Your Answers Should Be In A Short Essay Format And Include A

Your Answers Should Be In A Short Essay Format And Include An Introduc

Your answers should be in a short essay format and include an introduction, body and conclusion. The “grading matrix” that we have used during this course will apply to these answers. You must use at least two sources of law (one of which may be your textbook) in responding to each of the three main sets of facts. If you make any assumptions about the facts of any scenario be sure to identify these assumptions in your answer.

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The scenario presents multiple complex legal issues surrounding business formation, employment law, contractual relationships, liability, and bankruptcy. This essay explores these areas, providing clarity on the legal rights and obligations associated with different business structures, employment disputes, unionization, independent contractor relationships, and bankruptcy proceedings, with particular reference to the situation of John Albert and Matthew Baker’s enterprise, the Lending Store, Inc.

Business Formation and Legal Structures

Initially, Albert and Baker are considering forming their business as a general partnership. Under Arizona law, a general partnership is an association of two or more persons to carry on a business for profit, where each partner shares in profits and bears liability for debts (Arizona Revised Statutes §§ 29-101 to 29-312). As partners, Albert and Baker would have equal rights to the profits of the business, unless otherwise agreed (Restatement (Second) of Agency § 13). Their right to participate in management decisions depends on the partnership agreement; absent such an agreement, each has equal management rights (Arizona Uniform Partnership Act, A.R.S. §§ 29-111 to 29-115). Notably, as general partners, both are personally liable for the partnership’s debts and liabilities. This means that their personal assets could be used to settle obligations incurred by the partnership, exposing them to significant financial risk.

Alternatively, forming a corporation, specifically a domestic corporation under Arizona law (Arizona Revised Statutes §§ 10-101 to 10-400), involves filing articles of incorporation with the Arizona Corporation Commission, creating a legal entity separate from its owners. This process entails choosing a corporate name, filing the articles, appointing directors, and complying with licensing requirements. Once incorporated, Albert and Baker’s personal liabilities are typically limited to the extent of their investments in the corporation—personal assets are protected from corporate debts (Pierce v. Society of Sisters, 268 U.S. 510; Salomon v. A. Salomon & Co., Ltd., 1897). This structure also grants perpetual existence and ease of transfer of ownership interests.

A third option is forming a Limited Liability Company (LLC). An LLC combines features of partnerships and corporations: it offers liability protection to owners (members) akin to a corporation but permits flexible management structures similar to a partnership (A.R.S. §§ 29-610 to 29-650). To establish an LLC in Arizona, they would file articles of organization with the Arizona Corporation Commission and prepare an operating agreement outlining management and profit distribution. An advantage of an LLC is that it provides liability protection and tax flexibility. However, disadvantages include potentially higher state filing fees, and members could still be personally liable if they personally guarantee debts or commit wrongful acts.

Employment Law, Termination, and Workers’ Rights

Regarding employment issues, the company, as a corporation, must comply with Arizona employment laws and federal statutes like the Civil Rights Act and Americans with Disabilities Act (ADA). Mary Smith, a disabled employee with a permanent impairment, was terminated after being late due to her disability. She may claim violations of the ADA, asserting her termination was discriminatory based on her disability (42 U.S.C. § 12112). The ADA prohibits employers from discriminating against qualified individuals with disabilities who can perform essential job functions with reasonable accommodations (Barnes v. Gorman, 536 U.S. 181). Her claim could be strengthened if she can demonstrate she was qualified for her position and that her lateness was related to her disability.

The company’s defense could invoke the legitimate business reason for her termination—her tardiness and absences—and argue that her firing was based on performance issues unrelated to her disability. They might also argue that her lateness posed a safety concern or operational disruption. However, if her lateness was only marginally related to her disability and she was otherwise a qualified employee, courts could find that her termination violated the ADA.

The lawsuit, Smith v. Lending Store, Inc., would most likely result in a finding that the company violated employment discrimination laws, especially if the company fails to demonstrate that her termination was not discriminatory but based solely on her lateness. The decision may favor Ms. Smith, requiring reinstatement or compensation for lost wages and damages, unless the company successfully proves the employment was legitimately terminated for nondiscriminatory reasons.

