateral). The creditor's interest in the collateral is not a full ownership interest, but rather is the right to keep or sell the collateral if the debtor defaults on his obligation to the creditor. 2. Purchase Money Security Interests A purchase money security interest ("PMSI") is a special type of security interest in goods that has priority over all other security interests in the same goods if certain requirements are met. A PMSI arises when: (i) A creditor sells the goods to the debtor on credit, retaining a security interest in the goods for all or part of the purchase price (creditor and seller are the same person); or (ii) A creditor advances funds that are used by the debtor to purchase the goods (creditor and seller are different persons). Rule of thumb: A PMSI exists if (i) credit was advanced or a loan was made for the purpose of enabling the debtor to acquire the collateral, and (ii) the credit or loan proceeds were actually used to acquire the collateral. The importance of whether a security interest is a PMSI will be discussed later. *** E. COLLATERAL. Collateral is the property subject to a security interest. Under Art. 9, there are various types of collateral that may be divided into three broad classifications: tangible collateral or goods, intangible or semi-intangible collateral, and proceeds. It is important to know the collateral's type because certain rules (e.g., rules for how to perfect and priority rules) depend on the type of collateral involved. 1. Tangible Collateral or Goods. "Tangible" collateral or "goods" includes all things movable at the time the security interest attaches (including timber to be cut, unborn animals, and growing crops, but excluding money and intangibles) and fixtures. a. Types. There are four types of tangible collateral: 1) Consumer Goods. Goods used or bought for personal, family, or household purposes (e.g., a tractor used to mow the grass at home) are consumer goods. 2) Farm Products. Crops, livestock, unmanufactured products of livestock (e.g., eggs), and supplies used or produced in farming operations are farm products if they are in the possession of or used by a farmer. 50

3) Inventory. Goods that are leased or that are held for sale or lease (e.g., a tractor at a farm implement store), goods that are furnished or to be furnished under a contract of service, supplies that are used in manufacturing, materials that are used up quickly or consumed in a business (e.g., fuel used to run a factory), and work in progress (e.g., a partially built tractor) are inventory 4) Equipment. Goods that are not consumer goods, farm products, or inventory are equipment (e.g., durable goods used in a business, such as machinery used in a factory or a painting on an office wall). b. Determining Type. The category into which tangible collateral is placed does not depend on the nature of the collateral, but rather on the primary use to which the debtor puts the collateral at the time the security interest attaches. 2. Intangible or Semi-Intangible Collateral: There are eight types of intangible or semi-intangible collateral. They include: a. Instruments, b. Documents, c. Chattel Paper, d. Accounts, e. Deposit Accounts, f. Investment Property, and g. Commercial Tort Claims h. General Intangibles General intangibles include any intangible not coming within the scope of the definitions of the other types of intangibles-e.g., software, patent and trademark rights, copyrights, and goodwill. 3. Proceeds: Proceeds include whatever is received upon the sale, lease, exchange, license, collection, or other disposition of collateral or proceeds. Proceeds differ from the other types of collateral in that they constitute any collateral that has changed in form from a previous category. For instance, if a farmer borrows money from a creditor and gives the creditor a security interest in the wool from the farmer's sheep, the wool is collateral of the farm product type. If the farmer exchanges the wool for a tractor or money, the tractor or money now becomes a proceed of the wool. In addition, the tractor can also be classified as equipment. Proceeds are sometimes divided into cash and noncash proceeds because of the application of certain rules to each. Money, checks, deposit accounts, and the like are cash proceeds. All other proceeds are noncash proceeds. a. "Proceeds" Include Second Generation Proceeds. Proceeds can go through several transformations and still retain their character as proceeds. b. Insurance Payments and Claims for Damage Are "Proceeds." If the collateral is insured and money is received from the insurance company on account of loss or damage to the collateral, the money is a proceed of the collateral (up to the value of the collateral) unless it is payable to someone other than the debtor or the secured party claiming it. Furthermore, any claims arising out of the loss of, defects in, or damage to collateral are proceeds of the collateral up to the value of the collateral.

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II. CREATION (ATTACHMENT) OF SECURITY INTEREST A. INTRODUCTION. Art. 9 concerns the secured party's rights against both the debtor and third parties who may have an interest in the debtor's property. The former involves a process called attachment and the latter involves a process called perfection. This section covers attachment. A security interest is not enforceable (i.e., the creditor may not repossess the collateral) unless it has attached. B. REQUISITES FOR ATTACHMENT. There are three requirements for attachment of a security interest: (i) the parties must have an agreement that the security interest attach; (ii) value must be given by the secured party; and (iii) the debtor must have rights in the collateral. 1. Parties' Agreement. The parties must agree to create the security interest (i.e., they must enter into a security agreement). This agreement must be evidenced in one of the following ways: a. Authenticated Record. The parties' security agreement may be evidenced by a record (i.e., written or electronically stored information describing the collateral. A record is authenticated if it is signed or marked electronically with the present intent to identify the authenticating person and adopt the agreement. 1) Description of Collateral. The description of the collateral in the authenticated security agreement is sufficient if it reasonably identifies the collateral. **** b. Possession. The security agreement may be evidenced by the creditor's possession of the collateral. c. Control. If the collateral is a nonconsumer deposit account, electronic chattel paper, or investment property, the security agreement may be evidenced by control. 2. Value. Value must be given by the secured party (or on his behalf) before a security agreement will be effective to create a security interest. Any consideration sufficient to support a simple contract is value. There is no requirement that the consideration actually have been performed; it is sufficient if the secured party is under a binding obligation to perform. In addition, a preexisting debt is considered to be value given (even though it does not constitute consideration) if the security interest is intended as security for the preexisting debt. 3. Rights in Collateral. The debtor must have rights in the collateral to create a security interest. An ownership interest in or the right to obtain possession of the collateral qualifies as "rights in the collateral." 4. Coexistence Required. The three above requirements may occur in any order, but they must coexist before the security interest attaches. After-Acquired Property. A secured party will sometimes want to obtain a security interest not only in a debtor's present property, but also in property that the debtor will obtain in the future. This is permissible. a. General Rule Security Interest May Attach to After-Acquired Property. A valid security agreement may create a security interest in property to be acquired in the future that will 52

