1
Q
Setting the Rule for Secured Transactions: General rule for a valid security interest:
A
To attach a sec interest, either, the debtor must 1. authenticate a security agreement granting the creditor in the security interest in the collateral that describes the collateral or the creditor must take possession or control of the collateral. 2. the creditor must give value. 3. debtor must have rights in the collateral
2
Q
Agency law definition
A
Agency law governs the relationship between a principal and an agent.
3
Q
agent
A
person who acts or works on behalf of the principal.
4
Q
Requirements for an agency relationship
A
- Consent (by both the principal and the agent that the agent will act for the
principal’s benefit), and
2.Control (the agent is subject to the principal’s control).
5
Q
Principal
A
person who controls the agent.
6
Q
It is important to establish if an agency relationship exists because…
A
a principal can be liable to
a third party on a contract or in tort through the agent’s conduct.
7
Q
A principal is liable for a contract entered into by an agent if …
A
the agent had some kind of
authority.
8
Q
Actual authority
A
Express authority occurs when the principal expressly tells the agent to act
on the principal’s behalf.
Implied authority occurs when the principal’s conduct leads the agent to
believe that the agent has authority to act on the principal’s behalf (e.g.,
custom, past course of conduct, emergency situation).
9
Q
Apparent authority
A
Two requirements:
1) the person interacting with the agent does so with a reasonable belief in the agent’s authority and
2) the belief is generated
by some act or neglect by the principal.
10
Q
Agency: ratification
A
if the agent does not have any authority to enter into the transaction, the principal can ratify and become liable for the agent’s acts by impliedly affirming or accepting the benefits of the transaction so long as the principal knew the material facts
and had the capacity to ratify the transaction.
11
Q
Agents liability on Ks for disclosed principal, undisclosed, and unidentified
A
Disclosed principal: agent is liable if the agent did not have authority.
Undisclosed principal: agent is liable at the third party’s election.
Unidentified (partially disclosed) principal: both the agent and the principal may
be liable.
12
Q
Vicarious liability
A
employer or principal is liable if the employee or agent (mnemonic =
SMI):
o acted within the SCOPE of their employment,
o employee or agent made a MINOR deviation (detour) rather than a major deviation
(frolic), or
o committed an INTENTIONAL tort only if it was (mnemonic = BAN):
▪ for the principal’s BENEFIT,
▪ because the principal AUTHORIZED it, or
▪ one that arose NATURALLY due to the nature of the employment.
13
Q
direct liability
A
principal is liable for their own negligence in the hiring, firing, or supervising
of the agent.
14
Q
Are agents liable for their own torts?
A
yes
15
Q
If the agent breaches a duty, the principal can sue the agent for damages. What are those duties?
A
Duty of care
Duty to obey instructions
Duty of loyalty
16
Q
partnership
A
A partnership is the association of two or more persons to carry on as co-owners, a business
for profit, whether or not the persons intended to form the partnership.
17
Q
How to form a partnership
A
Formation of a partnership does not require much.
Co-ownership of a business is usually evidenced by joint control and the sharing of
profits and losses.
Profit sharing creates a presumption of the existence of a partnership
18
Q
Rights of Partners
A
Partners have equal rights to comanage in ordinary affairs.
o Ordinary matters require only a majority vote.
o Extraordinary matters require an affirmative vote or consent of all partners.
Profits are shared equally, unless otherwise agreed.
Losses are shared like profits.
Each partner is an agent of the partnership and has the ability to bind the partnership if
the partner has actual or apparent authority.
19
Q
Partners in a general partnership are jointly and severally liable for:
A
all debts the partnership incurs, and
partnership liability arising from a partner’s wrongful acts, such as negligence.
20
Q
Fiduciary duties of partners
A
Duty of loyalty not to usurp corporate opportunities for personal advantage.
Duty to account for any profit and to hold any profits as a trustee for the
partnership.
Duty of care to act with ordinary care when acting on behalf of the partnership.
21
Q
The end of a partnership occurs in three steps:
A
dissociation, winding up, and termination.
22
Q
Dissociation
A
is a partner’s change in the relationship with the partnership due to situations
such as death, withdrawal, or partner’s expulsion
23
Q
Wrongful withdrawal
A
Remaining partners can choose to not wind up the business and instead buy
out the withdrawing partner.
