TEST BANK Business Law Texts and Cases, 15th Edition by Clarkson (1) by ACADEMIAMILL

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Chap 01_15e Indicate whether the statement is true or false. 1. A court should overturn its precedents unless there is a compelling reason not to. a. True b. False 2. Controlling precedents are binding authorities. a. True b. False 3. Courts will not grant an equitable remedy unless the remedy at law is adequate. a. True b. False 4. A constitution is a primary source of law. a. True b. False 5. A citation is a regulation enacted by a city or county legislative body. a. True b. False 6. Courts often refer to secondary sources of law for guidance in interpreting and applying a primary source of law. a. True b. False 7. There is one right answer to every legal question. a. True b. False 8. The common law is a body of law developed from judicial decisions. a. True b. False 9. Civil law has to do with wrongs committed against society for which society demands redress. a. True b. False 10. Congress or a state legislature establishes an administrative agency to perform a specific function. a. True b. False 11. A case of first impression is any legal authority or source of law that a court may look to for guidance but need not follow when making its decision. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 01_15e 12. The study of business law does not involve an ethical dimension. a. True b. False 13. Independent regulatory agencies are not subject to the authority of the president. a. True b. False 14. In a criminal case, the object is to obtain a remedy. a. True b. False 15. With respect to the study of jurisprudence, there is only one school of legal thought. a. True b. False 16. Compartmentalizing the law into discrete topics indicates that each business transaction is subject to only one specific area of the law. a. True b. False 17. A secondary source of law establishes the law on a particular issue. a. True b. False 18. The doctrines and principles announced in court decisions govern all areas not covered by statutory or administrative law. a. True b. False 19. The basis of a civil law system is a written code of laws. a. True b. False 20. A federal statute applies only to those states that agree to apply it within their borders. a. True b. False 21. Even if it conflicts with the U.S. Constitution, a state constitution is supreme within that states’ borders. a. True b. False 22. International law derives from a variety of sources, including the laws of individual nations. a. True b. False

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Chap 01_15e 23. A statute is a secondary source of law. a. True b. False 24. Only if a state legislature adopts a uniform law does that law become part of the statutory law of that state. a. True b. False 25. A local ordinance commonly has to do with a matter concerning only a local governing unit. a. True b. False 26. Because laws may change, the ability to analyze and evaluate the legal ramifications of situations as they arise is not a lasting skill. a. True b. False 27. Administrative law plays a relatively insignificant role in the regulatory environment of business. a. True b. False 28. Rescission is the cancellation of a contractual obligation. a. True b. False 29. The legal rules that control a business’s actions reflect past and current thinking about how similar businesses should and should not act. a. True b. False 30. Rules issued by administrative agencies affect almost every aspect of a business’s operations. a. True b. False 31. In the United States, the law consists of written laws and court decisions. a. True b. False 32. The U.S. Constitution is the basis of all law in the United States. a. True b. False 33. Often, more than one rule of law will be applicable to a case. a. True b. False

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Chap 01_15e 34. Because courts of law and equity have merged, the principles of equity are no longer applied. a. True b. False 35. Federal agency regulations do not take precedence over conflicting state regulations. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. In a civil case, the object is to a. resolve a dispute to the satisfaction of all concerned parties. b. take coercive action against a violating party. c. punish a wrongdoer to deter others from similar actions. d. obtain a remedy to compensate the injured party. 37. On a challenge to a provision in a state constitution that conflicts with a provision in the U.S. Constitution a. neither provision will be enforced. b. both provisions will be enforced. c. the state provision will be enforced only within that state’s borders. d. the state provision will not be enforced. 38. Primary sources of law include a. legal encyclopedias. b. official comments to statutes. c. case law. d. legal treatises. 39. Power, Inc., is a corporation engaged in the business of producing, refining, and distributing energy resources. With respect to the firm’s managers, legal concepts can be useful for Power’s a. accounting and finance manager. b. human resources manager. c. marketing manager. d. all of the choices. 40. Each court has a jurisdiction. Jurisdiction is best defined as a. a doctrine that follows established precedents. b. the geographic area in which a court has the power to apply the law. c. a judicial proceeding to redress a wrong. d. a situation giving a person a right to initiate a judicial proceeding.

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Chap 01_15e 41. Laws enacted by legislative bodies at any level of government make up the body of law generally referred to as a. statutory law. b. the basis of all law in the United States. c. the supreme law of the land. d. uniform law. 42. The means to enforce a right or compensate for the violation of a right is a. a cornerstone. b. a remedy. c. jurisdiction. d. stare decisis. 43. Regulations issued by a state or local agency may affect all of the following aspects of a business’s operations except a. capital structure and financing. b. product manufacturing and marketing. c. relations with employees and unions. d. compliance with conflicting federal agency regulations. 44. An award of damages is a. an order to do or to refrain from doing a certain act. b. the right to harm another. c. a payment of money or property. d. the cancellation of a contract. 45. Criminal statutes proscribe a. the prosecution of private individuals by other private individuals. b. the prosecution of public officials by private individuals. c. the relief available when a person’s rights are violated. d. wrongs committed against society for which society demands redress. 46. An injunction is a. an order to do or to refrain from doing a certain act. b. a departure from precedent. c. a payment of money. d. the cancellation of a contract. 47. A precedent is a. the chief executive officer of the United States. b. a court decision that furnishes an example for deciding subsequent cases involving similar or identical facts or principles. c. a lawsuit in which a number of persons join together. d. the fundamental procedure by which the government exercises its authority. Copyright Cengage Learning. Powered by Cognero.

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Chap 01_15e 48. At one time, a court of law could grant as a remedy only a. monetary damages. b. an order to perform a contract as promised. c. a judicial proceeding for the resolution of a dispute. d. an injunction. 49. Common law rules develop from a. principles underlying judges’ decisions in actual controversies. b. regulations issued by administrative agencies. c. statutes enacted by Congress and the state legislatures. d. uniform laws drafted by legal scholars. 50. In Peyton v. Quality Motors, a state supreme court held that a minor could cancel a contract for the sale of a car. Now a trial court in the same state is deciding Rikki v. Street Deals, Inc., a case with similar facts. Under the doctrine of stare decisis, the trial court is likely to a. allow the minor to cancel the contract. b. disregard the Peyton case. c. order the minor to cancel the contract. d. require the minor to fulfill the contract. 51. The Food and Drug Administration (FDA) is an executive agency. As an executive agency, the FDA is subject to the authority of a. no government official or entity. b. the president. c. state legislatures. d. the U.S. Attorney General 52. Ordering a party to perform what was promised is a. an equitable remedy. b. an unenforceable demand. c. an action. d. beyond the court’s authority. 53. A constitution sets forth a government’s a. limits, but not powers. b. limits and powers. c. neither limits nor powers. d. powers, but not limits.

