38.4 Business Law Issue Spotting Drill
Key Takeaways
- REG business law rewards issue spotting: identify the legal relationship, the governing rule, the fact that triggers it, and the likely consequence.
- Agency questions turn on actual authority, apparent authority, ratification, and the duties owed between agent and principal.
- Contract questions require formation, performance, breach, discharge, and remedies before any accounting consequence; UCC Article 2 governs sales of goods.
- Secured transaction questions follow attachment, perfection, priority, default, and possible bankruptcy interruption under UCC Article 9.
- Business structure questions separate entity-level liability, owner authority, management duties, and personal guarantees.
Business Law as an Issue Log
REG business law is not tested like a law-school essay. The 2026 blueprint targets the practical legal implications of business transactions: agency, contracts, debtor-creditor relationships, federal laws and regulations, and business structure. You must read a short scenario and identify the issue, the rule, the controlling fact, and the consequence. Use a four-column issue log: relationship, rule, triggering fact, likely result. This stays compact enough for multiple-choice items and structured enough for simulations.
Core Issue Map
| Area | First question | High-yield consequence |
|---|---|---|
| Agency | Actual authority, apparent authority, or ratification? | Principal may be bound to a third party |
| Agent duties | Breach of loyalty, care, obedience, notification, accounting? | Agent owes damages or disgorgement |
| Contracts | Offer, acceptance, consideration, capacity, legality? | Valid contract creates enforceable duties |
| Sales (UCC Art. 2) | Are goods involved? Is a writing required over $500? | Statute of frauds and merchant rules apply |
| Secured transactions | Did the interest attach and perfect (Art. 9)? | Determines priority among creditors |
| Bankruptcy | Has a petition triggered the automatic stay? | Collection stops; distribution priorities apply |
| Worker classification | Who controls behavior, finances, relationship? | Payroll-tax and reporting exposure shifts |
| Entity structure | Owner, manager, partner, officer, or guarantor? | Authority and personal liability depend on role |
Drill 1: Agency and Authority
Facts: A company let its purchasing manager order laptops from Vendor for years. The company privately told the manager to stop but did not notify Vendor. The manager signs another purchase order using the same company email signature.
| Relationship | Rule | Triggering fact | Likely result |
|---|---|---|---|
| Principal and third party | Apparent authority arises from the principal's manifestations to the third party | Vendor saw the same title, signature, and prior dealing | Company is bound despite private limits on actual authority |
| Principal and agent | Agent must obey lawful instructions | Manager ignored the internal restriction | Manager is liable to the company for breach of the duty of obedience |
Exam trap: apparent authority is never created by the agent's secret say-so. It flows from the principal's words, conduct, title grants, prior dealings, or failure to notify the third party that authority changed.
Drill 2: Contract Formation and Remedy (UCC Article 2)
Facts: Buyer emails Seller offering to buy identified equipment for 48,000, delivery next month. Seller replies, "Accepted, delivery next month." Buyer later refuses because market prices fell.
| Step | Analysis |
|---|---|
| Governing law | Equipment is goods, so UCC Article 2 controls, not common law |
| Formation | Offer and acceptance fix parties, subject matter, price, timing |
| Statute of frauds | Over 500, a signed writing is required; the emails satisfy it |
| Breach | Buyer's refusal is non-performance unless an excuse applies |
| Remedy | Seller may recover damages (market price less contract price, or resale shortfall) plus incidental costs |
A falling market is not a legal excuse. Do not let the candidate "walk away" simply because the deal soured.
Drill 3: Secured Creditor Workpaper (UCC Article 9)
Facts: Bank lends 80,000, Debtor signs a security agreement describing specific equipment, Debtor owns the equipment, and Bank gives value. Bank files a financing statement. Debtor later defaults and files bankruptcy.
| Stage | Result |
|---|---|
| Attachment | Value given, debtor has rights in collateral, authenticated security agreement |
| Perfection | Filing the financing statement gives public notice and priority over later creditors |
| Default | Bank may repossess and dispose of collateral under state law |
| Bankruptcy | The automatic stay halts collection; Bank needs court relief before enforcing |
Order matters: a creditor cannot perfect an interest that never attached, and even a perfected creditor is stayed in bankruptcy.
Drill 4: Worker and Entity Classification
Facts: Nova LLC calls Mira an independent contractor. Nova sets her daily schedule, requires company tools, bars work for competitors, pays hourly, and trains her under a supervisor. The label does not control; the behavioral, financial, and relationship factors point to employee status. Flag the consequences: payroll tax (FICA and FUTA), income-tax withholding, benefit-plan eligibility, and W-2 versus 1099-NEC reporting.
Drill 5: Bankruptcy Priority and Discharge
Facts: A debtor files Chapter 7. Assets are sold; the trustee must pay claims in statutory order. Secured creditors are paid first from their collateral. Among unsecured claims, certain priority claims jump ahead of general creditors: administrative expenses of the estate, then specified domestic support obligations, then up to a per-employee limit of recent wages, then certain tax claims. General unsecured creditors share whatever remains pro rata.
Several debts are non-dischargeable regardless of the chapter, including most taxes for recent years, debts from fraud, student loans (absent undue hardship), domestic support, and liabilities from willful and malicious injury. The exam trap is assuming bankruptcy wipes out every obligation; it does not.
High-Yield Federal Securities and Employment Rules
REG also reaches federal regulation of business. Under the Securities Act of 1933, an issuer registers a public offering and faces liability for material misstatements in the registration statement; Regulation D provides private-placement exemptions. The Securities Exchange Act of 1934 governs ongoing reporting and Rule 10b-5 antifraud and insider-trading liability. On the employment side, candidates should distinguish the funding of FICA (split employer/employee) from FUTA (employer-only), and recognize that worker misclassification shifts both the payroll-tax burden and information-reporting duty back to the business.
Sarbanes-Oxley internal-control and document-retention provisions frequently appear in ethics-adjacent items.
Final Issue-Spotting Routine
Read the call of the question first. Mark the legal relationship, circle the conduct that changes rights, and write the consequence in one sentence: principal bound, contract formed, interest attached, creditor perfected, automatic stay applies, priority creditor paid ahead of general creditors, worker likely an employee, or owner personally liable on a guarantee. The graders reward the candidate who names the controlling rule and the triggering fact, not the one who writes the longest narrative.
A principal privately tells an agent not to buy from a supplier but does not notify the supplier, even though the agent has routinely placed similar orders. The agent places another ordinary order. Which issue most directly determines whether the principal is bound to the supplier?
Bank gives value, Debtor owns the collateral, and Debtor signs a security agreement that reasonably identifies the collateral. Under UCC Article 9, what has most likely occurred?