If winding up occurs, the withdrawing partner cannot participate.
24
Q
Rightful withdrawal
A
Winding up occurs (unless the remaining partners waive the right to wind up the business).
Withdrawing partner can participate in the winding up process
25
winding up
occurs when the partnership’s assets are liquidated, and the partnership’s
creditors are paid.
26
termination
is the true end of the partnership.
27
Creditors rights in a partnership
If a creditor has a claim against a partner, the creditor can get an interest in the partnership. The creditor can reach the partner’s profits.
If a creditor has a claim against the partnership, the creditor can try to collect from
individual partners.
28
Other kinds of partnerships
General partnership
Limited liability partnership (LLP)
Limited partnership (LP)
29
Approaches Used in Determining Choice of Law
Most significant relationship test under the Restatement (Second) of Conflict of Laws
o This test looks at a number of factors to determine which state has the most significant relationship to the parties and the issues, and thus, which state’s law
should apply.
Governmental interest approach
o This approach focuses on the policy reasons for applying one law over another.
30
Conflict of Laws and Civil Procedure
Klaxon rule: A federal district court sitting in diversity must apply the choice of law approach prevailing in the state in which the court sits. The federal court and the state court would use the same approach to achieve the goal of uniformity.
31
* Conflict of Laws and Family Law
Recognition of marriage: a marriage that is valid under the law of the place where it was contracted will be valid elsewhere unless the marriage violates a strong
public policy of the state with the most significant relationship to the spouses and the marriage.
▪ Common law marriage does not violate public policy.
32
* Conflict of Laws and Decedents’ Estates
The postmortem distribution of personal property is governed by the law of the state in which the decedent was domiciled at the time of their death.
o The postmortem distribution of real property is governed by the law of the situs.
The Law of Situs (lex situs) is a conflict-of-laws rule holding that the laws of the jurisdiction where property is physically located govern its ownership, transfer, and related disputes. It is primarily applied to real property (immovables) and tangible personal property.
33
How is a corporation formed?
A corporation is formed by filing articles with the state where you want to incorporate. A
corporation can also have bylaws (which control internal governance). The articles control
over the bylaws. A corporation can be formed for “any lawful purpose.”
34
If there is a good faith attempt to incorporate, then one relying on the corporate form.....
cannot try to go after the personal assets of the shareholders under corporation by
estoppel or de facto incorporation.
35
Corps: Subscription
Subscription: A fancy word for “offer.” This can be made before the corporation has been
formed and is irrevocable for six months (if it is a signed writing for a definite number of shares) or after the corporation is formed (in which case, it is revocable until it is accepted).
36
Corps: issuance
When the corporation sells its own shares. A board’s determination with
respect to the adequacy of consideration given is conclusive absent fraud or collusion.
37
corps: preemptive rights
Preemptive rights allow shareholders to maintain their ownership
interest in a corporation. They are not automatic. They only apply when new stock is
issued for money.
38
Corps: promoter and their liability
Unless a contrary intent is manifested, ordinarily promoters are personally
liable on contracts which they enter into on behalf of a to-be-formed corporation. They are
liable as soon as they agree to the contract up until there is a novation or release. (They are
still liable even if the corporation ratifies the contract!)
39
when is a corp liable on a pre-incorporation k?
A corporation is not liable on a preincorporation contract unless it ratified
or adopted the contract. This can be express (by the board of directors) or implied (from
accepting the benefits of the contract).
40
directors: board meetings
Ordinarily, the board of directors can act only at a duly constituted meeting in which a quorum is present. (A quorum means that there is a majority of directors present.)
41
business- judgment rule
Absent any evidence of fraud, bad faith, or self-dealing, there is a presumption under the
business-judgment rule that decisions are made by disinterested and independent directors on an informed basis and with a good faith belief that the decision serves the best
interests of the corporation and its shareholders. It is up to the plaintiff to overcome this
presumption.
42
Directors are required to discharge their fiduciary duties to the corporation (remember: it’s
good to care, man):
in good faith,
o with the care that an ordinarily prudent person in a like position would exercise under similar circumstances, and
o in a manner she reasonably believes to be in the best interests of the corporation.