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Chap 01_15e 54. Secondary sources of law include a. state constitutions. b. legal scholars’ research. c. laws passed by local governing bodies. d. regulations created by administrative agencies. 55. The Uniform Commercial Code facilitates commerce a. among the states. b. between the states and the federal government. c. in countries that were once colonies of Great Britain. d. in international markets. 56. Once a court has applied a principle to a certain set of facts, that principle must be applied in future cases involving a. different facts. b. similar facts. c. any facts. d. no particular facts. 57. The basis of all law in the United States is a. the U.S. Constitution. b. laws passed by Congress. c. case law. d. regulations created by administrative agencies. 58. Stare decisis is best defined as a. a doctrine under which judges follow established precedents. b. the authority to decide a specific dispute. c. a judicial proceeding to redress a wrong. d. a situation giving a person a right to initiate a judicial proceeding. 59. Federico and Gwen are involved in a court proceeding to enforce a right. This is a. an action. b. stare decisis. c. an injunction. d. a remedy. 60. In deciding a case of first impression, appropriate sources for a court to consider include all of the following except a. legal authorities that are not binding on the court. b. issues of fairness. c. government policy based on widely held social values. d. a poll of those present in the courtroom at the time of the decision. Copyright Cengage Learning. Powered by Cognero.

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Chap 01_15e 61. The classification of law that concerns the rights and duties that exist between persons and between citizens and their government is a. criminal law. b. civil law. c. natural law. d. legal positivism. 62. The Appellate Division of the New York Supreme Court issues an opinion that can be found at 157 A.D.3d 486, 69 N.Y.S.3d 26. “157” is a. the number of the volume in the official reports of the court’s decisions. b. the number of the volume in an unofficial report of the court’s decisions. c. a page number in the referenced volume. d. the number of the case in its chronological sequence. 63. In the case of Sales Corp. v. Transport Co., the court may rule contrary to a precedent if the court decides that the precedent a. is incorrect or inapplicable. b. is not in line with the judge’s personal values. c. would lead to unintended consequences. d. would not bring about the result the judge prefers. 64. The Florida legislature enacts a state law that violates the U.S. Constitution. This law can be enforced by a. no one. b. the federal government only. c. the state of Florida only. d. the United States Supreme Court only. 65. Cyberlaw is a. a classification of law. b. a new type of law. c. law that relates to the online environment. d. all of the choices. 66. The Uniform Commercial Code provides a set of rules governing a. commercial transactions. b. state legislative adoptions. c. congressional procedures. d. administrative processes.

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Chap 01_15e 67. The United States Supreme Court issues an opinion that can be found at __ U.S. __, 138 S.Ct. 617, 199 L.Ed.2d 501. “617” is a. the number of the volume in the official reports of the Court’s decisions. b. the number of the volume in an unofficial report of the Court’s decisions. c. a page number in the referenced volume. d. the number of the case in its chronological sequence. 68. When Lara and Mick cannot resolve their dispute amicably, Lara initiates a lawsuit against Mick. Lara is a. the case of first impression. b. the persuasive authority. c. the plaintiff. d. the defendant. 69. Administrative law includes a. all laws that affect business operations. b. the rules, orders, and decisions of a government agency. c. model laws developed by the National Conference of Commissioners on Uniform State Laws. d. laws enacted by a legislative body. 70. Believing that a higher, or universal, law exists that applies to all human beings, and that each written law should reflect the principles inherent in this higher law, is a. the historical school of legal thought. b. legal positivism. c. the natural law tradition. d. legal realism. 71. What is the doctrine of stare decisis? In the American legal system, how is it applied, and what is its effect?

72. The National Rights Council, a nonprofit organization, files a suit against the U.S. Department of Justice (DOJ), claiming that a certain federal statute the DOJ is empowered to enforce conflicts with the U.S. Constitution and with a state constitution. In each situation, which source of law has priority?

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Chap 01_15e Answer Key 1. False 2. True 3. False 4. True 5. False 6. True 7. False 8. True 9. False 10. True 11. False 12. False 13. False 14. False 15. False 16. False 17. False 18. True 19. True 20. False 21. False 22. True 23. False 24. True 25. True 26. False

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Chap 01_15e 27. False 28. True 29. True 30. True 31. True 32. True 33. True 34. False 35. False 36. d 37. d 38. c 39. d 40. b 41. a 42. b 43. d 44. c 45. d 46. a 47. b 48. a 49. a 50. a 51. b 52. a 53. b 54. b Copyright Cengage Learning. Powered by Cognero.

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Chap 01_15e 55. a 56. b 57. a 58. a 59. a 60. d 61. b 62. a 63. a 64. a 65. c 66. a 67. c 68. c 69. b 70. c 71. In a common law legal system, past judicial decisions are binding in current disputes with similar facts. This feature of the common law, which is the basis of the American legal system, is unique because, unlike the law in other legal systems, it is judge-made law. Within the common law system, when possible, judges attempt to be consistent and to base their decisions on the principles suggested by earlier cases. The body of principles and doctrines that form the common law emerged over time as judges applied the principles announced in earlier cases to subsequent legal controversies. The practice of deciding cases with reference to former decisions, or precedents—the cornerstone of the American legal system—is called the doctrine of stare decisis. Under this doctrine, judges are obligated to follow the precedents established within their jurisdictions. This helps courts to be more efficient, and makes the law more stable and predictable. 72. The U.S. Constitution is the supreme law of the land. A law in violation of the Constitution, no matter what its source, will be declared unconstitutional and will not be enforced. Thus, the federal statute does not have priority over the Constitution. The federal statute would have priority over the state constitution, however, because under the U.S. Constitution, when there is a conflict between a federal law and a state law, the state law is rendered invalid.

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Chap 02_15e Indicate whether the statement is true or false. 1. Corporations enjoy many of the same rights and privileges as natural persons do. a. True b. False 2. The Fifth Amendment allows persons to be deprived of property without due process of law. a. True b. False 3. Under the full faith and credit clause, any judicial decision in one state with respect to contract rights will be honored and enforced in all states. a. True b. False 4. When there is a direct conflict between a federal law and a state law, both laws are rendered invalid. a. True b. False 5. The dormant commerce clause comes into play when state regulations affect interstate commerce. a. True b. False 6. A law that that limits a fundamental right may be held to violate substantive due process. a. True b. False 7. Under the Ninth Amendment, people have rights in addition to those specified in the Constitution. a. True b. False 8. The U.S. Constitution divides powers among four branches of government. a. True b. False 9. Preemption occurs when Congress chooses to act exclusively on a subject over which the federal government shares power with the states. a. True b. False 10. A state may not restrict certain kinds of advertising, even in the interest of preventing consumers from being misled. a. True b. False

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Chap 02_15e 11. The system of checks and balances in the U.S. Constitution allows each branch of government to limit the actions of the other branches. a. True b. False 12. The first ten amendments to the U.S. Constitution are commonly known as the Bill of Rights. a. True b. False 13. Speech can be subject to reasonable restrictions. a. True b. False 14. The rights secured by the Bill of Rights are absolute. a. True b. False 15. When religious practices work against public policy, the government can act. a. True b. False 16. State governments do not have any authority to regulate interstate commerce. a. True b. False 17. Procedural due process focuses on the content of legislation. a. True b. False 18. Under the privileges and immunities clause, the federal government has the power to regulate commercial activities among the states. a. True b. False 19. Political speech by corporations falls within the protection of the First Amendment. a. True b. False 20. The free exercise clause prohibits the government from passing laws that have any impact on religion. a. True b. False 21. Nonverbal expression of belief is not a constitutionally protected form of expression. a. True b. False