attach to the property as soon as the debtor acquires an interest in the property. Such an interest generally may be created only by specifically including in the security agreement an after-acquired property clause (e.g., "this security agreement is secured by debtor's equipment now owned or acquired in the future"). III. PERFECTION OF SECURITY INTEREST A. IN GENERAL. As noted above, attachment establishes the secured party's rights to the collateral vis-a-vis the debtor. However, other parties may also have rights in the collateral (e.g., subsequent purchasers of the collateral, unsecured creditors, and other secured creditors). To acquire the maximum priority in the collateral over most such third parties, it is not enough that the security interest has attached; the secured party must also "perfect." There are five methods of perfection: (i) filing; (ii) taking possession of the collateral; (iii) control; (iv) automatic perfection; and (v) temporary perfection. 1. Timing of Perfection. A security interest is not enforceable against any party until it has attached to the collateral. Thus, perfection of a security interest cannot be completed until it has attached. In some circumstances, however, a party may complete all of the other steps necessary for perfection (e.g., filing) before the security interest has attached (e.g., where an after-acquired property clause is used). In such a case, the security interest will become perfected at the time that it attaches (i.e., as soon as the debtor obtains an interest in the collateral). 2. Effect of Perfection Limited. Despite perfection, a nonpossessory security interest may nevertheless be subordinated to some types of adverse third-party claims (e.g., to ordinary course buyers of inventory, to holders in due course of negotiable instruments). B. PERFECTION BY FILING. A security interest may be perfected by filing (either in writing or electronically) as to all kinds of collateral except deposit accounts and money. Note: If deposit accounts or money are claimed as proceeds of other collateral (e.g., if money is a proceed of sold equipment), a filed security interest in the original collateral perfects a security interest in the deposit accounts or money as proceeds of the original collateral. 1. Records to Be Filed (the Financing Statement). The Code simply requires "notice" filing. It does not require that a copy or abstract of the security agreement be filed. Notice filing contemplates that once a third party discovers that a debtor's property is covered by a financing statement, she will make further inquiry about the particular security agreement covering the property. "Notice" is given by the filing of a "financing statement," which contains the following elements: (i) The name and mailing address of the debtor; (ii) The name and mailing address of the secured party; (iii)An indication of the collateral covered by the financing statement; and (iv) If the financing statement covers real-property-related collateral (i.e., minerals, timber to be cut, or fixtures), the financing statement must also provide a description of the real property to which the collateral is related. *****

53

2. Authenticated Security Agreement Itself May Be Filed. The authenticated security agreement itself may be filed as the financing statement if the parties so desire. If it is filed, it must contain all the elements described above. 3. Place of Filing a. General Rule-File Centrally. Generally, filing must be done centrally with the secretary of state. b. Exception-Timber to Be Cut, Minerals, and Fixtures. If the collateral is timber to be cut or minerals, or if the collateral is or is to become a fixture and the filing is a fixture filing, filing is in the office where a lien on real property would be filed ("locally"). Often, the secured party will not be certain whether particular collateral is a fixture. In such a case, the only safe procedure is to file both in the real property records and with the secretary of state. 4. Period for Which Filing Is Effective a. Original Filing. Generally, a financing statement is effective for five years. [ b. Continuation Statement. Continuation statements may be filed during the last six months of the effective period of a prior filing and will continue the effectiveness of the filing for five more years. C. PERFECTION BY TAKING POSSESSION (PLEDGE). A secured party may perfect a security interest in most types of collateral simply by taking possession of the collateral. D. PERFECTION BY CONTROL. Security interests in investment property, nonconsumer deposit accounts, and electronic chattel paper may be perfected by "control." E. AUTOMATIC PERFECTION. In some transactions, the Code provides that the security interest is perfected simply by the attachment of the security interest, without taking any additional steps. This is referred to as "automatic" perfection. Perfection is automatic in the following circumstances: 1. PMSI in Consumer Goods. A PMSI in consumer goods is perfected as soon as it attaches. (Recall that a PMSI arises where the creditor (i) sells goods to the debtor on credit and reserves a security interest or (ii) advances the funds used to purchase goods and reserves a security interest and a PMSI in goods generally will attach when the debtor receives the goods.) Note: The only type of PMSI that is automatically perfected is a PMSI in consumer goods. A PMSI in inventory or equipment must be filed to be valid. F. TEMPORARY PERFECTION 1. Twenty-Day Period for Proceeds. A security interest in proceeds from original collateral is continuously perfected for 20 days from the debtor's receipt of the proceeds. This security interest becomes unperfected on the 21st day after the debtor's receipt of the proceeds unless the statutory requirements are complied with. In many cases the requirements are automatically met. 2. Twenty-Day Period for Instruments, Negotiable Documents, and Certificated Securities 54

***** If a secured party has a perfected security interest in collateral and the debtor sells, exchanges, or otherwise disposes of the collateral, the secured party has a temporarily (20 day) perfected security interest in whatever proceeds the debtor receives in exchange for the collateral. The security interest in proceeds will continue to be perfected beyond the 20 days if: (i) The security interest in the original collateral was perfected by filing a financing statement, a security interest in the type of collateral constituting the proceeds would be filed in the same place as the financing statement for the original collateral, and the proceeds were not purchased with cash proceeds of the collateral (called the "same office" rule); (ii) The proceeds are identifiable cash proceeds (called the "cash proceeds" rule); or (iii) The security interest in the proceeds is perfected within the 20-day period. IV. PRIORITIES A. INTRODUCTION. The heart of Art. 9 is its allocation of rights or priorities between conflicting interests. In resolving a priority question, it is important to note the type of collateral involved and the types of parties involved. Conflicts can arise between (i) a secured party and another secured party, (ii) a secured party and a buyer or other transferee of the collateral, (iii) a secured party and a lien creditor (usually a trustee in bankruptcy), and (iv) a secured party and an Art. 2 claimant. Note: Although Art. 9 provides rules for priority, parties entitled to priority under Art. 9 may contractually subordinate their rights to other parties. B. SECURED PARTY VS. SECURED PARTY 1. Priority Between Unperfected Secured Parties. If both security interests are unperfected, the first to attach has priority. 2. Priority Between Unperfected and Perfected Secured Parties -- Generally, a perfected security interest prevails over an unperfected security interest, even if the perfected secured party takes her security interest with knowledge of the earlier unperfected security interest. 3. Priority Between Perfected Secured Parties -- . General Rule - First to File or Perfect. When there are conflicting perfected security interests in the same collateral, priority goes to whichever party was the first to either file or perfect-whichever is earlierprovided that there is no period thereafter when there is neither filing nor perfection. Thus, if both parties perfected by filing, the one who filed first has priority - even if perfection was not complete upon filing). If one party perfected by filing and the other party perfected by some other method (e.g., taking possession), the party who filed will have priority if he filed before the other party perfected. And if neither party perfected by filing, the one who completed perfection first will have priority. *** d. PMSI Superpriority. PMSIs enjoy a superpriority-they are superior to prior perfected security interests in the same goods if certain conditions (discussed below) are met. Rationale: 55