43
Duty of loyalty: This comes up in three ways (mnemonic = BCC):
A director on both sides of the transaction (this is voidable unless it was fair or a majority
of disinterested directors approved or shareholders authorized to vote approved of it).
A director competing with its corporation.
A director taking a corporate opportunity
44
Directors duty in case of insolvency
The board of directors may not authorize the corporation to make distribution if the
corporation is insolvent under either insolvency test (the “balance sheet” or “equity” insolvency test) or if the distribution renders the corporation insolvent. The business-judgment rule applies
45
Shareholder removal of directors
Shareholders elect directors. But directors elect officers. (Officers are agents of the
corporation.)
* Shareholders can remove directors with or without cause by a majority of shares entitled
to vote. (Remember that voting agreements are enforceable!)
* A shareholder that owns not less than 10% of the outstanding shares of a class of the corporation’s stock has standing to commence a proceeding to have a director removed. The
court will order removal if the director engaged in fraudulent, illegal, or dishonest conduct or a gross abuse of authority and removal is in the best interest of the corporation.
46
Shareholder meetings
Meetings: Shareholders act by a meeting. Remote communication is permitted.
o Annual meetings: They get annual meetings. Even if corporate bylaws do not provide for an annual meeting, a meeting can be compelled by filing an application with the circuit court in the county where the principal place of business or registered office is located, provided that no date for an annual meeting has been designated for 15 months after the organization of the corporation or after the last
annual meeting.
o Special meetings: shareholders also get special meetings if 10% or more of the shares entitled to vote ask the circuit court to compel one for good cause shown.
47
Shareholder voting
A quorum of shares needs to be present to vote. The record owner on the record date votes. Shareholders are permitted to vote by agreement (must be in a signed writing)
or proxy (which does not have to be in a signed writing).
48
Holding shareholders liable
Generally, to pierce the corporate veil, a plaintiff must show that shareholders abused the privilege of incorporating and that fairness requires holding
them liable.
o One generally needs to show undercapitalization of the business, failing to follow
formalities, commingling of assets, confusion of business affairs, or deception of
creditors.
49
shareholder direct suits
a direct suit is appropriate when the wrong done amounts to a breach
of duty owed to the individual personally.
50
shareholder derivative suits
A derivative suit is appropriate when the injury is caused to the
corporation and the shareholder is trying to enforce those rights. A shareholder must have (mnemonic = SAD) standing, adequacy (adequately represent the interests of the corporation), and make a demand (and wait 90 days or until
rejection, unless irreparable injury would result). For dismissal or settlement of this kind of suit, court approval is needed.
51
shareholder inspection
A shareholder has a right to inspect books and records. There is a
procedure the shareholder must follow (they must make a demand, state their purpose, the
records sought, and that the records are connected with that purpose).
o The corporation bears the burden as to the stock ledger and shareholder list.
o The shareholder bears the burden of proof as to other records.
52
shareholders: Restriction on transfer of shares:
a restriction may be imposed but whether it is
enforceable against a person who receives the shares depends on whether they had actual
or constructive notice (i.e., if it was noted conspicuously on the stock certificates or if they
had actual knowledge, it is enforceable against them).
53
Corps: Fundamental changes
Fundamental changes like (mnemonic = DAMS): dissolution, amending the articles, merger, selling substantially all assets outside the ordinary course of business, require
approval by the board and a majority of outstanding shares entitled to vote. (This is higher than the general requirement!)
54
intestate succession
explains how property is divided when a person dies without a will
55
* Share of the surviving spouse
The spouse will get everything if the decedent’s parents are deceased, and the decedent did not have children outside of their relationship.
56
Share of the children (if no surviving spouse or parents)
Per capita at each generation: those in the same generation inherit the same
amount.
o Per capita with representation (modern per stirpes): heirs receive the
representative shares of their parents.
o Children for purposes of intestate succession include adopted children and children born out of wedlock.
57
Wills: Execution requirements
Writing
o Signed by the testator
o Witnessed by two people
o Testator must be 18 years old or older and have the intent that the document be
their will.
58
Holographic wills (unwitnessed wills)
Must be signed and (according to the UPC and some states), the material portions of the will must be in the testator’s handwriting.
o Recognized by about half the states.