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Chap 02_15e 22. The national government has the implied power to undertake actions necessary to carry out its expressly designated powers. a. True b. False 23. State regulatory powers are often referred to as police powers. a. True b. False 24. A resident of one state, when in another state, can be denied the privileges and immunities of that state for any reason. a. True b. False 25. Privacy rights receive no protection under federal law. a. True b. False 26. If a restriction imposed on speech by the government is content neutral, then a court will not allow it. a. True b. False 27. A law based on a suspect trait will not stand under the equal protection clause even if it is necessary to promote a compelling government interest. a. True b. False 28. The commerce clause has had no greater impact on business than any other provision in the Constitution. a. True b. False 29. Equal protection means that the government must treat all individuals the same. a. True b. False 30. In situations involving fundamental rights, a law that rationally relates to a legitimate government end will be struck down. a. True b. False 31. Local governments, including cities, exercise police powers. a. True b. False

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Chap 02_15e 32. The commerce clause has never been held to support the federal regulation of noncommercial activities that take place wholly within a state’s borders. a. True b. False 33. The United States Supreme Court has held that a constitutional right to privacy is implied by several of the amendments in the Bill of Rights. a. True b. False 34. Substantive due process requires that a person have an opportunity to object to a proposed action before a fair, neutral decision maker. a. True b. False 35. Only Congress may pass a law in conflict with the Constitution. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. Rory, the chief executive officer of Spout Off Inc., a website for short rants, claims that certain state and federal government actions infringe on rights guaranteed by the Bill of Rights. Most of these guarantees have been held to limit a. only the power of the federal government. b. federal and state actions. c. only the claims of individuals. d. only the conduct of corporations and other commercial entities. 37. River City enacts an ordinance that prohibits all advertising on the sides of trucks. A court would likely review this ordinance under the principles of a. equal protection. b. free exercise. c. interstate commerce. d. due process 38. Metro City enacts an ordinance that bans the use of “sound amplifying systems” on public streets. Niles wants to campaign for a seat on the city council by broadcasting his message through speakers mounted on a truck. In Niles’s suit against the city, a court would likely hold the ordinance to be a. an unconstitutional restriction of speech. b. constitutional under the First Amendment. c. justified by the need to protect individual rights. d. necessary to protect national interests.

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Chap 02_15e 39. Under the First Amendment, in comparison with noncommercial speech, the protection given commercial ads is a. equally extensive. b. not as extensive. c. more extensive. d. non-existent. 40. The federal government has the power to regulate commercial activities among the states under a. the commerce clause. b. the privileges and immunities clause. c. the full faith and credit clause. d. the First Amendment. 41. Mind Games Inc. markets a variety of shooting, fighting, and hunting video games. A state statue is enacted to require all game makers to label any games with an option to kill something as “excessively violent.” A court would likely hold this regulation to be a. an unconstitutional restriction of speech. b. constitutional under the First Amendment. c. justified by the need to protect individual rights. d. necessary to protect national interests. 42. Power Company creates a t-shirt design to express support for state tax credits favoring the use of energyefficient products. The firm distributes the t-shirts to many of its customers. The t-shirts are an example of a. unprotected speech. b. commercial speech. c. symbolic speech. d. illegal speech. 43. Centre City enacts an ordinance that bans the distribution of all printed materials on city streets. Diners Café opposes the city’s latest “revenue-enhancing” measure—a tax on prepared food sales—and wants to protest by distributing handbills. In Diners’ suit against the city, a court would likely hold the ban on printed materials to be a. constitutional under the First Amendment. b. not subject to the U.S. Constitution. c. unconstitutional under the commerce clause. d. unconstitutional under the First Amendment. 44. A statute enacted by the Wyoming state legislature to regulate trucking affects interstate commerce. In evaluating this statute, the courts will weigh the burden that it imposes on interstate commerce against a. the federal government’s authority to regulate the matter. b. the purpose of interstate commerce. c. the state’s interest in regulating the matter. d. the statute’s impact on noneconomic activity.

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Chap 02_15e 45. Utah enacts a statute to ban advertising in “bad taste.” Most likely, a court would hold this statute to be a. an unconstitutional restriction of speech. b. constitutional under the First Amendment. c. justified by the need to protect individual rights. d. necessary to protect national interests. 46. Federal regulations concerning medical devices directly conflict with a certain state law. Under the U.S. Constitution, which law takes precedence is determined by a. the full faith and credit clause. b. the commerce clause. c. the privileges and immunities clause. d. the supremacy clause. 47. The state of Florida can regulate building contractors and building codes in the state under its a. police powers. b. system of checks and balances. c. entitlement to full faith and credit. d. commerce power. 48. Jared claims that a Kentucky state statute infringes on his “substantive due process” rights. This claim focuses on a. procedures used to make decisions to take life, liberty, or property. b. the content of the statute. c. the treatment of similarly situated individuals. d. the steps to be taken to protect Orin’s privacy. 49. Dom burns a U.S. flag in his backyard. He films the activity and posts the video on YouTube.com. Dom’s conduct is most likely a. expressly prohibited by the Constitution. b. protected by the First Amendment. c. subject to reasonable restrictions under the due process clause. d. given strict scrutiny under the equal protection clause. 50. A rule issued by the federal Environmental Protection Agency (EPA) limits the amount of carbon that can be emitted from a car’s exhaust system. California state law prescribes much lower limits. Under the U.S. Constitution a. the rule and the law are invalid. b. the rule and the law apply equally. c. the state law takes precedence. d. the federal rule takes precedence.

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Chap 02_15e 51. Kansas enacts a law requiring all businesses in the state to donate 10 percent of their profits to Protestant churches that provide certain services to persons whose income is below the poverty level. Lo-Price Stores files a suit to block the law’s enforcement. The court would likely hold that this law violates a. no clause in the U.S. Constitution. b. the establishment clause. c. the free exercise clause. d. the supremacy clause. 52. Congress enacts the Ad Restriction Act (ARA) to limit advertising in certain circumstances. The ARA will be considered valid if it directly advances a substantial government interest a. and goes no further than necessary to achieve its objective. b. without regard to how “far” it goes. c. and the parties affected by it can elect how “far” to go in applying it. d. and goes further than necessary to ensure full coverage. 53. Peoples Rights Organization (PRO), a political lobbying group, wants a certain policy enacted into law. If PRO’s policy conflicts with the U.S. Constitution, a law embodying it can be imposed by a. Congress. b. any state. c. the President. d. none of the choices. 54. NatGas Corporation obtains a federal license to operate a gas pipeline through a certain area of Oregon. The Oregon state legislature enacts a law that bans gas pipelines in that area. Most likely, the state law violates a. no provision in the U.S. Constitution. b. the commerce clause. c. the due process clause. d. the supremacy clause. 55. Generally, given the broad language of the Constitution, the line between state and national powers is often determined by a. Congress. b. the courts. c. the President. d. the administrative branch. 56. Under the U.S. Constitution, Congress has the power to regulate a. every commercial enterprise in the United States. b. only intrastate commercial enterprises. c. only local commercial enterprises. d. only non-commercial activities.

