Property, intellectual property, credit and insolvency, and capstone: a legal risk audit

Businesses own, rent and borrow against property of many kinds: land and buildings, equipment and inventory, accounts receivable and, increasingly, intangible assets such as brands, software and data. This final lesson surveys the law of real and personal property, introduces the main forms of intellectual property, explains how lenders take security and what happens when a business cannot pay its debts, and then brings the whole course together in a capstone: a legal risk audit of an invented business. Copyright, licensing and creative business structures are covered in more depth in PHOT-410 and CRE-330.

Real property and leases

Real property is land and everything permanently attached to it, such as buildings and fixtures. The most complete form of ownership is the fee simple absolute, which can be sold, leased, mortgaged and inherited. Other interests include leases, easements and mortgages or deeds of trust, which give lenders security over land. Ownership is transferred by deed and recorded in county land records. Under state recording acts, an unrecorded interest may lose priority to a later buyer who records first without notice, so buyers search the records and almost always buy title insurance, which protects against defects the search missed. Zoning and land use rules are set by local governments under state law.

Most businesses lease rather than own their premises, so the commercial lease is often one of their largest contracts. Unlike residential tenancies, commercial leases are governed mainly by the lease itself and the common law, with few statutory protections. Key terms include the rent and how it escalates; whether the lease is gross (the landlord pays operating costs) or net (the tenant pays its share of taxes, insurance and maintenance, often called additional rent or common area maintenance); the permitted use and any exclusivity; responsibility for repairs and capital replacements (lesson 4's roof example); assignment and subletting rights; renewal options; personal guarantees; and what happens on default. A tenant should model the total occupancy cost over the term and negotiate before signing, because the lease will usually be enforced as written.

Personal property is everything else that can be owned: tangible goods, such as equipment, vehicles and inventory, and intangibles, such as accounts receivable, shares and intellectual property. When one person holds another's goods with permission, such as a repair shop holding a customer's car or a warehouse storing inventory, the relationship is a bailment, and the bailee must take reasonable care of the goods, with the standard depending on who benefits from the arrangement. Warehouses and carriers typically limit their liability by contract, as in London Drugs (lesson 4).

Intellectual property

Intellectual property (IP) law gives creators and businesses exclusive rights over certain intangible creations. The main categories are copyright, which protects original works of authorship; patents, which protect new, useful and non-obvious inventions; trademarks, which protect signs that distinguish one business's goods or services from another's; industrial designs or design patents, which protect the visual appearance of products; and trade secrets (lesson 7). IP rights are territorial, so protection must generally be obtained in each country where it is needed, although treaties simplify filing.

Under the Copyright Act, the author owns copyright, but in a work made for hire the employer or commissioning party is the author. A work is made for hire if an employee creates it within the scope of employment, or if it is specially commissioned, falls within nine listed categories (such as a contribution to a collective work, part of an audiovisual work, a translation or a compilation) and the parties sign a written agreement that it is a work made for hire. Many works commissioned from contractors, such as logos and much software, do not fall within the categories, so the business needs a written assignment of copyright. Patents belong to the inventor unless assigned, so employers use invention assignment agreements, subject to state laws, such as California's, that protect inventions employees develop entirely on their own time without company resources. Trademark rights in the United States depend on use, so businesses should register marks they use or intend to use and monitor for conflicting uses.

Secured transactions

When a business borrows, lenders usually take security over its assets, so they can seize and sell them if the business defaults. Security interests in personal property are governed by Article 9 of the UCC. A security interest attaches when value is given, the debtor has rights in the collateral and the debtor authenticates a security agreement describing it. To protect its priority against other creditors and a bankruptcy trustee, the secured party must perfect its interest, usually by filing a UCC-1 financing statement with the secretary of state in the state where the debtor is located (for a corporation or LLC, its state of organization). Priority between perfected interests generally goes to the first to file or perfect. A purchase-money security interest (PMSI), taken by a seller or lender who finances the purchase of specific collateral, has priority over an earlier blanket lien if it is perfected within 20 days after the debtor receives the collateral (and, for inventory, if prior notice is given to the earlier secured party). Security over land is taken by mortgage or deed of trust recorded in the land records.