The PMSI superpriority does not really harm the competing security interest since, but for the PMSI creditor, the debtor would not have the goods. 1) PMSI in Inventory. A PMSI in inventory has priority over a conflicting security interest in the inventory itself, proceeds that are chattel paper (or proceeds of that chattel paper), proceeds that are instruments, and any identifiable cash proceeds that are received on or before delivery to a buyer if: (i) The PMSI in inventory is perfected at the time the debtor gets possession of the inventory (the filing must take place before the inventory is delivered to the debtor); and (ii) Any secured party who has filed her security interest in the same inventory receives an authenticated notification of the PMSI before the debtor receives possession of the inventory, and the notification states that the purchase money party has or expects to take a PMSI in inventory of the debtor described by kind or type. The notification is effective for deliveries of the same type of collateral for five years. ***** f. Priority in Proceeds. For purposes of determining the priority of security interests in proceeds, the Code divides collateral into "filing collateral" and "non-filing collateral." Filing collateral is collateral in which a secured party would normally achieve priority by filing a financing statement (i.e., goods, accounts, commercial tort claims, general intangibles, and nonnegotiable documents); non filing collateral is collateral in which a secured party would normally achieve priority by possession or control, rather than filing (e.g., cash, chattel paper, nonconsumer deposit accounts, negotiable documents, instruments, and investment property). 1) General Rule. Generally, under the "first to file or perfect" rule, a perfected security interest in proceeds will have the same date of priority as the perfected security interest in the original collateral, as long as the perfection of the security interest in the proceeds extends beyond the 20-day temporary perfection period. C. SECURED PARTY VS. BUYER OR OTHER TRANSFEREE 1. Unperfected Secured Party vs. Buyer a. General Rule - Buyer Prevails. A buyer of collateral (or a lessee of goods) takes free of a security interest covering the collateral if she both gives value and receives delivery of the collateral without knowledge of the security interest before it is perfected. b. Exceptions 1) Buyers of Receivables. Recall that sales of certain receivables (i.e., accounts, chattel paper, payment intangibles, and promissory notes) are treated by Art. 9 as being creations of security interests in the receivables being sold and, therefore, the purchaser is not considered a "buyer" as the term is used in this section. Rights between such purchasers of receivables and other holders of security interests in the same accounts are governed by the rules applicable between conflicting security interests. 2) PMSI Grace Period. If a secured party attaches a PMSI in the debtor's collateral before the buyer or lessee without knowledge pays value and receives delivery (if required), the secured party will have priority over the buyer or lessee if she files within 20 days after the debtor receives the collateral. 56

2. Perfected Secured Party vs. Buyer. Generally, a perfected security interest in goods is good against subsequent buyers. There are, however, some cases in which the buyer will defeat even a perfected prior security interest. a. Secured Party Consents to Sale. If the secured party consents to a sale, lease, or other transfer of the collateral free of the security interest, the transferee will take free of the secured party's perfected security interest. b. Buyer in the Ordinary Course of Business. A buyer who buys goods in the ordinary course of business from a seller who is engaged in the business of selling goods of the kind purchased generally takes free of a nonpossessory perfected security interest in the inventory even if the buyer knows of it, unless the buyer also knows that the sale is in violation of the terms of the security agreement. 1) Seller Must Be in Business of Selling Goods of the Kind. A buyer will not qualify as a buyer in the ordinary course ("BIOC") unless the seller is in the business of selling goods of the kind that the buyer buys. Note: The sale must be in the seller's ordinary course of business, but there is no restriction on the use to which the buyer puts the goods. Thus, in the example above, Customer can qualify as a BIOC even if he purchased the car for use in his business. 2) Buyer Takes Free Only of Interests Created by His Seller. To qualify under the BIOC rule, the security interest must have been created by the buyer's seller; if the security interest was created by someone else, the BIOC rule does not apply. 3) Knowledge. Note that a buyer may still qualify under the BIOC rule even if the buyer knows that the inventory is subject to a security interest, unless the buyer also knows that the sale violates the security agreement. ***** D. SECURED PARTY VS. LIEN CREDITOR 1. Unperfected Secured Party vs. Judicial Lien Creditor. A judicial lien creditor (i.e., a person who has acquired a lien on the collateral through judicial attachment, levy, or the like) prevails over the holder of a security interest in collateral if the judicial lien creditor becomes such before the security interest is perfected. a. Trustee in Bankruptcy. "Judicial lien creditor" includes a trustee in bankruptcy, who is said to be a hypothetical lien creditor in all of the debtor's property beginning on the date the bankruptcy petition is filed. b. PMSI Grace Period Exception. A secured party who attaches a PMSI in the debtor's collateral before a judicial lien creditor acquires an interest in the collateral will have priority over the judicial lien creditor if it files within 20 days after the debtor receives the collateral. 2. Perfected Secured Party vs. Judicial Lien Creditor a. General Rule-Judicial Lien Subject to Prior Perfected Interest. A prior perfected security interest in the collateral has priority over a judicial lien creditor's interest in the same collateral. 1) Prior Filed Security Interest May Also Have Priority. If a secured party files its security interest but does not attach (and therefore does not perfect) before a judicial lien creditor's 57