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Chap 02_15e 57. Bryan creates a website to post threatening messages about celebrities. Under the First Amendment, these messages are most likely protected a. all of the time. b. none of the time. c. only if there are no accompanying ads. d. only if the threats can be verified. 58. Alix posts a podcast on the Believe! website in which she insists that Congress base all federal law on her religious principles. Under the First Amendment, Alix is guaranteed a. the power to delegate her view to the federal government. b. the right to fair payment for her podcast. c. the right to a review of her opinion in due process. d. the freedoms of religion and speech. 59. A federal form of government is one in which the national government shares sovereign power with a. no one. b. the states. c. the national government. d. the people. 60. The members of Climate Action believe that a recently enacted federal law is unconstitutional. They write and sign a petition to the government to repeal the law, refuse to obey it, and stop others from complying with it. Under the First Amendment, these individuals have a right to a. petition the government. b. refuse to obey any law with which they disagree. c. stop others from complying with any law. d. none of the choices. 61. Under the U.S. Constitution, the federal government has the power to regulate commercial activities among the states. This grant implies that the regulation of such activities is not within the authority of a. Congress. b. the states. c. the President. d. the courts. 62. To reduce traffic, Market Town enacts an ordinance that allows only a few specific street vendors to operate in certain areas. A court would likely review this ordinance under the principles of a. equal protection. b. free exercise. c. interstate commerce. d. free speech.

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Chap 02_15e 63. Under the First Amendment, in comparison with commercial speech, the protection given obscene speech is a. equally extensive. b. not as extensive. c. more extensive. d. non-existent. 64. The term checks and balances refers to the system under which a. a state must refrain from imposing unreasonable burdens on citizens of another state. b. the powers of government are divided among its branches, each of which exercises a check on the actions of the others. c. any judicial decision with respect to property rights in one state will be honored and enforced in all states. d. the national government regulates interstate commerce. 65. Pharma Corporation expresses opinions on political issues through its financial contributions to political action committees and other groups. Under the First Amendment, Pharma’s “expression” is most likely a. discouraged. b. prohibited. c. protected. d. prescribed. 66. The Bill of Rights embodies a. a series of protections for the individual against government action. b. payment in the form of taxes by business entities to obtain certain rights. c. the privileges and immunities of the citizens in the several states. d. rights established under deeds, wills, contracts, and similar instruments. 67. Pat stands in front of Rogue’s Tavern, shouting “fighting words” that are likely to incite Rogue’s patrons to respond violently. The First Amendment protects such speech a. all of the time. b. none of the time. c. only if it is noncommercial. d. only if it is symbolic. 68. Book Stop, a bookstore in Capital City, sells publications that criticize government actions and policies. The city enacts an ordinance prohibiting the sale of such materials in the interest of preserving public tranquility. This ordinance is most likely a. an invalid invasion of individuals’ privacy. b. an unconstitutional restriction of speech. c. a violation of corporations’ rights to certain privileges. d. constitutional under the First Amendment.

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Chap 02_15e 69. Mia claims that a North Carolina state statute infringes on her “procedural due process” rights. This claim focuses on a. procedures used in making decisions to take life, liberty, or property. b. the content of the statute. c. the treatment of similarly situated individuals. d. the steps to be taken to protect Mia’s privacy. 70. Jon, a law enforcement official, monitors Kelsey’s Internet activities—e-mail and website visits—to gain access to her personal financial data and student information. This may violate Kelsey’s right to a. privileges and immunities. b. privacy. c. free speech. d. free exercise. 71. The Wisconsin state legislature enacts a statute that prohibits the advertising of video games “because the games might be harmful to minors.” Despite this new statute, the president of x-Games, Inc., orders x-Game marketers to place ads in various media. When an x-Game ad appears on YUTV, a local television station, x-Games and YUTV are charged with violating the statute. What is the defendants’ best defense against a conviction?

72. Kim operates Kim’s Fruits & Vegetables, a small market stocked entirely with produce grown on her adjacent farm. Under what clause of the Constitution can the federal government regulate Kim’s activities? What is Kim’s best argument against federal regulation of her farm and business?

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Chap 02_15e Answer Key 1. True 2. False 3. True 4. False 5. True 6. True 7. True 8. False 9. True 10. False 11. True 12. True 13. True 14. False 15. True 16. False 17. False 18. False 19. True 20. False 21. False 22. True 23. True 24. False 25. False 26. False

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Chap 02_15e 27. False 28. False 29. False 30. False 31. True 32. False 33. True 34. False 35. False 36. b 37. d 38. b 39. b 40. a 41. a 42. c 43. d 44. c 45. a 46. d 47. a 48. b 49. b 50. d 51. b 52. a 53. d 54. d Copyright Cengage Learning. Powered by Cognero.

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Chap 02_15e 55. b 56. a 57. b 58. d 59. b 60. a 61. b 62. a 63. d 64. b 65. c 66. a 67. b 68. b 69. a 70. b 71. x-Games and YUTV cannot be convicted because a state legislature cannot enact a statute that restricts commercial speech (in this situation, marketing video games) to this extent. The First Amendment protects commercial speech. Because commercial speech does not receive as much protection as noncommercial speech, however, states can place some restraints on the former. For example, to protect consumers, a state may ban certain kinds of marketing practices, such as deceptive or misleading advertising. Generally, a restriction on commercial speech will be considered valid as long as it (1) seeks to implement a substantial government interest, (2) directly advances that interest, and (3) goes no further than necessary to accomplish the objective. Here, the complete ban on ads for video games “because the games might be harmful to minors” is too restrictive: it goes too far in attempting to protect minors for an apparently unsubstantiated purpose. 72. Under the commerce clause, at least in theory, Congress has the power to regulate any activity—interstate or intrastate —that affects interstate commerce. Thus, under that clause, it could be argued that the farmer’s growing and selling of produce is subject to federal regulation because these activities affect interstate commerce. The farmer-vendor’s best argument against federal regulation of her farm and business in this problem might be that in her case these activities and their effects are purely local. But because of the economic character of these activities, there is an effect on interstate commerce, however minimal and despite their local character. For example, customers who buy produce from the market are not likely to purchase the same goods from stock traded in interstate commerce. Thus, it is unlikely that a court would accept this argument.

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Chap 03_15e Indicate whether the statement is true or false. 1. It can be difficult to predict with certainty how a court will apply a given law to a particular action. a. True b. False 2. Corporate social responsibility may increase a business’s reputation or goodwill. a. True b. False 3. An overemphasis on long-run profit maximization is a common reason for ethical problems that occur in business. a. True b. False 4. Judging a job applicant based on what an online search reveals about the applicant’s activities outside the workplace universally is viewed as ethical. a. True b. False 5. Making ethical decisions is most often best done by analyzing objective standards (such as profit or number of people fired) instead of subjective impacts on stakeholders. a. True b. False 6. The effectiveness of an industry code of ethics is partly determined by the commitment of the industry or company leadership to enforce it. a. True b. False 7. Under the “stakeholder view,” no group ever has a greater stake in company decisions than the shareholders do. a. True b. False 8. When profit maximization is the goal, a company does not benefit from ethical behavior. a. True b. False 9. Corporate “citizenship” involves making decisions beyond just maximizing profits and dividends. a. True b. False 10. Outcome-based ethics determines what is ethical by looking at the potential benefits and harms of a given action. a. True b. False