59
Codicils
A supplement to a will that modifies it, adds to it, explains it, or revokes it.
o Must generally be executed in the same manner as a will.
o Republishes the will and controls to the extent that it is inconsistent with the will.
60
* Incorporation by reference
A writing that is not valid as a will may be incorporated into a will if:
▪ the will manifests an intent to incorporate the writing, and
▪ the writing is identified with reasonable certainty.
The writing must exist at the time the will is executed.
▪ The UPC and some states recognize the right of a testator to dispose of
tangible personal property by a signed memorandum whether it is
prepared before or after the execution of the will.
61
Revocation of a will
Physical act: a will may be revoked by the execution of a new will or some other physical
act, such as writing words of cancellation.
* Changed circumstances: divorce bars a former spouse from taking a gift under a will that
was executed prior to the divorce.
62
Wills construction problems: * Deceased beneficiary
One cannot give a gift to a dead person, so a gift to a deceased beneficiary will“lapse” and fall into the residuary of the estate.
o Antilapse statutes
▪ All states have antilapse statutes.
▪ If a beneficiary dies before the testator and was related by blood to the testator and had issue who survived the testator, the beneficiary’s issue will take in lieu of the deceased beneficiary.
o Marital property is divided between the parties.
o Separate property remains with the owner and includes (mnemonic = BIG) property acquired before marriage, inheritance, and gifts to one party
63
Wills construction problems: Ademption
The gift fails because the property no longer exists.
o Applies to specifically devised property.
o Common law: testator’s intentions are irrelevant.
o Some modern statutes state that the beneficiary is entitled to substitute property owned by the testator at the time of their death if the testator intended for the beneficiary to take the substitute property.
o Unpaid insurance proceeds: if proceeds are paid after the death of the testator, some courts will allow those proceeds to go to the beneficiary.
o Conservator gift: if the property that was the subject of a specific bequest was sold by a conservator of the testator’s estate, the beneficiary will receive the pecuniary
value of the property.
64
Will contests
Grounds to contest the validity of a will or its admission into probate include age, testamentary intent, mental capacity, undue influence, fraud, and mistake.
* Standing: a will can be contested only by persons who would be better off financially if the will were denied probate than they would if the will were admitted to probate.
65
nonprobate transfers
gifts
Joint tenancy
Tentative trusts and payable-on-death accounts
Other nonprobate transfers: insurance and joint bank accounts
66
wills: family protection: * Spouse’s forced or elective share
If the spouse does not like what they are given in the will, they can elect against the
will.
o The spouse will receive a fraction of the estate, the size of which is calculated by certain factors, including the size of the augmented estate.
67
wills: family protection: Pretermitted spouse
If the will was written before the marriage and the spouse was omitted from the will, the spouse is generally entitled to the intestate share.
68
wills: family protection:Pretermitted child
If the child was born after the will was executed, the child is entitled to share in the gift of the other then-living children.
69
What is family law primarily governed by?
Family law is primarily governed by state law.
* The U.S. Constitution places limits on state laws governing family law.
Because marriage is a fundamental right, direct burdens on marriage are not permitted.
70
Validity and recognition of marriage
Each individual must (CARS) have the capacity to consent, be of marriageable age,
not be closely related to the other person, and be single.
A license and solemnization are required.
71
common law marriage
Recognized in some states
▪ Requirements (mnemonic = CACH): capacity to enter into a marital contract, a present agreement to be married, cohabitation, and “holding out” a marital relationship to the community.
72
A marriage that is valid under the laws of the place where it was contracted will be valid elsewhere unless
is violates a strong public policy of the state that has the
most significant relationship to the spouses and the marriage.
73
Divorce
the marriage existed and then ended
▪ No-fault divorce
Virtually all states recognize no-fault divorce.
Neither fault nor consent by the other spouse is required.
Bases: one or both of the following: irreconcilable differences and
a minimum period of separation.
▪ Fault-based divorce
About 2/3 of states recognize fault-based divorce.
Examples of bases: adultery, desertion, cruelty, felony conviction
74
Annulment
the marriage was invalid from the beginning
▪ Bases (mnemonic = FIND): fraud, inability to consummate the marriage,
not allowed by law, and duress.