interest arises, the secured party has priority over the judicial lien creditor as long as the secured party (i) evidences its security interest with an authenticated security agreement, possession, or control, and (ii) eventually attaches and perfects its security interest. G. PRIORITIES IN A NUTSHELL When a debtor defaults and a number of persons have an interest in the same item of collateral, remember the following hierarchy: the person with the highest priority has first rights in the collateral; if any part of the collateral or its proceeds is left, the next person can recover, etc. Excluding investment property and nonconsumer deposit accounts, in which the party with control generally has priority, the ranking is as follows: 1. Most buyers in the ordinary course of business who do not know the sale is in violation of the security interest. 2. Holders in due course and the like of negotiable instruments (i.e., commercial paper, documents of title, securities). 3. Transferees of funds from deposit accounts. 4. Certain purchasers of chattel paper or instruments who have possession or control. 5. Possessory lienholders. 6. Art. 2 claimants with possession of the goods. 7. PMSIs (except a consumer purchaser from a consumer, such as a neighbor buying from a neighbor, has priority over an automatically perfected PMSI in the consumer goods). Recall that only a PMSI in consumer goods is perfected automatically. Other PMSIs must be perfected through some other method (generally by filing), but there is a 20-day grace period for PMSIs in goods other than inventory and livestock. 8. Perfected security interests and liens that have attached to the collateral (including trustees in bankruptcy as of the date the bankruptcy petition is filed). a. As between perfected security interests in the same collateral, the first to file or perfect has priority. b. As between a perfected security interest and an attached judicial lien, the attached judicial lien has priority if it was created before the security interest was filed or perfected. Otherwise, the security interest has priority. 9. Purchasers of collateral who buy for value and receive delivery without notice of any unperfected security interests. 10. Unperfected security interests (rank in priority according to order of attachment). 11. The debtor.

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PARTNERSHIPS - TEXAS I. NATURE OF A PARTNERSHIP 1. Partnership Defined The Texas Business and Organizations Code (TBOC) provides that: an association of two or more persons to carry on a business for profit as owners creates a partnership, regardless of whether: (i) the persons intend to create a partnership, or (ii) the association is called a partnership, joint venture, or other name. ***** VI. RELATIONS OF PARTNERS TO THIRD PARTIES A. AGENCY LAW Every partner is an agent of the partnership for the purpose of its business. The authority of a partner to bind the partnership when dealing with third parties roughly follows agency law. B. ACTUAL AUTHORITY A partnership will be bound by a partner's act if the partner had actual authority. Actual authority is the authority a partner reasonably believes she has based on communications between the partnership and the partner. Such actual authority can come from the partnership agreement or a vote of the partners. Decisions on matters within the ordinary course of business must be decided by a majority in interest of the partners; whereas decisions on matters outside the ordinary course of business require consent of all partners. C. APPARENT AUTHORITY A partnership also will be bound by a partner's act if the partner acted with apparent authority. The TBOC provides that: (i) The act of any partner; (ii) For apparently carrying on in the ordinary course the partnership business or business of the kind carried out by the partnership; (iii) Binds the partnership unless: i. The partner had authority to act for the partnership in the particular matter; and ii. The person with whom the partner was dealing knew that the partner lacked authority. Exam Tip: Remember as agents of the partnership, partners have apparent authority to bind the partnership to any contract within the scope of the partnership business. If a contract is outside the scope of partnership business, the partnership generally will not be bound unless, the partner had actual authority. 1. Business of the Kind Note that apparent authority is not limited merely to transactions that are in fact within the ordinary course of business for the partnership in question but extends also to 59

transactions that apparently would be for carrying on business of the kind run by the partnership. ***** C. FALSE REPRESENTATION OF PARTNERSHIP In certain situations, parties who are not partners may be held liable to third parties as if they were partners. This concept is often referred to as "partnership by estoppel." 1. Liability of Person Held Out as Partner When a person represents himself or permits another to represent him as a partner, he will be liable to third parties who extend credit to the partnership, Liability of Person Who Holds Another Out as Partner When a person holds another out as a partner, he thereby makes that person his agent to bind him to third parties. (If there is a partnership, only those partners who know of or consent to this holding out will be bound.)

2.

E. LIABILITY OF PARTNERS 1. Types of Liability a. Types, of Liability A partner's liability includes contract liability (for contracts within the scope of the partnership business or expressly authorized) and tad liability (for partners' and employees' torts committed within the course of the partnership business or with the partnership's authority). Nature of Liability Except for partners in limited liability partnerships (see VIII., infra), all partners are jointly and severally liable for partnership obligations, whether arising in contract or tort. Is. judgment is not personally binding on a partner unless he has been served. Extent of Liability Each partner is personally add individually liable for the entire amount of the obligation, with rights of contribution and indemnification Exhaustion of Partnership Assets Required A creditor cannot proceed against a partner on a partnership obligation unless: (i) the creditor has obtained a judgment against the partnership that remains unsatisfied for 90 days, (ii) the creditor and the partner have agreed that obtaining a judgment against the partnership is not required, or (iii) the partnership is bankrupt. Liability of Incoming Partner An incoming partner is not personally liable for partnership obligations incurred before he became a partner. Liability of Withdrawn Partner A withdrawn partner remains liable for an obligation arising while he was a partner unless the creditor has discharged him from the liability.

b.

c. d.

e.

f.

Exam Tip: Examiners often test the difference in liability between an incoming partner and 60

an outgoing partner. Remember, an outgoing partner generally remains liable for all partnership debts incurred while he was a partner whereas an incoming partner generally has no liability for debts incurred before she became a partner. 2. Criminal Liability A partner will not be criminally liable for the crimes of other partners committed within the scope of the partnership business unless he participated in the commission of the crime as either a principal or an accessory. III. PROOF OF PARTNERSHIP EXISTENCE 1. Factors Indicating Creation of a Partnership The following factors indicate that the parties have created a partnership; a. Receipt of or the right to receive a share of profits; b. Expression of an intent to be partners; c. Participation or the right to participate in control of the business; d. Sharing or agreeing to share losses or liability for claims by third parties against the business; and e. Contributing or agreeing to contribute money or other property to the business. 2. Factors Not Indicating Creation of Partnership The following factors do not indicate that the parties have created a partnership: a. Receipt of or the right to receive a share of profits as: 1) 2) 3) 4) 5) Repayment of a debt; Wages or compensation to an employee; Payment of rent; Payment of interest on a loan; Payment to a former partner, representative of a deceased or disabled partner; or transferee of a partnership interest; or