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Chap 03_15e 11. The Sarbanes-Oxley Act was enacted to reduce the number of unethical business decisions by requiring the accountability of publicly traded companies. a. True b. False 12. Company codes of conduct outline company policies on particular issues and how employees are expected to act. a. True b. False 13. Decision makers need to consider what they can and will do before they consider what they should do. a. True b. False 14. The study of ethics goes no further than the requirements of the law to evaluate what is right for society. a. True b. False 15. One of the most important ways to maintain an ethical workplace is for management to set standards and expectations for ethical behavior. a. True b. False 16. Corporate social responsibility links the responsibility of citizenship with the strategy and key principles of a business. a. True b. False 17. Outcome-based ethics deals with traditional standards of behavior. a. True b. False 18. Rationalization is the process of making a logical decision based in evidence and an analysis of the ethical dimensions of the decision. a. True b. False 19. One view of the role of business in society is the perceived duty of a company only to generate revenue for its owners. a. True b. False 20. Under the categorical imperative, an unethical decision that would have only a small impact is acceptable as long as no one else in society acts the same way. a. True b. False

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Chap 03_15e 21. Global businesses need to be conscious of the impact of different religious principles on ethics. a. True b. False 22. The first step in making an ethical decision is to understand the problem. a. True b. False 23. Conduct that is legal is ethically unquestionable. a. True b. False 24. Ethical decision makers should test and reflect on the outcome of their decisions. a. True b. False 25. Because social media is so widespread, it is legal and ethical for a company to have social media policies limiting employees from criticizing the company. a. True b. False 26. Because it may be unclear how a court will interpret and apply a law, companies can ensure decisions are viewed as ethical by documenting their own interpretation of the law. a. True b. False 27. Congress does not pass laws based on ethics. a. True b. False 28. When making ethical decisions, a business should evaluate the financial implications. a. True b. False 29. Ethics is a branch of philosophy that focuses on morality. a. True b. False 30. Once a company has investigated any foreign suppliers, it is unnecessary to continue to monitor those suppliers. a. True b. False 31. As part of the IDDR approach described in the text, it is important to list many possible actions and analyze them using several different ethical theories. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 03_15e 32. Under the principle of rights theory, the key factor in a decision is how the result may harm the rights of the company to make money. a. True b. False 33. The term moral minimum is best defined as the highest degree of ethical behavior expected of a firm. a. True b. False 34. Once a law is passed to codify an ethical requirement, the ethical aspect of the action is no longer important. a. True b. False 35. Duty-based ethics is based in the idea that every business has certain duties to others. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. Basil and other managers employed by Creosote Company are most likely to find that unethical behavior in the workplace can be deterred by a. taking immediate action in response to unethical conduct. b. imposing sanctions disproportionate to misconduct. c. distributing rewards without regard to ethics. d. ignoring small breaches of company rules. 37. Underscoring the importance of ethics is that the law is not always easy to interpret or apply because laws a. are organized and structured, and thus can be difficult to read. b. represent the people’s will, which changes. c. result from a political process involving compromise. d. contain arbitrary and capricious terms. 38. Data Inc. adheres strictly to the goal of maximizing profits. Data will benefit from ethical behavior a. if customer service is good. b. if its owners are happy with the revenue. c. under no circumstances. d. if it efficiently allocates scarce resources. 39. Considering the triple bottom line requires looking at how business decisions impact all of the following except a. the profits. b. the planet. c. the people. d. the platitudes.

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Chap 03_15e 40. Ethics focuses on how persons making business decisions apply a. legal doctrine. b. moral principles. c. corporate policy. d. financial priorities. 41. Build-It Inc. applied an inexpensive but untested technique to brace a transit tunnel wall. The technique was legal but the tunnel collapsed, killing several commuters. Build-It’s action was a. unethical because the technique was untested. b. ethical because the technique was legal. c. unethical because the technique was inexpensive. d. ethical because the technique inexpensive and untested. 42. A highly successful company is most likely to behave more unethically than a less successful firm if a. both companies’ clients and customers focus solely on profitability. b. employees are expected to continue performing at a high level. c. the government does not investigate the source of the success. d. the successful company focuses on long-run profit maximization. 43. When adopting duty-based ethics, corporations often demonstrate the duties they owe a. through required government disclosure forms. b. in their mission statements and strategic plans. c. by adopting a corporate religion. d. in the biographies of corporate leaders. 44. Ray, the manager of Soy Farm Inc., must decide whether to plant genetically modified seed that could spread to the crop of an adjacent farm, whose owner opposes its use. Not using the seed could cut Soy’s production and profitability, impacting its owners, employees, creditors, and others. If Ray considers all of these factors in making his decision, he is likely applying a. religious principles. b. the categorical imperative. c. the principle of rights theory. d. utilitarianism. 45. Teresa must resolve a business problem for which she believes there is no easy answer. She identifies the reasons for this belief before analyzing solutions. In terms of the IDDR approach, this is a. the discussion step. b. the decision step. c. the inquiry step. d. the review step.

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Chap 03_15e 46. If a company strictly complies with existing laws, the firm will a. fulfill all business ethics obligations. b. fulfill no business ethics obligations. c. fulfill some business ethics obligations. d. not need to fulfill any business ethics obligations. 47. A business corporation that acts to ensure its employees are treated fairly and its operations minimally impact the environment is applying the concept of a. moral minimum. b. corporate social responsibility. c. categorical imperative. d. triple bottom line. 48. According to the theory of corporate social responsibility, any decision by corporate management should consider how an action affects the firm’s a. officers and employees only. b. officers, shareholders, suppliers, customers, and community. c. shareholders only. d. profit only. 49. Adhering to utilitarian ethics in making a business decision is likely to result in an action that is considered morally correct if it produces the greatest good for a. the business decision maker. b. the business. c. the fewest people. d. the most people. 50. In addressing an ethical problem, a business decision maker evaluates possible solutions to the problem and then considers what should be done. In terms of the IDDR approach, this is a. the discussion step. b. the decision step. c. the inquiry step. d. the review step. 51. The Fraud Reduction and Data Analytics Act to prevent, detect, and respond to fraud in federal programs institutionalizes a. fraud. b. ethical rights and duties. c. federal programs. d. corporate policy.

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Chap 03_15e 52. A company’s ethical code of conduct is not a. law. b. a set of rules that the company can enforce. c. an outline of the company’s policies. d. a guide for the company’s decision makers facing ethical questions. 53. Questions of what is ethical involve the extent to which a company has a. a legal duty beyond those duties mandated by ethics. b. an ethical duty beyond those duties mandated by law. c. any duty beyond those mandated by both ethics and the law. d. any duty when it is uncertain whether a legal duty exists. 54. The National Association of Manufacturers (NAM) announces a new industry code of ethics. The effectiveness of this code will be determined by a. the commitment of NAM’s members to enforcing the code. b. the similarity of the code to the personal values of NAM’s members. c. the success of the campaign publicizing the code. d. the relationship between the code and the law. 55. When the chief financial officer, or other executive, of a corporation is unsure whether a certain business action is legal, she should act a. in her own best interest. b. honestly and responsibly. c. in the best short-run interest of the company. d. to maximize profit. 56. To successfully apply the concept of corporate social responsibility, the key factor is a. the relation of a social activity to a corporate business activity. b. the nature of the publicity a corporation will derive from a social activity. c. the political correctness of a social activity. d. the effect of a social activity on corporate profitability. 57. “Be honest and treat people fairly.” In regard to business ethics, implementing this motto is a. subordinate to such expedient factors as cash flow and debt payments. b. only important in politically sensitive situations. c. important in all circumstances. d. only important with respect to important customers. 58. Compliance with the law is not always sufficient to determine “right” behavior because a. the law does not codify all ethical requirements. b. company codes are also sources of law. c. business decisions can have negative impacts. d. ethical problems occur in business. Copyright Cengage Learning. Powered by Cognero.

