BLW513 Property, Business Crimes, Secured Transactions, and Bankruptcy
For Americans, property is the foundation upon which virtually everything else exists. It undergirds our legal system, our social system, and our government. Much of our legal system involves conflicts around property: who has a right to it, who can be excluded, how it can be held, what can be done on it, to it, over it, or with it, what happens if someone without rights takes it, and so on.
What is Real Property and Why do We Care?
Real property is land and anything permanently attached to it such as houses, trees, fences, and so on. Our law recognizes property rights in land as far down as we can go, and as far up as is feasible. Our law considers property as important, but it considers real property as of truly unique significance. Even though one plot of land may look much like another, our law considers each piece of real property unique and its owner has a right to claim it to the exclusion of all others. Property rights include what interest a person holds in the real property, as well as how that interest is held.
What Real Property Interests does the Law Recognize?
One of the most important questions about real property is the nature of the property interests that is held. It determines what the owner can do with the property regarding his or her possession of it. There are several different types of interests, called estates or interests, recognized at law.
Next we examine business crimes. It would be impossible to list and explain all of the crimes that may be committed by and against businesses. We refer to most business crimes as white collar crimes. Although we cannot imprison a corporation, we can send corporate officers and managers to prison if they participate in the crime or should have known that a crime was committed.
The Corporate Criminal
A corporation can be held criminally liable for acts performed by its officers, directors and employees. The employees who perform those acts can also be held criminally liable for the acts.
Do Businesses have Constitutional Rights?
A corporation has most of the rights that individuals have under the constitution. Under the constitution, businesses are protected from illegal searches and seizures by the Fourth Amendment much like individuals are. Corporations have no Fifth Amendment rights against self-incrimination. The Sixth Amendment gives the corporation the right to counsel. The Eighth Amendment’s prohibition against cruel and unusual punishment has no application to corporate punishment.
Types of White Collar Crimes
Generally, if a corporation commits a crime it is for the specific purpose of gaining an advantage in the market.
Securities are regulated by the Securities and Exchange Act of 1934. The primary purpose of the statute is to protect investors from fraudulent activity involving the purchase or sale of securities on the stock market. Keep in mind that the main intent of securities laws is to make sure investors are aware of all they need to know to make prudent business decisions.
The most prominent criminal activity involving fraud on the market is insider trading. Insider trading occurs when someone, usually a corporate insider, buys or sells a security while in possession of inside information. Inside information is any material information about the stock that is unknown to the public. Lastly, insider trading can occur if a person is not a member of the corporation but works for the corporation in an outside capacity and, as a result of the position, learns of and acts upon non-public information.
Conspiracy, Obstruction of Justice, Mail Fraud, and Perjury
Conspiracy is an agreement between two or more persons to commit a crime or to conspire to commit an act that is not unlawful by unlawful means. Adding a charge of conspiracy (thus increasing the potential penalty) often acts as an incentive for the guilty party to plead to the underlying charge in exchange for dropping the ancillary charge of conspiracy. This negotiation is called plea bargaining and is very common.
Perjury is the willful and corrupt false swearing or affirming, under oath, as to a material matter in question.
Mail fraud is using the mail to obtain money or property in a scheme to defraud. Wire fraud is the same, but requires use of a telecommunications device of any kind if the communication crosses state lines.
The crime of obstruction of justice can be used to address conduct that overlaps with other categories of crime, for example, perjury. It is generally defined as any corrupt attempt to influence, interfere, or impede an investigation conducted by any officer of the court or of the law by threats, intimidation, or corrupt persuasion.
Antitrust crimes involve unfair marketing techniques and conduct designed to eliminate competition through unfair means. The primary statutes: the Sherman Act1, the Clayton Act2, the Robinson-Patman Act3, and the Federal Trade Commission Act4, all have as their purpose keeping competition in check. Price discrimination is an antitrust violation under the Robinson-Patman Act.
- 15 U.S.C. §1
- 15 U.S.C. §12
- 15 U.S.C. §13(a)
- 15 U.S.C. §41
Price discrimination occurs when different purchasers of the same product are charged differently for an item that costs the same to produce if the purpose is to decrease competition or create a monopoly. The Sherman Antitrust Act makes it a crime to enter into a contract or engage in a conspiracy that restrains trade.
For a Sherman Act violation, the government must prove that there was a conspiracy between two or more persons that unreasonably restrained interstate trade with the intent to violate the law.
Price fixing is an antitrust violation under the Sherman Act. Price fixing occurs when two or more competitors conspire to sell a product for the same price. If two or more firms engage in a conspiracy to fix prices, they have formed a cartel.