6) Payment of consideration for the sale of a business or other property; b. Existence of joint or common tenancies; c. Sharing or possession of a right to share gross receipts; and d. Ownership of a mineral property under a joint operating agreement. VII. EVENTS OF WITHDRAWAL AND WINDING UP A. IN GENERAL Under the TBOC, there, are two types of events that affect the partnership: (i) events of withdrawal of a partner, and (ii) events requiring the winding up at the partnership. 61

B. WITHDRAWAL 1. Events of Withdrawal The following are events of withdrawal: (i) the receipt by the partnership of notice of a partners desire to withdraw; (ii) the occurrence of an event specified in the partnership agreement as an event of withdrawal; (iii) the expulsion of a partner per agreement, majority in interest vote or judicial decree; (iv) a partners bankruptcy, the death or incapacity of an individual partner, or the termination of a partner that is an entity; (v) the redemption of all of a partner's interest in the partnership by a transferee holding that interest; or (vi) a vote by the majority-in-interest to continue the business after a partner has requested that the partnership be wound up. 2. Wrongful Withdrawal A partners withdrawal is wrongful if it: (i) is in breach of an express provision of the partnership agreement; (ii) occurs before the expiration of the period of duration, completion of a particular partnership undertaking, or occurrence of an event specified in the partnership agreement; or, (iii) is pursuant to a court-ordered expulsion. A partner who wrongfully withdraws is liable for damages caused by the withdrawal. 3. Partners Power to Bind Partnership After an Event of Requiring Winding Up After the occurrence of an event requiring winding up, the partnership is bound: (i) by a partner's act that is appropriate for winding up the partnership business, and (ii) by an act inappropriate for winding up if the partnership would have been bound had the event not occurred and the other party to the transaction did not have notice of the event. If a partner has.notice.of an event requiring winding up and incurs a partnership liability not appropriate for winding up, the partner is liable to the partnership for any loss that it suffers as a result. Rules for Distributions a. Order of Distribution All creditors are paid first, including partners who are creditors. The remaining assets are then distributed to the remaining partners according to their capital accounts. Insolvency Conflict Between Partnership and Separate Creditors Partnership creditors have priority over a partners separate creditors in partnership property and parity with separate creditors on the partner's separate property. Partner Who Pays More than His Share Entitled to Contribution Where a partner is forced to pay more than his share of the partnerships debts, he is entitled to contribution from the other partners to equalize the shares.

b.

c.

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I. CORPORATIONS Corporation Law in Texas is controlled by the Texas Business Organizations Code ("TBOC"). A. TYPES OF CORPORATIONS

A corporation is a separate legal entity which comes into existence by charter from the state. Corporations may be for profit or nonprofit. This outline covers corporations for profit organized under the Texas Business Organization Code including (i) general corporations publicly traded; (ii) general corporations not publicly traded; and (iii) close corporations. This outline does not cover banks, trust companies, building and loan associations, insurance companies, railroad companies, cemetery companies, cooperatives, labor unions, abstract and title companies-all of which are specially chartered. ***** D. BROAD POWERS 1. All Acts Necessary to Operate Profitable Enterprise A corporation may do almost all acts necessary for the operation of an enterprise for profit that an individual may do. There are two exceptions. A corporation may not engage in the following combinations of business: a. b. The business of raising cattle and owning land therefore, and the business of operating stockyards and slaughtering, refrigerating, canning, curing, or packing meat. The petroleum oil producing business and the pipeline business.

2. Specific Activities Permitted A corporation may contract, buy and sell property, and sue and be sued in contract, tort, or for statutory violations. Under the TBCA, a corporation may also lend money to and otherwise assist its employees, officers, and directors. However, any such loan must be based on a reasonable expectation of either direct or indirect benefit to the lending or assisting corporation. E. PERMISSIBLE CORPORATE PURPOSES A corporation for profit, except a specially chartered business or unlawful combination, may be formed for any lawful purpose. F. OWNERSHIP AND CONTROL Unless the articles, bylaws, or a shareholder agreement provides otherwise, the business and affairs of the corporation are managed by the board of directors, who are elected by the shareholders-the owners of the corporation. Officers of the corporation are chosen by the board of directors and may, for many purposes, be viewed as agents of the board to enforce policies set by the board.

G. BASIC DOCUMENTS GOVERNING A CORPORATION

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1. Articles of Incorporation. The articles of incorporation are a general statement in writing that describes the purposes and structure of the company. The articles are created by the incorporators and may be amended by the shareholders. 2. Bylaws. The bylaws are a specific statement of management procedures and powers of agents of the company. The bylaws cannot validly contradict the articles. The bylaws are adopted and may be amended or repealed by the board of directors, unless the power to amend or repeal is reserved exclusively to the shareholders in the articles, or unless the shareholders in a bylaw expressly provide that the board may not amend or repeal that particular bylaw. II. FORMATION OF THE CORPORATION A. DE JURE CORPORATION A corporation formed in accordance with all applicable laws is a de jure corporation. 1. Incorporator Corporate status is initiated by an incorporator. Only one incorporator is required. That person may be a natural person 18 years old or older, or a corporation, partnership, association, trust, or estate, without regard to residence or domicile. Contents of Articles of Incorporation a. Mandatory Provisions A corporation must have articles of incorporation. Texas law requires that the articles contain the following: 1) Name of Corporation 2) Initial Directors 3) Purposes 4) Duration 5) Capital Stock Structure and Shareholders' Rights ***** III. DISREGARDING OF CORPORATE ENTITY (PIERCING THE CORPORATE VEIL) A. INTRODUCTION Under some circumstances, a corporate entity, i.e., a de jure corporation, may be disregarded and the shareholders held personally liable when the courts believe that justice will be served. Disregarding the entity is known as "piercing the corporate veil." There are three situations in which the veil is often pierced: (i) when corporate goals and formalities are ignored; (ii) when the corporation is undercapitalized; and (iii) to prevent fraud. B. WHEN WILL VEIL BE PIERCED? The general rule is that the corporate entity will be disregarded "to prevent fraud or achieve equity." This very general statement is obviously too vague to be meaningful. Therefore, a number of more specific tests have been developed.

2.

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1. Alter Ego (Ignoring Corporate Goals and Formalities) a. Individual Shareholder If the shareholders treat the assets of the corporation as their own, use corporate funds to pay their private debts, fail to keep separate corporate books, fail to hold shareholders' or directors' meetings, fail to issue stock, or generally disregard corporate formalities, the courts will often find that the corporate entity is a mere "alter ego" of the shareholders. However, the mere fact that the shareholders are sloppy in administering corporate affairs is not sufficient to warrant piercing the corporate veil - there must be some basic injustice, i.e., the result must "achieve equity." This latter determination, obviously, can be made only on a case-by-case basis.