Unionization and Employee Rights

Employees seeking union representation must follow procedures established by the National Labor Relations Act (NLRA). First, they need to petition the National Labor Relations Board (NLRB) for a representation election by gathering signed authorization cards from at least 30% of employees. A majority vote then results in the certification of the union as the bargaining representative (NLRB procedures). Once unionized, the employees can engage in collective bargaining to negotiate wages, hours, and working conditions. The company may contest the union’s formation or conduct unfair labor practices, but a lawful election typically grants the union power to represent employees.

Despite election certification, certain circumstances limit a union’s right to strike. Legally, striking over unfair labor practices or during specific phases of collective bargaining may be protected; however, strikes are unprotected if they violate contractual provisions or occur during a strike ban period (Section 7 of the NLRA). Additionally, strikes “at the picket line” over certain issues may be categorized as economic strikes, which under some conditions, allow employer lockouts or replacement workers.

Independent Contractors vs Employees

Hiring mortgage loan agents as independent contractors rather than employees introduces different legal and tax obligations. Independent contractors generally control how they perform their work and supply their own tools, unlike employees who are integrated into the company’s core operations. Under IRS guidelines and Arizona law, key differences include tax responsibilities—independent contractors pay their own taxes, including self-employment tax—and the lack of employee benefits, such as health insurance or workers’ compensation, which are typically provided to employees. The company must also avoid misclassification, as misclassifying employees as independent contractors can lead to legal penalties and back taxes (IRS Revenue Ruling 87-41; Arizona Department of Revenue Rules).

Financial Downturns and Legal Liabilities in the Context of Bankruptcy

The downturn and the incident involving John Jones represents critical legal and financial issues. The theory of vicarious liability, under agency law, suggests that the company (as the principal) can be held liable for the tortious acts of its employees (agents) if committed within the scope of employment (Restatement (Third) of Agency § 7.07). Since Jones was acting during the course of his employment, the company is likely liable for the injuries caused. Jones’s admitted conduct—driving under the influence—may also invoke negligent entrustment, if the employer was aware of his prior conduct or propensity for risky behavior.

Regarding defenses, the company could argue Jones’s acts were outside the scope of employment or that Jones intentionally deviated from his duties, which might limit its liability. The employer might also invoke the defense of “going fast and loose” with safety policies if Jones’s misconduct was deliberate or reckless (Larson v. St. Francis Hotel, 1950). If the court finds Jones was acting within his employment scope, the company could be held liable for damages awarded to the injured driver.

In a liability judgment, courts often decide that the employer is vicariously liable but that Jones personally is also responsible. The company’s inability to pay may result in insolvency, making enforcement of judgments difficult. Insurance coverage limitations further exacerbate the risk. The legal principle of joint and several liability suggests that both Jones and the company can be held responsible, but the injured plaintiff’s recourse would be against the company’s assets.

Finally, Albert and Baker contemplating bankruptcy face the legal process of Chapter 7 liquidation, which involves a trustee overseeing the sale of assets to satisfy creditors and discharging personal debts. If they file for bankruptcy, their personal assets are protected from creditors, but their ability to manage the business would cease. Conversely, Chapter 11 reorganization might allow the company to restructure debts, continue operations, and potentially recover financially if they successfully negotiate with creditors. The outcome depends on the company’s ability to develop a feasible plan, which, given the current financial issues, could still be challenging but offers a pathway to revival.

References

• Arizona Revised Statutes §§ 10-101 to 10-400. (2023). Arizona Corporation Commission.
• Arizona Revised Statutes §§ 29-101 to 29-312. (2023). Arizona Legislature.
• Arizona Revised Statutes §§ 29-610 to 29-650. (2023). Arizona Legislature.
• Larson v. St. Francis Hotel, 1950.
• Pierce v. Society of Sisters, 268 U.S. 510 (1925).
• Restatement (Second) of Agency §§ 13, 7.07. (1958).
• Restatement (Third) of Agency §§ 7.07. (2006).
• Salomon v. A. Salomon & Co., Ltd., 1897 AC 22 (HL).
• United States v. Silk, 331 U.S. 704 (1947).
• 42 U.S.C. § 12112. (2023). Americans with Disabilities Act.