Insolvency and bankruptcy

A business is insolvent when it cannot pay its debts as they come due or its liabilities exceed its assets. Bankruptcy is federal law under the Bankruptcy Code. In Chapter 7, a trustee liquidates the debtor's non-exempt assets and distributes the proceeds; a corporation in Chapter 7 does not receive a discharge and simply ceases to operate. In Chapter 11, the debtor usually remains in possession and runs the business while it negotiates a plan of reorganization, which must be approved by classes of creditors and confirmed by the court; Subchapter V offers a faster, cheaper Chapter 11 process for small businesses with debts below a threshold adjusted periodically ($3,424,000 since April 2025). Chapter 13 lets individuals with regular income repay debts over three to five years. Filing triggers an automatic stay that stops most collection actions. The trustee can recover preferential payments made to creditors in the 90 days before filing (one year for insiders) and fraudulent transfers made for less than reasonably equivalent value while insolvent.

Distributions follow a strict order of priority. Secured creditors are paid first from their collateral, up to its value. Certain claims have statutory priority. Unsecured creditors share pro rata in what is left, and shareholders receive anything only after all creditors are paid in full, which rarely happens. Because unsecured trade creditors often recover only a small fraction of their claims, suppliers manage credit risk through credit checks, deposits, credit insurance, retention of title clauses and purchase-money security.

Section 507 of the Bankruptcy Code sets priorities among unsecured claims after administrative expenses: they include domestic support obligations, employee wages, salaries and commissions earned within 180 days before filing, up to $17,150 per employee for cases filed from April 1, 2025, employee benefit plan contributions and certain taxes. Under section 503(b)(9), suppliers have an administrative priority claim for the value of goods received by the debtor within 20 days before filing, and under section 546(c) sellers may reclaim goods delivered within 45 days before filing if they make a timely written demand. In Chapter 11, the absolute priority rule generally requires that a dissenting class of unsecured creditors be paid in full before equity holders keep anything.

Insurance as a risk management tool

Insurance transfers financial risk to an insurer in exchange for a premium. Common business coverages include commercial general liability (bodily injury and property damage to third parties, including premises and product liability), property insurance, business interruption insurance, automobile insurance, professional liability or errors and omissions, directors' and officers' liability, cyber insurance, employment practices liability and, where required, workers' compensation. Insurance contracts are interpreted against the insurer where ambiguous, and insurers owe a duty of good faith in handling claims, but policyholders must disclose material facts when applying, comply with notice requirements and read exclusions carefully. Insurance does not cover everything: fines, deliberate wrongdoing, contractual liabilities assumed beyond the law and unremitted taxes are commonly excluded or uninsurable.

Capstone: a legal risk audit

A legal risk audit is a structured review of where a business is exposed to legal liability and what it is doing about it. It draws on every lesson in this course. The process has five steps: understand the business (its activities, people, contracts, assets, customers and locations); identify legal risks in each area; assess each risk by likelihood and impact; decide on a response (avoid, reduce, transfer through contracts or insurance, or accept); and assign owners and deadlines for the actions, with periodic review. The output is a risk register that management and the board can use.

The capstone business is invented. Harbourline Coffee Roasters, Inc. is a Delaware corporation headquartered in Oregon, owned by two founders, each holding 50 % of the shares with no shareholders' agreement. It has 45 employees, including six delivery drivers and two "freelance" baristas who work regular shifts. It roasts coffee in a leased warehouse, sells wholesale to 120 cafés under its own standard terms and conditions, runs an online store with customer accounts, an email newsletter of 18,000 subscribers collected over five years and a new text-message promotion program, and has just signed a five-year lease for a second café, personally guaranteed by both founders. Its logo was designed by a freelancer. It is negotiating a large supply contract with a grocery chain that requires a cap on Harbourline's liability of no more than the contract value and a strict product recall indemnity.

The audit is not a one-time exercise. Laws change, as many examples in this course show, and the business itself changes as it grows, enters new markets and launches new products. A short annual review, plus a review before any major decision such as a new location, product launch, financing or acquisition, keeps the register current. The audit also improves relationships with professional advisers: a lawyer given a clear risk register can focus advice where it matters most, and an insurance broker can match coverage to actual exposures.