***** 2. Undercapitalization It is now generally accepted that shareholders will be liable if they fail to provide adequate capitalization for the corporation. Compliance with the Texas requirement of at least $1,000 capitalization does not assure a finding of adequate capitalization. The general rule usually stated by courts is that the shareholders must "put at the risk of the business unencumbered capital reasonably adequate for its prospective liabilities." 3. Avoid Existing Obligations or Fraud The corporate entity will be disregarded any time it is necessary to prevent fraud or to prevent an individual shareholder from using the corporate entity to avoid his existing personal obligations, e.g., transferring all of his personal assets to a corporation in order to avoid paying his creditors. Note that a corporation can be formed to avoid future personal liability that would otherwise arise from the operation of the business. C. WHICH SHAREHOLDERS ARE HELD LIABLE AND IN WHAT AMOUNTS? 1. Inactive-Active Tests When the corporate veil is pierced, normally only the shareholders who were active in the management or operation of the business will be held personally liable. In other words, passive investors who acted in good faith will not be held liable for the corporate debts. 2. Amount of Liability When shareholders are held liable, they normally will be held liable for the entire amount of the claim, even if it exceeds the amount that would have been considered "adequate capitalization." Liability is joint and several. D. WHO MAY "PIERCE"? 1. Creditors a. Tort A tort victim is often a successful plaintiff under the theory of piercing the corporate veil, since he usually has not been involved with the corporation in a transactional sense, and should not be forced to sue an insolvent corporate shell for his damages. b. Contract Courts are reluctant to pierce the corporate veil in contract cases, since the contracting party has an opportunity to investigate the financial condition of the

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corporation and, in the absence of misrepresentation or fraud, has a less equitable claim for relief unless the obligee demonstrates that the shareholder caused the corporation to perpetrate an actual fraud on the obligee primarily for the direct personal benefit of the shareholder. Failure to observe corporate formalities alone is not a ground for piercing the corporate veil. 2. Shareholders There are some situations where it might be advantageous for shareholders to have the corporate entity disregarded; however, the courts are virtually never willing to do so. 3. Loss of Franchise If a corporation's privileges are forfeited for failure to pay franchise tax, every officer and director is personally liable for each debt of the corporation incurred after the tax was due and before corporate privileges are revived. (An officer or director will not be liable if the debt was incurred over his objection or without his knowledge.) This liability is unaffected by subsequent reinstatement of the corporation. ***** VII. SHAREHOLDERS A. GENERAL RIGHTS AND DUTIES

Shareholders have certain rights and powers that are often the subject of bar examination questions. 1. Right to Manage or Control Unless the articles, bylaws, or a shareholder agreement provides otherwise, shareholders generally have no right to manage or control the corporation directly; however, they do own the corporation and, hence, are responsible for electing directors at shareholders' meetings 2. Right to Maintain Voting Strength Shareholders also have an interest in maintaining their voting strength and are often able to do so by means of preemptive rights. 3. Right to Bring Derivative Lawsuits Finally, shareholders, under certain conditions, have a right to bring derivative lawsuits on behalf of the corporation. B. RIGHT TO MANAGE THE CORPORATION 1. No Direct Control Although the shareholders collectively own the corporation, absent a contrary provision in the articles, bylaws, or a shareholder agreement, shareholders have virtually no power to control the day-to-day management of corporate affairs directly. 2. Indirect Control Shareholders may use indirect methods of control to attain their goals. These indirect methods are: a. Election of directors; b. Approval of amendments to articles of incorporation; and c. Approval of fundamental changes in the corporation, i.e., merger, sale of assets, etc.

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*****
IX. OFFICERS A. POWERS 1. Between Corporation and Officers The officers have such authority and duties as are provided in the bylaws or determined by the board, as long as they are not inconsistent with the bylaws. 2. Between Corporation and Third Parties The rules of agency determine the authority of officers. The usual theories of agency applied are actual authority (which may be express or implied), apparent authority, and inherent authority. a. Express Actual Authority An officer may have express actual authority based on the bylaws, resolutions of the board of directors or shareholders, or express delegations from a superior officer to a subordinate officer. For example, the bylaws may authorize expressly that the president may appoint a general manager or other employees, in which event she does not need the approval of the directors. [Miller v. Angelina & Neches River Railroad, 476 S.W.2d 389 (Tex. Civ. App. 1972)] Implied Actual Authority An officer may receive indications of delegated authority which, to her as a reasonable person, show intent of the company to grant power to do certain acts. An example is tacit approval (not ratification) by the board with full knowledge of actions taken by an officer. Under Texas law, a president probably has implied power to enter into minor transactions in the ordinary course of business, unless the board of directors or shareholders have expressed their opposition to her doing so. The communication granting implied actual authority is merely less specific than the communication granting actual express authority. Apparent Authority An officer may appear to a third person to have authority to do acts by reason of communications to the third person originating with the board of directors or superior officers. The test is whether the third person reasonably relied on the appearance of authority created by the principal (the corporation), not the appearance of authority created by the officer alone.

b.

c.

***** 4. Liability to Creditors a. In General Ordinarily, a director has no liability to creditors for the debts of the corporation; nor does he have liability for torts committed by other officers or employees of the corporation. b. Personal Liability A director is, of course, liable for torts he commits, contracts on which he accepts personal liability, and all fraudulent acts and misrepresentations.

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RULE TEMPLATES

The particular rules of law that must be memorized and brought forth to answer the particular question given.