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Chap 03_15e 59. Duty-based ethical standards are most likely to derive from a. a corporate ethics code. b. a cost-benefit analysis. c. philosophical reasoning. d. the law. 60. Cloud Source LLC sells to Distribution Inc. a promising idea for a technological innovation that looks promising but that is still being developed. This is a. ethical and legal. b. ethical but illegal. c. legal but unethical. d. illegal and unethical. 61. Making a business decision based on its projected financial outcome and then arguing that the decision is ethical is a. rationalizing the decision. b. questioning the decision. c. using the utilitarian approach. d. using the stakeholder approach. 62. Under the principle of rights theory, a key factor in determining whether a business decision is ethical is how that decision a. compares to religious principles. b. affects the rights of others. c. causes consequences that would follow if everyone acted the same way. d. supports the right to make a profit. 63. When making decisions that are ethical under either profit maximization or corporate citizenship theories, a business should include all of the following steps except a. recognize that there is an ethical issue in the decision. b. apply ethical theories to reasonable alternatives. c. publicize the options you rejected with your reasons. d. reflect on the outcome of the decision once it is made. 64. The utilitarian theory of ethics does not require a. a choice among alternatives to produce the maximum societal utility. b. a determination of whom an action will affect. c. an assessment of the effects of alternatives on those affected. d. the acquiring of the means of production by workers.

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Chap 03_15e 65. Ethical issues that a business manager is not likely to encounter include a. protocols for company meetings. b. questions of workplace diversity. c. compliance with environmental regulations. d. application of safety standards. 66. Business ethics looks at whether business decisions a. are right or wrong. b. derive from well-known business principles. c. follow legal doctrine. d. align with corporate policy. 67. Peanut Products Company (PPC) makes goods that can cause severe health problems to those with peanut allergies. PPC analyzes the cost of warning people of the risk (which the company’s management sees as obvious) and the harm to people if no warning is provided. This analysis most likely is part of a. a duty-based ethics approach. b. corporate social responsibility. c. religious ethical principles. d. outcome-based ethics. 68. To avoid unethical practices by a foreign supplier, an effective business practice is to a. pay foreign employees at U.S. pay rates. b. have suppliers sign contracts affirming that they will behave ethically. c. routinely monitor the foreign workplaces. d. obtain a legislative decree that the supplier is ethical. 69. A cost-benefit analysis is part of a. a duty-based ethics approach. b. corporate social responsibility. c. the principle of rights theory. d. utilitarianism. 70. With respect to what society will tolerate, a company’s compliance with the law, and no more, is a. the highest ethical level. b. the lowest ethical level. c. the only ethical level. d. irrelevant.

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Chap 03_15e 71. Lily, an executive with Medico Inc., has to decide whether to market a product that could offer substantial benefits but might also have potentially serious side effects for a small percentage of users. Using the different ethical philosophies discussed, analyze the decision.

72. Sports Equipment Corporation sells a profit-generating product that is capable of seriously injuring consumers who misuse it in a foreseeable way. The firm’s managers are contemplating adding a warning to the product but that warning will increase the cost of the product, and they are worried that it may deter some potential customers from buying it. Thinking about the two main theories of the role of business in society, discuss whether the corporation would behave ethically by continuing to sell the product without warning.

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Chap 03_15e Answer Key 1. True 2. True 3. False 4. False 5. False 6. True 7. False 8. False 9. True 10. True 11. True 12. True 13. False 14. False 15. True 16. True 17. False 18. False 19. True 20. False 21. True 22. True 23. False 24. True 25. False 26. False

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Chap 03_15e 27. False 28. True 29. True 30. False 31. True 32. False 33. False 34. False 35. True 36. a 37. b 38. a 39. d 40. b 41. a 42. b 43. b 44. c 45. c 46. c 47. b 48. b 49. d 50. a 51. b 52. a 53. b 54. a Copyright Cengage Learning. Powered by Cognero.

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Chap 03_15e 55. b 56. a 57. c 58. a 59. c 60. a 61. a 62. b 63. c 64. d 65. a 66. a 67. d 68. c 69. d 70. b 71. When a corporate executive has to decide whether to market a product that might have undesirable side effects for a small percentage of users but that would be beneficial for most users, the decision turns on the benefit to the many versus the harm to the few. Of course, all possible precautions should be taken to protect the few. A more specific answer depends on which system of ethics is applied. From a religious duty-based perspective, the answer might be absolute—do not sell the product because some would be harmed, sell the product only to those who would not be harmed, or sell the product with clear warnings of the possible harm. Similar conclusions might be reached through a philosophical, “categorical imperative,” duty-based approach, which would consider the result if every corporation chose to sell the product. A principle-of-rights dutybased approach might likewise come to the same conclusions, reasoning that all persons have a right to life, for example, and that the corporation has an ethical duty to respect that right and act accordingly. From a utilitarian perspective, under a cost-benefit analysis, if the product were sold, it could benefit the greatest number of persons—future and current employees, as well as shareholders, and most consumers. If there was “bad” publicity, and it was adverse enough to reduce sales, however, more persons could benefit from the decision not to market the product. Under any of the different corporate social responsibility theories, the decision whether to market the product would acknowledge the firm’s duty to act ethically and be accountable to society. There might be a balancing of the interests of competing stakeholder groups or a shouldering of the responsibility to behave in a socially beneficial way as a good corporate citizen. Of course, the firm would likely have to accept any legal liability that would arise from its sale of the product. Copyright Cengage Learning. Powered by Cognero.

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Chap 03_15e 72. There are two primary theories of the role of business in society. First, the historical role of business was to maximize profits. The second theory is that business should behave as a corporate citizen. As a profit maximizer, Sports Equipment Corporation should evaluate this decision to minimize costs and maximize profit to the company. Adding a warning would increase the cost (and decrease the profits) of the product. At the same time, a lawsuit because of injury could be very expensive. It is unclear whether the addition of a warning would result in decreased sales. The decision maker should have a professional analysis done of the financial impacts of the lawsuit as well as lost sales cause by either a lawsuit or the addition of a warning. As a corporate citizen, the company may consider the triple bottom line. There is no information on the “planet” and so that factor won’t enter the analysis. The “profit” analysis will be similar to that in the prior paragraph. The “people” analysis would include the impact on the consumers who might be injured by the foreseeable misuse. Because a warning could prevent this injury (either through more responsible use or by elimination of a sale to the consumer who might misuse the product), the corporate citizen model is likely to result in the addition of a warning.

