Management 108

Group Problem 2 – Part 1

Brian Hernandez, Eric Jeng, Ishan Sengupta, Katherine Sun, Aggie Wong

Question 1a:

Regional Bank is entitled to the accounts receivable. A security interest was created since Shady
Characters, Inc. was in possession of the collateral (present inventory, proceeds, after-acquired
inventory, as well as current and after-acquired equipment), Shady executed and delivered a
security agreement to Regional Bank, Regional Bank gave Shady $100,000 in exchange, and
Shady had rights in the collateral. The attachment took place on June 1st and Regional Bank
perfected the security interest by filing the UCC-1 financing statement on June 2. Downtown Bank
didn't perfect until July 1. Since Regional Bank perfected first, they have priority over Downtown
Bank. Regional Bank's security interest included proceeds, which includes accounts receivable.

Question 1b:

Although Regional Bank perfected first on June 2, City Office Supply has priority over the
equipment. A PMSI was created when Shady Characters, Inc. bought office equipment and City
Office Supply agreed to extend credit for the purchase price of the office equipment, giving City
Office Supply a security interest in the equipment once it delivered the equipment and filed a
UCC-1 financing statement on September 5. In determining priority over security interests, the
UCC provides that a PMSI in some cases will prevail over another security interest in after-
acquired collateral, even though the other was perfected first. One such exception is a PMSI in
equipment. City Office Supply has a PMSI in the office equipment and the security interest was
perfected on September 5, which is within 20 days after Shady Characters, Inc. took possession
on August 18.

Question 2:

First Time Bank can repossess the machinery and equipment from Robert. The necessary
requirements for attachment were fulfilled by executing a promissory note and a security
agreement with First Time Bank. Assuming that the equipment and machinery were the stated
collateral for the agreement, First Time Bank has the right to repossess them from Robert on a
default of the loan. The act of perfecting a security interest only protects a secured party from
having another third party try to have their debts satisfied by the same collateral. Since it is
clearly stated that Robert did not try to sell the machinery or use the machinery as collateral for
another loan, First Time Bank would have first priority when claiming the collateral, regardless of
the lack of perfection. Therefore, perfection is not required for this case.

Question 4:

The consultant should be considered an employee for two main reasons as stated within the
problem. First, the consultant is working full time and is being paid by salary and not a per-hour
basis. Additionally, the consultant is using equipment supplied by the employer. Both these
reasons constitute grounds of an employer-employee relationship. However, there is a need for
clarification of what "substantial decision making authority" implies. If this means that the
consultant has control over the details of his work, and not the employer, then the consultant
could arguably be an independent contractor.

The web designer should be considered an independent contractor for several reasons. Since the
designer is working from home, this implies a lack of employer control and supervision over the
designer's work. Also, the designer is using his own equipment and is being paid by a hourly basis
and not a salary. Lastly the fact that the designer has other clients possibly creates the suggestion
that the designer is engaged in a business distinct from that of the employer's, though this is not
certain.

A major legal distinction between the two classifications is that employers must pay certain taxes,
such as Social security and unemployment taxes, for employees but not independent contractors.
Also, certain employment laws such as workplace safety and employment discrimination do not
apply to independent contractors. A final legal consequence is that only independent contractors
retains the copyright for their own work. Another legal consequence of incorrectly characterizing
someone as either an employee or independent contractor arises in regards to liability for harm
caused to a third party. The amount of liability an employer must undertake in hiring either an
employee or an independent contractor is significantly higher when an employee is involved.
Under the doctrine of repondeat superior, the employer is liable for harm caused to a third party
by an employee within the scope of employment. An employer is generally not liable for physical
harm caused to a third party by a negligent act of an independent contractor in performance of
the contract, however. Exceptions are made in certain situations such as a contract that involves
hazardous activities.

Question 5:

The legal theory that allows Thelma to sue Vircon for injuries sustained in the accident is the
doctrine of respondeat superior. The principal-employer is held liable for any harm caused to a
third party by an agent-employee within the scope of employment. Thus, Vircon is vicariously
liable (indirectly liable), without regard to personal fault of Vircon, for torts committed by Helmut
and its other employees in the scope of employment. Helmut is an employee of Vircon and since
he was visiting a new supplier for the purposes of Vircon's business, he was within the scope of
employment. This means that Vircon is liable for the damages Helmut caused Thelma and her
poodle in the car accident.

Question 6:

The previous answer would not change if Helmut was doing a personal errand on his way back to
work after visiting a client. According to the doctrine of respondeat superior, the principal-
employer is liable for harm caused by an agent-employee to a third party. This means the
employer is vicariously liable for crimes committed by an employee in the course or scope of
employment. In determining if Helmut was within the scope of employment, we look to the
distinction between a "detour" and a "frolic." Even though Helmut was doing a personal errand, he
was on his way back to work and the client he was visiting was only five minutes from his direct
route back to work. This is not a substantial deviation from Helmut's scope of employment, thus
Vircon is still liable for damages Helmut caused to Thelma and her poodle. If Helmut had traveled
to another city to meet with a client for non-business purposes, he would have been outside the
scope of employment.
If Helmut was an independent contractor, Helmut would be personally liable for the crime he
committed since an employer is not liable for physical harm caused to a third party by the
negligent act of an independent contractor in the performance of the contract. The employer
doesn’t have the right to control the details of an independent contractor's performance of the
contract. This particular contract does not constitute an exception to this rule since no hazardous
activities such as blasting operations, the transportation of volatile chemicals, or use of poisonous
gases were involved. Vircon is not liable for the negligent acts by Helmut in the accident; Thelma
would not be able to sue Vircon.