Fall 2012 – BAR ESSAY WRITING – SYLLABUS

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Sec. 2, Tues., 3pm – 4:50pm, Room 202

Greg Hardmon, J.D., Instructor

Phone: 713.313.1394 Office: Library Basement B30½ (A)

Email: gchardmon@tmslaw.tsu.edu 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% 3. Participation 10%
2. Essay Rewrites 20% 4. Half Day Mock Exam 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. 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.
2. Please remember to turn off all cell phones.
3. Please refrain from coming to class late or departing during class instruction. It is
disruptive, and disrespectful to other students.
4. Please refrain from using personal computers in class for anything other than class
materials.
5. 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

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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 student’s own words) in
preparation for the next in-class exam. There will be a class review of students’ rules before
class test.

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● 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 re-
write 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 sub-
issues tested and discussed in each class. Five bonus points will be awarded for COMPLETE
rule templates.
IX. SCHEDULE
Week 1 Introduction & objectives; overview of Texas essays; outlining/
Tues, Aug 21 coding & structure of an essay; explanation of rules & templates
Week 2 Class Exercise – Child Custody
Tues, Aug 28 p. 6-15
Week 3 Family Law Exercise – Community Property
Tues, Sept 4 Homework Assignment Only. LABOR DAY – NO CLASS p. 16-19
Week 4 Essay 1: Family Law – Child Support
Tues, Sept 11 p. 20-22
Week 5 Essay 2: Family Law – Marriage Dissolution & Spousal
Tues, Sept 18 Maintenance p. 23-27
Week 6 Essay 3: Wills and Trusts and Estates, Guardianship – Wills &
Tues, Sept 25 Estate Administration p. 28-32
Week 7 Essay 4: Wills, Trusts and Estates, Guardianship – Guardianship
Tues, Oct 2 p. 33-36
Week 8 Homework assignment TBA.
Tues, Oct 9 MIDTERM WEEK – NO CLASS
Week 9 Essay 5: Commercial Law – Negotiable Instruments
Tues, Oct 16 In Class Exercise TBA p. 37-48
Week 10 Essay 6: Commercial Law – Negotiable Instruments
Tues, Oct 23 p. 37-48
Week 11 Essay 7: Commercial Law – Secured Transactions
Tues, Oct 30 p. 49-58
Week 12 Essay 8: Commercial Law – Secured Transactions
Tues, Nov 6 p. 49-58
Week 13 Essay 9: Business Associations – Partnership
Tues, Nov 13 p. 59-63
Week 14 Essay 10: Business Associations – Corporations
Tues, Nov 20 p. 63-67
Week 15 Review for upcoming exam
Tues, Nov 27
Final Three-hour simulation of “Day 3 of the Texas bar.” Students must
3.5 hrs be in their seats by 9am. No one admitted late. No excused
TBA absences. There will be six essays.
This syllabus is not a contract and is subject to change with or without notice.

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 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

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 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 . . .”

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 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

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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

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 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

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 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

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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 court-
ordered 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 well-
being.
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.

14
 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.

15
 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.

18
 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)]

19
 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.

20
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).

21
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).

22
 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.

24
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 attorney-
client relationship and has formed that relationship with the attorney ad litem.

25
 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.

26
 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.

27
 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.

29
 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.

30
 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.

32
 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.
2. 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.
3. 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.
4. 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.

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.

D. 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.

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 decedent’s
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.
2. 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
 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.
C. 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.
D. 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.
E. 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.
F. 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.
G. PERSONS DISQUALIFIED TO SERVE AS GUARDIANS
A person is disqualified from being appointed guardian if he:
1. Lacks capacity (e.g., is a minor);

2. Lacks experience to properly and prudently manage the estate or otherwise is an

unsuitable choice;
3. Has a conflict of interest (e.g., is indebted to the ward, has a claim adverse to the
ward);
4. 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).
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 ward’s 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.

36
 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.

39
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 Hans Immigrant, who cannot read English, signs a promissory note
in the Factum: 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.

Example of Honest John tells Cathy Consumer that the car he is selling has
Personal Fraud: 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.

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

45
 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.

48
 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.

51
 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.

58
 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,
2. 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.)

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).
b. 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.

c. Extent of Liability
Each partner is personally add individually liable for the entire amount of the
obligation, with rights of contribution and indemnification
d. 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.
e. Liability of Incoming Partner
An incoming partner is not personally liable for partnership obligations incurred before
he became a partner.
f. 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.

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) Repayment of a debt;
2) Wages or compensation to an employee;
3) Payment of rent;
4) Payment of interest on a loan;
5) 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 partner’s 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 partner’s 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 partner’s 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. Partner’s 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.
b. Insolvency – Conflict Between Partnership and Separate Creditors
Partnership creditors have priority over a partner’s separate creditors in
partnership property and parity with separate creditors on the partner's separate
property.
c. Partner Who Pays More than His Share Entitled to Contribution
Where a partner is forced to pay more than his share of the partnership’s debts, he
is entitled to contribution from the other partners to equalize the shares.

62
 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. The business of raising cattle and owning land therefore, and the business of
operating stockyards and slaughtering, refrigerating, canning, curing, or packing
meat.
b. 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.

2. 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.

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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)]

b. 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.

c. 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.

*****
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 child’s 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 child’s physical health or
emotional well being; and
iii. the grandparent requesting possession or access to the child is the parent of the
child’s 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
child’s 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 court’s 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 child’s 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

1 - 20% 2 - 25% 3 - 30% 4 - 35% 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
testator’s 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
testator’s surviving spouse.
o There are other children then living, and they are provided for in the testator’s
will, the pretermitted child’s 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 decedent’s 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 minor’s 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 maker’s head and threatening to pull the trigger if he did not sign the
note). Threatening to prosecute maker’s 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 indorser’s liability
o Presentment to drawee within 30 days of indorsement

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 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 Party’s Rights against third parties with competing interest in debtor’s 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 Buyer’s 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 partner’s 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.”
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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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