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Chap 04_15e Indicate whether the statement is true or false. 1. A question of law is generally the focus of an appellate court. a. True b. False 2. The simplest form of alternative dispute resolution is mediation. a. True b. False 3. To use arbitration as a method of dispute resolution, the parties must agree to arbitrate any dispute before it arises. a. True b. False 4. Doing business within a jurisdiction is not enough for most courts to compel a defendant to appear. a. True b. False 5. For purposes of diversity jurisdiction, a corporation is not considered a citizen of any particular state. a. True b. False 6. Parties to international business transactions should include certain clauses, including arbitration clauses, in their contracts to avoid added complexity in related legal proceedings. a. True b. False 7. Because the Internet is international in scope, it raises international jurisdictional issues. a. True b. False 8. The effect of the minimum-contacts standard is that a business firm has to comply with the laws of any jurisdiction in which it targets customers. a. True b. False 9. In a case involving Internet transactions, jurisdiction is proper only when the defendant conducts substantial business in the jurisdiction online. a. True b. False 10. Large corporations that do business in many states are now automatically subject to jurisdiction in all of them. a. True b. False

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Chap 04_15e 11. A corporation’s compliance with the laws of any jurisdiction in which it does business is complicated by the fact that those laws can be very different. a. True b. False 12. Arbitration differs from other forms of alternative dispute resolution in that a third party hearing a dispute makes a decision for the parties. a. True b. False 13. Jurisdiction refers to the right of a citizen to bring a case before a court. a. True b. False 14. An appellate court will not challenge a trial court’s finding of fact, even if the finding is clearly erroneous. a. True b. False 15. Multinational corporations agreeing to resolve a dispute through a formal hearing before a panel of experts is a method of alternative dispute resolution. a. True b. False 16. Only the United States Supreme Court exercises the power of judicial review. a. True b. False 17. Any court can exercise jurisdiction over any person. a. True b. False 18. Negotiation requires the use of a neutral third party to facilitate a settlement. a. True b. False 19. Generally, because the parties to arbitration are free to agree to the means of the method, a court will not hear a complaint from either party about the results. a. True b. False 20. When concurrent jurisdiction exists, the decision of whether to litigate in a federal or state court can be affected by the availability of different remedies. a. True b. False

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Chap 04_15e 21. In the American governmental system, applying the laws to specific situations is the essential role of Congress. a. True b. False 22. In a case based on diversity of citizenship, a federal court will apply to the dispute the law of all of the jurisdictions of the parties. a. True b. False 23. A federal court will apply federal law in a case involving a federal question. a. True b. False 24. Because the Internet is international in scope, no party to an online dispute resolution proceeding can appeal to a court at any time. a. True b. False 25. That a favorable court decision will be likely to remedy an injury is an element of standing. a. True b. False 26. Most states encourage or require parties to undertake a trial before alternative dispute resolution. a. True b. False 27. Judicial review is the process through which Congress approves or rejects judicial appointments. a. True b. False 28. The amount of business a corporation does within a state can serve to subject or exempt the firm from that state’s jurisdiction. a. True b. False 29. There are no international conventions or treaties to assist in the enforcement of arbitration clauses because their enforcement is a national domain. a. True b. False 30. Under a state long-arm statute, a court can exercise jurisdiction only over certain nonresident defendants. a. True b. False

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Chap 04_15e 31. A choice-of-law clause permits a party to choose which nation’s law to apply to a dispute arising under an international contract. a. True b. False 32. Because the courts have defined interstate commerce broadly, arbitration agreements only slightly connected to interstate commerce may be enforced. a. True b. False 33. Laws would have no discernible meaning without the courts to interpret them. a. True b. False 34. A court’s review of an arbitrator’s decision is the same in scope as an appellate court’s review of a trial court’s decision. a. True b. False 35. The federal courts are an independent system of courts superior to the state courts. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. Ovid wants to file a suit against Petra. For a court to hear the case, a. both parties must consent. b. the court must have jurisdiction. c. the parties must have diversity of citizenship. d. the parties must own property. 37. State trial courts that are called county, district, superior, or circuit courts are most likely to have a. appellate jurisdiction. b. general jurisdiction. c. limited jurisdiction. d. no jurisdiction. 38. In a case based on diversity of citizenship, a court will apply a. federal common law. b. the relevant state law. c. any law that the parties to the case agree to apply to their dispute. d. the law that produces the most equitable result.

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Chap 04_15e 39. The United States Supreme Court has held that a mandatory arbitration clause in an employment contract is generally enforceable because in agreeing to the clause, the parties waived a. their right to sue. b. the right to engage in other methods of alternative dispute resolution. c. rights under statutes designed to protect the employee. d. the right to terminate the employment relationship without cause. 40. State trial courts that are called special inferior trial courts or minor judiciary courts are most likely to have a. appellate jurisdiction. b. general jurisdiction. c. limited jurisdiction. d. no jurisdiction. 41. Heyli is not a resident of Iowa although her website can be accessed by residents of that state. Jen files a suit against Heyli in an Iowa state court. The court is most likely to have jurisdiction over Heyli if Jen’s claim arises from a. minimum contacts between Heyli and any Iowa resident. b. substantial business between Jen and Heyli through Heyli’s website. c. no interactivity between Heyli and any Iowa resident through Heyli’s website. d. the Internet’s capacity to bypass boundaries. 42. A dispute between two cheese makers—Cheddar Creamery Company and Deli Dairy Inc.—falls under a state statute on unfair trade practices. The application of this law to these parties must be determined by a. an appellate court. b. a trial court. c. a judge. d. a jury. 43. Hobbes, a resident of Illinois, owns a warehouse in Indiana. A dispute arises over the ownership of the warehouse with Jules, a resident of Kentucky. Jules files a suit against Hobbes in Indiana. Regarding this suit, Indiana has a. federal jurisdiction. b. in personam jurisdiction. c. in rem jurisdiction. d. no jurisdiction. 44. Maris files a suit against Ngu in a state court over an employment contract. The case proceeds to trial, after which the court renders a verdict. The case is appealed to the state’s highest court. After that court’s review of Maris v. Ngu, a party can appeal the decision to the United States Supreme Court if a. a federal question is involved. b. a state question is unresolved. c. the party is unsatisfied with the result. d. the state trial and appellate court rulings are different.

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Chap 04_15e 45. The 1803 decision of the United States Supreme Court in the case of Marbury v. Madison established a. the jurisdiction of the courts. b. the writ of certiorari. c. the power of judicial review. d. the rule of four. 46. A trial court’s capacity to directly observe witnesses’ gestures, demeanor, and other nonverbal behavior supports the decision of an appellate court to a. conduct a new trial and re-examine the witnesses. b. apply the trial court’s interpretation of the law in the case. c. defer to the trial court’s findings on questions of fact. d. focus on what really happened in regard to the dispute. 47. The jurisdiction of the federal courts is limited because a. the federal government has limited powers. b. Congress sets the limits. c. the territory of the United States is limited. d. the states can exercise their authority under long arm statutes. 48. Ginny and Haruto present their case to an Idaho state court for resolution. The court defers to a different Idaho court’s findings of fact in the case, and focuses on the application and interpretation of the law to the dispute. The court currently deciding Ginny and Haruto’s dispute is a. an appellate court. b. a trial court. c. a U.S. magistrate’s court. d. a special inferior court. 49. Steel Mill Inc. makes steel forms of substandard quality. Tower Building Company has never bought or used a Steel Mill form, but files a suit against the firm, alleging that its products are defective. The defendant’s best ground for dismissal of the suit is that the plaintiff does not have a. venue. b. exclusive jurisdiction. c. standing to sue. d. minimum contacts. 50. Two businesses—Berry Farms LLC and Canned Jams Inc.—dispute the quality of goods delivered by the seller and the price agreed to by the buyer. With regard to this dispute, the two parties can a. any of the choices. b. litigate it. c. settle it between themselves. d. resolve it through an alternative method, such as arbitration.