Entering into the agreement to perform an illegal act is called collusion.
Bid rigging is another form of illegal antitrust activity prohibited by the Sherman Act. Bid rigging involves interference with the competitive bidding for the awarding of a contract.
Crimes against the environment encompass many different crimes ranging from air pollution to illegal dumping of toxic wastes on land and in water. Under the overall umbrella of the Environmental Protection Act, these statutes are used to prevent harm to the environment.
Workers are protected in the workspace by the Occupational Safety and Health Act.5 This act tries to set minimum standards for a safe work environment by imposing training, equipment guidelines, and reporting requirements on employers.
Racketeering Influenced and Corrupt Organizations Act (RICO)
RICO was originally aimed at organized crime prosecutions, but has become a useful tool in prosecuting white collar crimes. RICO requires a pattern of predicate acts in furtherance of an illegal activity.
Although corruption may conjure up thoughts of politicians, the politicians engaged in corrupt activity are often enticed into doing so by corporate officials. Political corruption occurs when the acts of a public servant deviates from their appointed duties for the politician’s personal enrichment.
Embezzlement is a breach of trust done for private gain done by an employee or agent of the corporation. For embezzlement to occur there has to be a breach of trust and the relationship allowed the employee or agent to obtain money or property.
5. 29 U.S.S. § 651 et seq
Computer crime refers to the intentional use of a computer to commit fraud or for other illegal purposes. If a crime can be committed without the use of a computer, it is not a computer crime. A crime that can only be committed via use of the computer is what a computer crime refers to. Cyberterrorism and Internet fraud are distinctly computer crimes.
The Controlling the Assault of Non-Solicited Pornography and Marketing Act (CAN-SPAM) is used to target unsolicited emails that are often used to commit Internet fraud. Many of the Internet fraud cases implicate legitimate corporations.
Identity theft could happen anytime and might be difficult to avoid. Corporations are implicated in this crime because often it is from the corporation’s database that the identity of its customers is pilfered, usually through hacking methods. The government has also been the victim of stolen identity. Most corporations who have been victimized have offered to pay for credit monitoring of each victim for several years to allow the potential victim to be sure his or her credit is not being used illegally.
Corporations have the same right to defend themselves as do individuals. Corporations can make use of constitutional defenses such as search and seizure laws, as well as substantive defenses such as defendant alleging and proving he or she did not do the act alleged. Immunity, self-defense and criminal insanity are some substantive defenses.
The Sarbanes Oxley Act
Following the Enron scandal of 2002 and others that followed on the heels of Enron, Congress enacted the Sarbanes Oxley Act of 2002. The purpose was to avoid a continuation of Enron-type scandals. The act increased the criminal penalties imposed for violations of the act. The act also created the private, non-profit Public Company Accounting Oversight Board, or PCAOB.
PCAOB is designed to oversee the auditors of public companies. Violations of the Sarbanes Oxley Act or specific PBOAB rules may result in sanctions being levied against the violators. The PCOAB was created to police what had not been policed before – the moral compass of corporate culture. What Sarbanes-Oxley and PCAOB does is create an accountability system that is so exact that any breach other than the most innocent is penalized. Corporate America brought that on itself.
Unlike days of yesteryear when credit was a thought of as almost shameful and a luxury in which few consumers indulged, credit has today become an almost vital part of life as we have come to know it. Secured transactions involve a debt to pay money that is made stronger by the debtor giving an interest in his or her property as a means of securing the promise of repayment.
Bankruptcy involves a debtor who cannot afford to repay his or her debts having those debts legally discharged by the court. Most of the credit you may be aware of is based on a simple contract with a debtor’s promise to pay a debt owed to the creditor such as that involved in a credit card transaction.
This further assurance generally comes in the form of the creditor asking the debtor for collateral to secure repayment of the debt. Most debtors repay their debts as agreed. Debts are often secured by collateral owned by the debtor. In order for a creditor to be able to secure her debt with that collateral, she must file a financing statement. A creditor with a perfected security interest is called a secured creditor.
If a business fails or an individual cannot pay her debts and has to file for bankruptcy protection, the creditors get in line for repayment of the business’s or individual’s debts.
An unsecured creditor is a creditor without a security interest in a debtor’s property, such as a credit card company that has extended credit to the consumer.
Failure to Perfect a Security Interest
A lender who fails to perfect his or her security interest faces certain defeat by the avoidance powers of the bankruptcy trustee. If a creditor has failed to file the financing statement properly the filing is ineffective, unless the mistake was made in good faith or the person against whom the statement is filed has knowledge that the collateral is covered by the financing statement.