75
child custody
o Best interests of the child standard
May include child’s preference, parent’s religious faith, and any other
factor that is relevant to the child.
76
custody types
Physical custody: the right of the parent to have a child live with them.
▪ Legal custody: the power of the parent to make important decisions
concerning the child.
77
custody arrangements
Joint custody
▪ Sole custody
78
modification of child custody
There must be a substantial change of circumstances.
▪ Generally, this change must have been unforeseen at the time of initial
judgment.
79
child support
Federal legislation requires all states to employ numerical child support
guidelines and establish a rebuttable presumption that the resulting award is correct.
▪ The guidelines must be applied in all cases, regardless of the parents’ marital
status.
80
modification of child support
There must be a substantial change in circumstances.
* Involuntary reduction in income warrants relief.
* Voluntary reduction in income: two views:
-Refusal to modify
-Multi-factor test that includes whether the party acted in
good faith.
▪ Federal law prohibits the retroactive modification of child support.
81
Rights of parents
Decisions by a fit parent must be given some deference including decisions
regarding religious upbringing and medical care.
▪ Parental rights are not absolute and can be limited if parental decisions
will jeopardize the health or safety of the child or have the potential for
significant social burdens.
82
rights of biological fathers
who are involved with their children generally have rights.
▪ An involved father may oppose an adoption petition and is entitled to
notice of adoption proceedings.
83
adoption
is a complete and final transfer of parental rights and responsibilities.
84
family law: third party rights
If there is a custody dispute between a parent and a third party (such as a
grandparent), there is a rebuttable presumption that custody in the
parent is in the best interest of the child.
85
Property division for divorce:
Marital property is divided between the parties.
o Separate property remains with the owner and includes (BIG) property acquired before marriage, inheritance, and gifts to one party.
86
Property division for divorce: * Division based on premarital agreement
A court will enforce a premarital agreement so long as the agreement is voluntarily
made and substantively fair, and full disclosure of assets and obligations was made
87
Property division for divorce: * Division based on settlement agreement
The court may reject the agreement, accept it, or accept it with modifications.
The court may set aside a settlement agreement that is based on fraud,
overreaching, or duress that results in an agreement that is substantively unfair to one of the parties.
88
Types of spousal support
Permanent
Temporary
Lump sum
* The determination of spousal support usually requires an assessment of the parties’
financial resources and needs, marital contributions, and marital duration.
* Modification of spousal support can occur if there is an unanticipated substantial change
in circumstances.
89
Family law: Power of a Court (Jurisdictional and Conflict of Laws Issues)
Uniform Interstate Family Support Act (UIFSA)
Uniform Child Custody Jurisdiction and Enforcement Act (UCCJEA)
Parental Kidnapping Prevention Act (PKPA)
90
How to start a secured transactions essay?
“Article 9 applies to all security interests in personal property or
fixtures by contract.”
91
classifying collateral
Goods can be classified into four categories. Look at the moment of attachment when classifying goods. Note: classification matters for perfection purposes!
* Consumer goods (i.e., used or bought for primarily personal, family, or household
purposes)
* Inventory (i.e., goods held by a person for sale or lease, or raw materials)
* Farm products (i.e., crops, livestock, etc. used by a person in a farming operation)
* Equipment (i.e., catch-all—goods other than inventory, farm products, or consumer goods)
Collateral can also be classified as intangible or semi-intangible (i.e., instruments like a check,
chattel paper like a lease, or an account when someone owes a creditor money).
92
How Does a Security Interest Arise? (Lender vs. Debtor) (mnemonic = RVS AID)
Remember, security interests are voluntary transactions whereby a debtor will “secure” a loan
with a piece of collateral that the secured party can take and sell if the debtor defaults! This
way the secured party does not have to blindly trust the debtor.
93
There are three things needed for a security interest to arise so that the lender can collect on
the debt by seizing and selling the collateral if need be.
1. Debtor has rights in the collateral
2. Value is given by the secured party
3. There is a binding security agreement
-Authentication: generally a signed writing, unless the secured party has possession.
-Intent: to create a security agreement
-Description: Must accurately describe the collateral. A generic description is okay—
i.e., “equipment” or “inventory.” But one that is against public policy, like “all consumer goods,” is not okay. Neither is a super-generic description like “all debtor’s
assets.”