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FAMILY LAW - CHILD CUSTODY RULE TEMPLATE 153.191 Parent to Be Appointed Possessory Conservator The court will appoint a possessory conservator that is not a managing conservator so long as the appointment is in the best interest of the child and parental access does not endanger the childs welfare 153.373 Voluntary Surrender of Child Rebuts Parental Presumption It is presumed that a parent will be appointed managing conservator of the child unless the parent i. voluntarily relinquished the child to a nonparent for a period of one year or more within 90 days of the suit, and ii. it is in the bet interest of the child for the nonparent to be appointed managing conservator. 153.431 Appointment of Grandparent, Aunt or Uncle as Managing Conservator If both parents of the child are deceased the court may, at its discretion, appoint a parent, sister of brother of the deceased parent as managing conservator of the child. 153.433 Possession of or Access to Grandchild A grandparent will be granted reasonable access to their grandchild if at the time i. at least one parent has parental rights, ii. the grandparent can prove by a preponderance of the evidence that possession or access to the child would be in the best interest of the childs physical health or emotional well being; and iii. the grandparent requesting possession or access to the child is the parent of the childs parent and that child has been incarcerated during the three months preceding the filing of the petition, has been found incompetent, is dead, or does not have court ordered possession of the child. 153.434 Limitation on Right to Request Possession or Access (By Grandparent) A grandparent may not seek access or possession to a grandchild if i. both of the biological parents of the grandchild are deceased, ii. had their parental right terminated, iii. signed an affidavit placing the children with a non-parent or stepparent as managing conservator, or iv. the grandchild has been adopted or is pending adoption by someone other than the childs stepparent.

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DIVISION OF MARITAL PROPERTY RULE TEMPLATES Courts have wide discretion in dividing community property using a just and right division standard. There is not a requirement for 50/50 division. Factors to be considered in reaching the just and right division include: fault in dissolution of marriage, disparities in earning ability, and size of community and separate properties. Abuse of the courts discretion can only be shown with evidence that no rational basis exists for the division and the division is so disproportional as to be manifestly unjust.

PRESUMPTION OF GIFT RULE TEMPLATE Under the Texas Family Code, where one spouse uses separate funds to purchase property and takes title in the names of both spouses, a presumption arises that the purchasing spouse intended to make a gift of one-half of the property to the other spouse. o However, the presumption can be overcome by evidence showing that no gift was intended. LIMITED SPOUSAL MAINTENANCE RULE TEMPLATE Under the Texas Family Code, Spousal maintenance may be awarded when (1) the parties have been married for 10 years or more, (2) the requesting spouse lacks sufficient financial recourse to provide minimum reasonable needs, (3) or either (i) the requesting spouse suffers from an incapacitating disability which existed before the divorce, (ii) is custodian of a child that is disable, of any age from the marriage, which is an impediment to her gainful employment, or (iii) Lacks earning ability to support minimum reasonable needs CHILD SUPPORT RULE TEMPLATES Factors the court must consider in setting amount of child support a. Statutory guidelines b. Needs of the child c. The ability of the pares to contribute to the childs support d. Any financial resources available for support of the child, e. Amount of possession and access to the child.

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Statutory Guidelines Fixed percentage of NET RESOURCES not to exceed $7,500.00 There is rebuttable presumption that a support order tied to the statutory guidelines percentage is reasonable and in the best interest of the child. o If the court deviates from this guideline, it must make specific findings as to the reasons that justify the deviation. Statutory Percentage of Net Resources 2 - 25% 3 - 30% 4 - 35%

1 - 20%

5 - 40%

Intentional Unemployment/Under Employment If the obligor parent is intentionally unemployed or under employed, the child support guidelines are applied to the amount the court determines that the obligor parent could earn if employed consistent with his skills and earning potential.

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WILLS & ESTATE ADMINISTRATION RULE TEMPLATES Pretermitted Child Under the Texas Probate Code, a pretermitted child is a child that is born or adopted after testators will is executed. Under the pretermitted child statute, if at the time of execution: o The testator has no living children, or has living children not provided for in his will, pretermitted child takes an intestate share of all property not bequeathed to testators surviving spouse. o There are other children then living, and they are provided for in the testators will, the pretermitted childs share will be limited to gifts to such children. o Pretermitted child is provided for in the will or through a nonprobate transfer, rule does not apply. Adopted Adults Under the Texas Probate Code, an adopted adult: o Is considered to be the son or daughter of his or her adoptive parents for all purposes o Is entitled to inherit from and through the adopted parents, and o May not inherit from or through the biological parents Small Estate Administration Under the Texas Probate Code, through small estate administration, a surviving spouse can clear title to homestead if: o No other real property is owned by the decedent and o The estate totals less than $50,000, not including the homestead o Files sworn affidavit attested to by two disinterested witnesses Statutory Heirship Proceeding Under the Texas Probate Code, statutory heirship proceedings can be used if person dies intestate and no need for formal administration: o Used to formally recognize the title of successors by inheritance o Useful for collecting bank accounts and other items in the decedents name

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GUARDIANSHIP RULE TEMPLATES Minor Ward With One Surviving Parent Under Texas Probate Code, if one parent is dead, the survivor is the natural guardian of the person of the minor children and is entitled to be appointed guardian of their estates. There is a rebuttable presumption that appointing a minors natural parents as guardian is in the best interest of the ward Guardian Preference Declaration Of Minor Ward Under the Texas Probate Code, when an application is filed for the guardianship of the person or estate, or both, of a minor at least 12 years of age, the minor, by writing filed with the clerk, may choose the guardian if the court approves the choice and finds that the choice is in the best interest of the minor Guardianship Appointment Texas probate courts have a wide discretion to appoint a guardian in the best interest of the ward. The appointment can however be overturned for clear abuse of discretion. Under the Texas Probate Code, a parent is presumed to be the best guardian unless that presumption is rebutted by clear and convincing evidence. Additionally, a person may not be appointed guardian if the person is o one whose conduct is notoriously bad, o one who because of inexperience, o lack of education, or o for other good reason is incapable of properly and prudently managing and controlling the ward or the ward's estate. The court can determine if the person to be appointed guardian is eligible or is a proper person to act as guardian by the preponderance of the evidence