While filing is the usual way a security interest is perfected, in some situations a security interest is automatically perfected upon attachment. The two most important situations in which automatic perfection applies are (1) purchase money security interests (PMSI) in consumer goods and (2) temporary perfection with respect to instruments, documents, and proceeds.
A seller of goods who provides the purchase price to the buyer retains a security interest in the goods by a security agreement and has a perfected interest without doing anything more such as filing a security agreement. No filing or other step is required to perfect a purchase money security interest (PMSI) in consumer goods. Although PMSI perfection is automatic, ancillary filings, for example, a motor vehicle that must be filed with the state to obtain a title, can also be challenged by the bankruptcy trustee. A security interest in negotiable instruments is automatically perfected upon attachment for 21 days without filing or taking possession.
The whole purpose of a security interest is to make sure the creditor has the most protection possible if the debtor does not repay the loan the creditor extended. However, perfection of a security interest may not be the end of the secured creditor’s concerns about the property. When more than one party has an interest in the same collateral, Article 9 establishes a set of rules that determines the relative priorities among these parties. In order for credit to be extended to a debtor using a security interest in collateral, the creditor wants to be sure that if the debtor becomes bankrupt the creditor will be able to shield the collateral from the reach of the debtor’s other creditors or from disposal by the debtor. Generally, where there is more than one secured creditor, victory goes to the first creditor to file or otherwise perfect; in a sense, this rule creates a race to the proper filing office. To be certain, Article 9 should be consulted for the rules and exceptions concerning how priorities are established and enforced in your jurisdiction. For our general purposes however, the first secured party to file or otherwise perfect has priority.
A lien is created by state statute for the purpose of securing priority of payment of the price or value of work performed and materials furnished in enhancing the value of property. A lien can be created by the state for almost any service or performance. The lien holder has priority over all other creditors.
It is common in many business transactions involving the extension of credit for the creditor to require that someone in addition to the debtor promise to fulfill the obligation. This promisor generally is known as a surety.6 Sureties are also frequently utilized by employers to protect against losses caused by defalcations (breaches of trust, such as embezzlement) by employees, as well as in construction contracts for commercial buildings to bond the performance of the contract.
Distinction Between Surety and Guarantor
A surety is obligated to pay the debt as soon as it becomes due and the debtor does not pay. A guarantor does not become obligated unless the debtor does not pay, but the creditor must first try to collect from the debtor before the guarantor becomes obligated on the debt. There are different kinds of guaranties. The most common are an absolute guaranty and a guaranty for collection only. An absolute guarantee puts the guarantor in the same position as a surety, i.e., he is guaranteeing payment, and the creditor can look to the guarantor immediately as if he was a surety. A guaranty for collection only requires the creditor to take extra steps before he can collect from the guarantor.
When business fails or individuals become mired in debt, businesses and individuals have the choice to take advantage of the bankruptcy codes that give them the opportunity to either have their debts completely discharged, or allow them an opportunity to be protected from creditors while they reorganize their debts so that the business can be maintained and creditors can be paid off over time. This goal is accomplished through the bankruptcy discharge, which releases individual and business debtors from personal liability from specific debts and prohibits creditors from ever taking any action against the debtor to collect those debts.
The Bankruptcy Process
Article I, Section 8, of the U.S. Constitution authorizes Congress to enact uniform laws on the subject of bankruptcies. While states may have their own bankruptcy provisions, it is the uniform federal law that governs all bankruptcy cases. Accompanying the Code are the Federal Rules of Bankruptcy Procedure (the Rules), which, much like the civil and criminal rules we discussed in the court chapter, are the rules that must be followed to successfully proceed through a bankruptcy in federal court. Each judicial district in the U.S. has a bankruptcy court. Presiding over each bankruptcy is the bankruptcy judge, who is a judicial officer of the court. Accompanying the judge is the trustee in bankruptcy. A debtor usually meets with his or her
6. Technically, under the common law there is a difference between a surety and a guarantor. A surety is bound on the same instrument as the principal debtor, whereas a guarantor is bound by a separate or collateral writing. However, for convenience, we will apply surety to mean both. Under the UCC, Article 3, a guarantor is a surety who adds words of guaranty to his or her signature, but these words add nothing to the suretyship obligation.
creditors in a “341” meeting, so named because of the section of the bankruptcy code which requires such a meeting. There are actually several different kinds of bankruptcy and they do not all operate the same way or do the same thing.