94
Perfection Generally (Lender Vs. Lender)
Note: this only matters when there is more than one secured party and not enough money in
the collateral!
How to perfect generally: (mnemonic = FAPC)
* Filing: File a financing statement (including the debtor’s name, a description of the collateral,
and the secured party’s name). The goal is to put others on notice!
* Automatic: there is automatic perfection for a PMSI in consumer goods.
* Possession: for goods, money, etc.
* Control: for deposit accounts, investment property, etc.
95
Perfection when purchase money security interests (PMSIs) are involved
Purchase money secured creditors are given super priority over other interests because they
enable the debtor to do something he otherwise would not be able to do without sacrificing
what the other lenders have.
Consumer goods: these are perfected when the interest attaches (exception: vehicles in some
cases).
* Inventory: The PMSI must be perfected before debtor receives possession, and the secured
party must send an authenticated notification to holders of conflicting interests. This is good
for five years, generally.
* Equipment: Attachment is needed, then a financing statement must be filed. There is a 20-
day grace period to file a financing statement after debtor receives the goods. This does not
apply to inventory or livestock.
96
Article 9: Sale and Transfers of Collateral
Unless agreed otherwise, a security interest will automatically attach to proceeds of a sale of
collateral subject to a security agreement.
* A buyer in the ordinary course of business generally takes free of any security interest in
the collateral.
* A buyer not in the ordinary course of business takes collateral subject to any perfected
security interest.
97
Article 9: Fixtures, Accessions, and Commingled Goods
Fixtures: Goods connected to real property so an interest arises under real property law.
Generally, a fixture filing is needed to perfect over a conflicting real estate interest.
Construction mortgage: a properly recorded construction mortgage has priority over later filed PMSIs in fixtures so long as it is recorded before the collateral becomes a fixture and the collateral is affixed before the completion of the construction.
Accessions: These are goods that are physically united with other goods in a manner that the initial identity is not lost (i.e., a new motor in an old car). Commingled goods are goods
that lose their identity (i.e., flour in bread).
98
Article 9: default
Default is defined by the terms of the security agreement! ***Remember a secured transaction is a voluntary transaction!***
A few notes on default
* If a default occurs, the lender can demand payment.
* There is a statutory right to repossess the collateral by going to court or by self-help so
long as there is no breach of peace.
* There are requirements that the secured party must undergo to allow the debtor to protect
themselves: (1) a commercially reasonable sale, and (2) notification of the sale within a
reasonable time. There are specifications for what constitutes a notification of sale for both
consumer and nonconsumer transactions.
99
Trust terminology
Settlor: the one making the trust
Trustee: the one entrusted with managing the trust
Beneficiary: the one who benefits from the trust
100
Types of trusts
Express trust: created pursuant to the express intention of the settlor.
Implied trust: created when there is no express intention of the settlor to create a trust, but equity will create a trust, nonetheless
101
Requirements to create a valid express trust
Settlor with capacity
present intent to create a trust ( manifested by settlors words, writing or conduct)
Trustee
▪ If there is no trustee, the court will appoint one.
*inter-vivos trust only; testementary trust will not fail for lack of trustee)
definite Beneficiary(s)
▪ The same person cannot be the sole trustee and the sole beneficiary, or
the trust will collapse.
Trust property
▪ Must be identifiable.
Valid trust purpose
- one that is not illegal, against public policy, or impossible to achieve, and does not violate RAP)
o Most MEE sample answers also include an intent to create a trust.
102
Trusts: pourover will
a will that makes a gift to a trust.
The trust must be identified in the testator’s will and the terms incorporated in a
writing that is executed before or concurrently with the will.
103
Spendthrift trust
contains a clause that restrains both the voluntary and involuntary
transfer of a beneficiary’s interest.
o A creditor cannot reach the trust’s assets before they are distributed to the beneficiary.
o Favored creditors may reach the beneficiary’s interest by garnishment or attachment but they can recover only what the beneficiary would be able to recover.
Examples:
▪ Child and spousal support creditors
▪ Judgment creditors who have provided services to protect the beneficiary’s
interest
▪ A state or the U.S. government
▪ Creditors furnishing necessaries (some states)
104
charitable trust
may be created for a charitable purpose
o Must have a large number of not readily identifiable individuals to benefit from the
trust.