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COMMERCIAL LAW RULE TEMPLATES ARTICLE 3 COMMERCIAL PAPER Negotiable Instrument Under the UCC, a negotiable instrument means a writing, signed by obligor, unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if it: o (i) is payable to bearer or to order at the time it is issued or first comes into possession of a holder; o (ii) is payable on demand or at a definite time; and o (iii) does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money. Opting out Writing NOT NEGOTIABLE on a note will make it non-negotiable, however, writing the same words on a check does not destroy the negotiability of the check. Holder In Due Course (HIDC) Under the UCC, a Holder in Due Course is a holder of a negotiable instrument, who took in good faith, for value, and without notice of claims, defects, or defenses. Only applicable real defenses (as opposed to personal defenses) are effective against an HDC. o Misrepresentation Personal defense not effective against an HIDC o Statute of Limitations Real defense effective against an HIDC o The statute of limitations to bring a lawsuit to enforce a note is six years from the due date (not the date of issue) o Duress Real defense effective against an HIDC However, to defeat a holder in due course, the duress must be such that it would nullify the underlying contract under Texas law (e.g., holding a gun to the note makers head and threatening to pull the trigger if he did not sign the note). Threatening to prosecute makers son for theft is not likely to be sufficient duress to void his obligation. Liability on Negotiable Instrument A drawer is obligated to pay a check according to its terms at the time it was issued or if the drawer signed an incomplete instrument, according to its terms when completed An indorser is obligated to pay the amount due on the instrument according to the terms of the instrument at the time it was indorsed or if the indorser indorsed an incomplete instrument according to its terms when completed Three conditions must be met to trigger indorsers liability o Presentment to drawee within 30 days of indorsement 74

o Dishonor by drawee o Notice of dishonor within 30 days of dishonor. Qualified Indorsement -- An indorsement that states without recourse or otherwise disclaims liability of the indorser will free the indorser of any further liability A bank is liable to the customer for paying a post dated check before the specified date only if the customer gives the bank prior notice that describes the check with reasonable certainty

ARTICLE 9 SECURED TRANSACTIONS In General Art. 9 applies to all kinds of contractual security interests in personal property and fixtures (i. e., personal property that is firmly affixed to real property). A consignor must comply with Art. 9 to protect its interest in consigned goods against creditors of the consignee if the consigned goods are worth a total of $1,000 or more. Classification of Collateral Collateral is the property subject to a security interest. The category into which tangible collateral is placed does not depend on the nature of the collateral, but rather on the primary use to which the debtor puts the collateral at the time the security interest attaches. Attachment A security interest is not enforceable unless it is attached There are three requirements for attachment of a security interest: (i) the parties must have an agreement that the security interest attach; (ii) value must be given by the secured party; and (iii) the debtor must have rights in the collateral The description of the collateral in the authenticated security agreement is sufficient if it reasonably identifies the collateral. A security interest can be created between a creditor and debtor for inventory now owned or after-acquired through a security agreement that reasonably identifies the collateral. Perfection Secured Partys Rights against third parties with competing interest in debtors collateral. There are five methods of perfection: (i) filing; (ii) taking possession of the collateral; (iii) control; (iv) automatic perfection; and (v) temporary perfection. A financing statement that is properly filed protects a creditor against other creditors for the collateral identified which has been secured by a security agreement.

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PRIORITY RULE TEMPLATES General Rule - First to File or Perfect When there are conflicting perfected security interests in the same collateral, priority goes to whichever party was the first to either file or perfect - whichever is earlier provided that there is no period thereafter when there is neither filing nor perfection. A perfected security interest is good against subsequent buyers PMSI in Inventory A PMSI in inventory has priority over a conflicting security interest in the inventory itself, proceeds that are chattel paper (or proceeds of that chattel paper), proceeds that are instruments, and any identifiable cash proceeds that are received on or before delivery to a buyer if: (i) The PMSI in inventory is perfected at the time the debtor gets possession of the inventory (the filing must take place before the inventory is delivered to the debtor); and (ii) Any secured party who has filed her security interest in the same inventory receives an authenticated notification of the PMSI before the debtor receives possession of the inventory, and the notification states that the purchase money party has or expects to take a PMSI in inventory of the debtor described by kind or type. The notification is effective for deliveries of the same type of collateral for five years. o A buyer who purchases goods in the ordinary course of business from a seller who sells goods of that kind will take free of non possessory perfected security interest in the inventory even if they buyer is aware of the security interest unless buyer is aware that the sale violates the terms of the agreement. o Buyers seller must have created the security interest and secured party was not in possession of the inventory at the time of the sale. Proceeds Under the UCC, if a secured party has a perfected security interest in collateral and the debtor sells, exchanges, or otherwise disposes of the collateral, the secured party has a temporarily (20day) perfected security interest in whatever proceeds the debtor receives in exchange for the collateral. Further, the security interest in proceeds will continue to be perfected beyond the 20 days if the proceeds are identifiable cash proceeds (this is sometimes called the "cash proceeds" rule); or the security interest in the proceeds is perfected within the 20-day period. Priority in security interest is priority in proceeds.

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BUSINESS ASSOCIATIONS RULE TEMPLATES PARTNERSHIPS 1. Partners are liable to the partnership and other partners for any breach of the partnership agreement. 2. Every partner is an agent of the partnership for the ordinary course of business and has equal management rights and authority to bind the partnership in that business. a. Partners are jointly and severally liable for partnership obligations, acts of other partners and the partnership in the ordinary course of business. b. Partners are liable and obligated to pay their share of winding up costs c. Partnership resources must be exhausted first. 3. Partnerships are liable for the loss of money received in the course of business and misapplied by a partner while in the partners custody. 4. Partnerships are liable for the torts committed by partners within the course of the partnership business. CORPORATIONS A properly formed corporation is a legal entity liable for the debts and obligations incurred by its agents when the agents act within their authority. A president, as an agent, acts i. with express actual authority based on the bylaws, resolutions of the board of directors or shareholders, or express delegations from a superior officer to a subordinate officer, ii. with apparent authority when she acts in the ordinary course of business; unless the third party knew the agent lacked authority, and iii. with implied actual authority when she reasonable believes she has authority granted to her by virtue of her position, unless expressly forbidden. Piercing the Corporate Veil Shareholders are generally not personally liable for corporate obligations. A court may pierce the corporate veil if the corporation is being used to perpetrate actual fraud. i. Mere failure to observe formalities is not enough to justify piercing. ii. Those directors or shareholders that actively participate in corporate management will be held personally liable. iii. When the corporate veil is pierced, normally only the shareholders who were active in the management or operation of the business will be held personally liable. iv. Liability is joint and several. 77

Loss of Franchise If a corporation's privileges are forfeited for failure to pay franchise tax, every officer and director is personally liable for each debt of the corporation incurred after the tax was due and before corporate privileges are revived. 1. An officer or director will not be liable if the debt was incurred over his objection or without his knowledge. 2. This liability is unaffected by subsequent reinstatement of the corporation.

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