A debtor is eligible for involuntary bankruptcy if either 1) it is generally not paying its debts, or 2) a custodian has been appointed during the last 120 days to take charge of substantially all of the debtor’s property. In order to file the petition, creditors must have total outstanding unsecured debt of at least $10,000. The benefit to the unsecured creditor of filing involuntarily against its debtor is the ability to recover transfers of assets from the debtor that should not have been made. The courts will look closely at the motivation of the creditors in filing.
There are six types of bankruptcy that can be filed under the code. The most often used and those we will focus on are Chapters 7, 11, and 13.
What is a Discharge in Bankruptcy?
A bankruptcy discharge releases the debtor from personal liability for certain specified types of debts. The discharge is a permanent order prohibiting the creditors of the debtor from collecting discharged debts, including legal action and communications with the debtor, such as phone calls, letters, and personal contacts. All creditors are notified by the clerk of the court that they are not to continue to collect from the debtor and that continued collection efforts could result in a contempt order being issued against them for failing to follow the court order of discharge.
Not all debts are dischargeable in bankruptcy. Generally, debts are exempted for public policy reasons.
One ethical dilemma facing lawyers is the concept of “asset planning” or “bankruptcy planning.” These terms are often buzzwords for hiding assets from creditors. For example, suppose a client sought advice from his attorney because he was about to be sued and he realized that his assets might be at risk. What would be his lawyer’s obligation? Should she convert his non-exempt assets to exempt assets? Create a spendthrift or other protective trust for his spouse or family member that is exempt? Transfer real estate that he owns into property he shares with his spouse in a tenancy by the entirety? Place his assets in a foreign account? Or just advise him to go on a spending spree?7 Authorities agree that conversion of non-exempt property into exempt property is not fraudulent per se8, but that begs the question. Should an attorney advise a client to hide or remove assets from his creditors?
All of these devices would be exempt from the bankruptcy estate or would use assets that some would argue belong to the creditor.
8 In re Moreno, 892 F.2d 417 (5th Cir. 1990)
Lesson Learning Objectives
By the conclusion of this Lesson you should be able:
- Explain the types of property the law recognizes.
- Compare and contrast different types of property estates.
- Demonstrate the constitutional protections offered to companies and corporations
- Identify the types of white collar crimes most associated with business
- Discuss the Sarbanes Oxley Act’s impact on investor confidence
- Describe a secured transaction, security interest and types of collateral.
- Explain the bankruptcy process and the types of bankruptcy.
- Study Chapters 7, 8 and 9 of the text.
The following Assignments should be completed and submitted to the course faculty via the learning platform for evaluation and grading. Submit your responses to these questions in one WORD document. List the question first, and then your response.
Be sure to properly site your sources, both in-text and with a reference list at the conclusion. If you use an online source to support your answers, you must provide a properly formatted link to the source. You should use APA citation format and make sure your sources are credible. In most cases, your responses should be no more than 100 words.
Short Answer Questions
- What is real property?
- What are the different ways real property can be held?
- How is title to real property transferred?
- What are white collar crimes?
- What are the various constitutional rights of business?
- What is insider trading?
- Discuss price fixing.
- What is a secured transaction?
- Discuss the difference between a surety and a guarantor.
- Explain Chapter 11 bankruptcy.
Professional Development Questions
- Jay’s parents granted Jay title to their home. In return, Jay entered into an agreement with his parents stating that the coveyancing agreement was created "to protect and preserve an interest in the premises for the parents to insure that the parents may reside in the premises for so long as they shall live." Additionally, the conveyancing agreement provides that the parents had the right "to reside in the premises for so long as they choose and for the rest of their lives." Finally, the conveyancing agreement states that Jay "agrees to provide living accommodations for his parents, either on the premises or at some other premises in which Jay resides." Has Jay granted his parents a life estate in the property? (Altomari v. Altomari, 2008 Conn. Super. LEXIS 2142 (Super. Ct. Conn. 2008)
- You are a maintenance worker at a brokerage firm. One night while emptying the trash, you notice a sheet of paper which appears to be a note describing a big merger that is about to happen between two companies. You are not experienced at all in the stock market, but you use your life savings to buy stock in the company that was listed as the takeover company. As it turns out, you are right about the merger, and your stock increases more than you can imagine once the merger occurs. What crime are you guilty of committing?
Lesson 4 Quiz
Use the quiz to test your knowledge of the concepts covered in this lesson. You may take the quiz as many times as you wish. The results are not calculated into your grade.
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