105
cy pres
allows a charitable trust to be modified and not fail if the court finds that the settlor had a general charitable intent if the charitable purpose of the trust
becomes unlawful, impracticable, or impossible to achieve.
106
Alienability of Trust Interests: Disclaimer:
a beneficiary can disclaim their interest in the trust.
o Majority rule: a beneficiary has 9 months to disclaim an interest.
o UPC approach: a beneficiary can disclaim any time before acceptance.
107
Modification of a Trust
Generally, a trust is revocable unless the trust says otherwise.
* If a trust is revocable, it is also amendable.
108
Termination of a Trust: consent
Revocable trust: can be terminated by the settlor at any time. Under the UTC, the settlor can revoke by complying with revocation methods stated in the trust or any other method manifesting clear and convincing evidence of the settlor’s intent.
o Irrevocable trust
▪ Termination by settlor: all the beneficiaries are in existence, and all
agree.
▪ Termination by beneficiaries after settlor’s death: income beneficiaries
and remaindermen unanimously consent and there is no material
purpose of the trust yet to be performed.
109
Termination of a Trust: merger
the trust will collapse if the sole trustee is the sole beneficiary.
110
Termination of a Trust: Trust’s purpose
becomes unlawful, contrary to public policy, or impossible to achieve.
111
Termination of a Trust: Uneconomic trust:
the value of the trust property becomes so low (usually less than
$50,000) that the trustee determines that the cost of the administration of the trust is not
justified.
112
Powers and Duties of Trustees
Duty to administer the trust
Duty of loyalty
-Duty to act for the interests of the beneficiaries
-Duty to act impartially
Duty of care—prudent administration
-The trustee must manage the trust assets as a prudent investor would.
-The trustee must comply with the Uniform Prudent Investor Act.
-Duty to diversify: diversification is one of the hallmarks of prudent investing.
-Duty to allocate properly to principal and income
113
Remedies for breach of trust
Removing the trustee
Compelling trustee to perform their duties
Compelling the trustee to pay damages
114
trusts: power of appointment
A settlor or testator can give a beneficiary a power of appointment, which enables the beneficiary to designate who will receive trust or estate property.
-General power of appointment: the class of people that the donee can exercise a power of appointment in favor of is unlimited.
-Special power of appointment: the class of people that the donee can exercise a power of appointment is limited.
Generally, if a power of appointment is not properly exercised, the property will go to the grantor’s estate and pass to whomever the grantor gave it to in the event of default of
appointment.
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Construction of a Trust: Gifts to classes: gifts given to a group of individuals.
UPC approach: each living beneficiary takes their share and the deceased
beneficiary’s share will pass to their surviving descendants.
Common law: the gift will go to whomever the instrument says it should go to or, if
the instrument does not discuss the death of the beneficiary, to whomever the deceased person has specified in their will or through intestacy.
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Secret Testamentary Trust
Absolute gift in will made in reliance on the beneficiary's promise to hold the property in trust for another
- extrinsic evidence allowed
-Result: constructive trust imposed in favor of intended beneficiary
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Semi-Secret Testamentary Trust
Gift in will to a person "in-trust," but does not name trust beneficiary
- no extrinsic evidence allowed
-Result: "trustee" holds on resulting trust for testator's legatees or heirs
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The basics of " secret" trusts
Recall that a "secret trust" situation arises when a settlor secretly agrees with a will beneficiary that the beneficiary will hold the property in trust for someone else, but the will doesnt state the trust nature of the gift.
If the intended beneficiary can prove by clear and convincing evidence that the will beneficiary promised to hold the property in trust and the settlor relied on that promise, a constructive trust will be imposed on the property in favor of the intended trust beneficiary.
This is true even if the will beneficiary did not make the promise until after the will was executed. Furthermore, it doesn't matter whether the will beneficiary intended to perform the [promise when they made it; all that matters is that the settlor relied on the promise.
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Is there a valid express private trust? ( what questions should you ask yourself)
1. does the settlor have capacity and present intent to create a trust?
-valid trust must have a settlor with capacity and intent to split legal and equitable title
2. Is there a qualified trustee?
-valid trust needs a trustee who can hold legal title to the trust property
3. Are there definite beneficiaries who accept the interest?
-valid trust must have beneficiaries because there must be someone to enforce the trust
4. Is there trust property (res)?
-valid trust must have trust property
5. Is the trust purpose valid?
-trust must have a valid purpose
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Is there a valid express private trust? Step 1: does the settlor have capacity and present intent to create a trust? (answer)
Capacity
-inter vivos trust: same capacity needed for inter vivos gift
-testementary trust: same capacity needed for a will
-lack of legal capacity to convey prevents trust from arising
-undue influence, fraud, or duress renders trust unenforceable
Present intent
-must intend trust to take effect immediately
-must express intent by words or conduct while settlor owns the property
-precatory expressions(hope,wish) result in inference that no trust was intended, but inference may be overcome by other evidence: definite and precise directions,directions addressed to a fiduciary, a resulting "unnatural" disposition of property if no trust imposed; or, extrinsic evidence showing that the settlor previously supported the intended beneficiary
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Is there a valid express private trust? Step 2: Is there a qualified trustee? (answer)
1. Trustee must have capacity to acquire and hold property for own benefit and capacity to administer that property
-example: minors and insane persons can hold property, but cant administer
2. settlor may declare self as trustee
3. trustee must have duties
4. failure to name trustee ( or failure of trustee to accept or qualify) doesn't defeat a testamentary trust; court will appoint.
5. intervivos trust may fail without trustee for lack of valid delivery and transfer of trust property
6. Have creation formalities been met?
-valid trust needs to meet formalities of creation. know the requirements for intervivos and testementary trusts
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Is there a valid express private trust? Step 3: Are there definite beneficiaries who accept the interest?
1. must be definite beneficiary, or ascertainable within the period when all interests must vest under RAP
- example: trust for "friends" is insufficient
- class gift ok if reasonably definite, can allow trustee to select in their discretion
2. must be capable of taking and holding title to property, but need not be competent
3. notice not required but beneficiary must accept; acceptance is presumed
4. beneficiary may disclaim in writing; most states require this within 9 months
5. many states ( and UPC) apply until anti-lapse statutes if beneficiary with certain degree of relationship predeceases, unless trust provides otherwise
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Is there a valid express private trust?Step 4: Is there trust property?
- no trust property = no trust
- must be existing interest in existing property- but future interests are ok
- must be property that settlor has right to convey
- must be identifiable and segregated
-debtor cant hold own debt in trust
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Is there a valid express private trust?Step 5: Is trust purpose valid?
1. generally a settlor can create a trust for any purpose, except a purpose that is: illegal, impossible to achieve, intended to defraud settlors creditors, or contrary to public policy ( induce crimes, torts, divorce, child neglect etc)
2. if a condition attached to an interest IS against public policy
- the settlors alternative desire controls if expressed
-invalid condition is subsequent- condition stricken, but trust is valid
-invalid condition precedent- condition stricken, court decided whether interest valid or fails
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Is there a valid express private trust?Step 6: Have creation formalities been met?
inter vivos trust- created during settlor's life by:
settlors declaration they are trustee of specific property for a beneficiary
-settlor keeps legal title
-personal property- no transfer needed
-real property- should be conveyed from settlor as individual to settlor as trustee
OR, settlor's transfer of property to the trustee
-settlor conveys legal title
-personal property- conveyed by physical delivery or written instrument
-real property- conveyed by deed
Testementary trust- created by settlor's will
-essential terms must be ascertained from will, incorporated document, facts of independent significance , or exercise of power of appointment
-secret trust (absolute gift but trust intended)- constructive trust imposed
-semi-secret trust (gift in trust w/o beneficiary) - resulting trust for testator's heirs
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De Jure corporation: method of formation and Effect on personal liability
Method of formation: follow all statutory provisions
effect on personal liability: insulates against personal liability of shareholders
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De Facto corporation: method of formation and Effect on personal liability
Method of formation: colorable compliance with most statutory provisions and exercise of corporate privileges
effect on personal liability: insulates against personal liability of shareholders, but corporation subject to quo warranto proceeding by state
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Corporation by Estoppel: method of formation and Effect on personal liability
Method of formation:
Feb Bar 2026
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