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Chap 04_15e 51. A decision on a question of state law is final when a. an issue of federal law is involved. b. the United States Supreme Court rules on it. c. the state’s highest court make the decision. d. a U.S. magistrate judge decides the case. 52. Fresh Seafood Inc. and Grocers Market LLC dispute a term in their contract. Because the parties have a longstanding business relationship that they would like to continue, they could settle their dispute through mediation because a. the case will be heard by a jury. b. the dispute will eventually go to trial. c. the process is not as adversarial as litigation. d. the resolution of the dispute will be decided an expert. 53. Liz and Moss disagree over the amount due under their contract. To avoid involving a third party in the resolution of their dispute, Liz and Moss could resolve their dispute through a. arbitration. b. litigation. c. mediation. d. negotiation. 54. In a suit to compel arbitration, a court will order a dispute to be arbitrated if a. both parties consented to it. b. the rules for the arbitration are fair to at least one of the parties. c. the relevant state or federal statute does not include such claims. d. all of the choices. 55. Jill and Kane, with their attorneys, meet to try to resolve a dispute. A neutral third party works with both sides and proposes a solution, but does not make a decision resolving the matter. This is a. arbitration. b. mediation. c. negotiation. d. none of the choices. 56. The concept of venue reflects the policy that a court trying a case should a. be more or less informed or prejudiced for or against the defendant. b. have exclusive jurisdiction over the subject matter. c. be in the geographic neighborhood of the incident or parties in dispute. d. have minimum contacts with the parties to the case.

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Chap 04_15e 57. With respect to international dispute resolution, a domestic court may enforce a foreign court’s decision for any of the following reasons except a. courtesy. b. if the foreign decision is consistent with domestic national law and policy. c. if a foreign plaintiff won a favorable judgment in the plaintiff’s country. d. a desire not to accommodate the foreign plaintiff. 58. Ty, a citizen of Utah, files a suit in a Utah state court against Vancouver Sales Corporation, a Washington state company that does business in Utah. The court has original jurisdiction, which means that a. the case is being heard for the first time. b. the court has a unique method of deciding whether to hear a case. c. the court has unusual procedural rules. d. the subject matter of the suit is interesting and new. 59. Tabulated Data Inc. files a suit against the United States, challenging a congressional enactment mandating that employers pay their employees’ student loans. The process by which the court decides this issue is a. judicial review. b. voir dire. c. unconstitutional. d. the rule of four. 60. A court’s subject-matter jurisdiction may be limited by all of the following except a. the subject of a lawsuit. b. the sum in controversy. c. whether the proceeding is a trial or an appeal. d. the prior experience of the court in deciding similar disputes. 61. Because litigating a complaint can be costly, and there is a backlog of cases in many courts, a businessperson is likely to attempt to resolve a dispute a. through the court system. b. with a method of alternative dispute resolution. c. by anticipating that the dispute will resolve itself. d. by filing a writ of certiorari in a different court. 62. Kari and Lillian, who are citizens of Mississippi, are involved in a case related to the adoption of their child. Over this case, Mississippi state courts have a. concurrent jurisdiction with federal courts. b. concurrent jurisdiction with other state courts. c. exclusive jurisdiction. d. no jurisdiction.

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Chap 04_15e 63. Franco files a suit in a federal district court against Greta. Franco loses the suit, appeals to the U.S. Court of Appeals for the Ninth Circuit, and loses again. Franco asks the United States Supreme Court to hear the case. The Court is a. not required to hear the case. b. required to hear the case because Franco lost in a federal court. c. required to hear the case because Franco lost in a lower court. d. required to hear the case because it is an appeal. 64. A mandatory arbitration clause in an employment contract may not be enforced if a. the arbitration rules and procedures are unfair to one of the parties. b. the parties did not specify limits to the disputes that may be submitted. c. the relevant arbitration statute does not exclude the claim in dispute. d. a party who agreed to the clause later opposes arbitration. 65. Lazlo, a citizen of Minnesota, wants to file a suit against Nadji, a citizen of Ohio. The diversity of citizenship may be a basis for a. no court to exercise jurisdiction. b. a federal court to exercise jurisdiction. c. any court to exercise jurisdiction. d. the United States Supreme Court to refuse jurisdiction. 66. Cattle House Steaks, a Colorado company, enters into a contract over the phone with Beef Packing Inc., an outof-state corporation. If a dispute arises, a Colorado court can exercise jurisdiction over Beef Packing a. under the minimum-contacts test. b. on the basis of a federal question. c. in no circumstances. d. only if Beef Packing files the suit. 67. A challenge to the constitutionality of an executive order that limits certain state actions is a. beyond the jurisdiction of the courts. b. solely for the executive to decide. c. subject to the exclusive authority of Congress. d. within the power of judicial review. 68. Rock Quarry Inc. and Serene Vineyards agree to resolve a dispute in arbitration. The arbitrator meets with the quarry’s representative to discuss the matter without the vineyard’s representative being present. If this substantially prejudices the grape grower’s rights, a court will most likely a. dismiss the dispute. b. review the record of the case. c. file a complaint against the arbitrator. d. set aside any award.

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Chap 04_15e 69. The availability of different remedies is a factor that can affect a. a party’s decision to litigate in a certain court. b. the in rem jurisdiction of a court. c. standing, venue, and other threshold issues. d. the determination of whether a court can exercise jurisdiction. 70. Cornel and Deanna resolve their dispute over the subsidence of Cornel’s real property due to Deanna’s excavation for an irrigation pond by having a neutral third party render a binding decision. This is a. arbitration. b. mediation. c. negotiation. d. early neutral case evaluation. 71. Juan sued Abram in state court, and lost his case. He immediately appealed to the intermediate level appellate court for his state, where he lost again. After losing again at the state supreme court level, he is so angry that he wants to take his case all the way to the U.S. Supreme Court. Does Juan have the right to have his case heard by the U.S. Supreme Court? What is the procedure he would use to get the U.S. Supreme Court to hear his case?

72. Norwest Trucking Corporation files a suit in a state court against Bob’s Service Company (BSC), and wins. BSC appeals the court’s decision, asserting that the evidence presented at trial to support Norwest’s claim was so scanty that no reasonable jury could have found for the plaintiff. Therefore, argues BSC, the appellate court should reverse the trial court’s decision. Is the appellate court likely to reverse the trial court’s findings with respect to the facts? Why or why not? What are an appellate court’s options after reviewing a case?

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Chap 04_15e Answer Key 1. True 2. False 3. False 4. False 5. False 6. True 7. True 8. True 9. False 10. False 11. True 12. True 13. False 14. False 15. True 16. False 17. False 18. False 19. True 20. True 21. False 22. False 23. True 24. False 25. True 26. False

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Chap 04_15e 27. False 28. True 29. False 30. True 31. False 32. True 33. True 34. False 35. False 36. b 37. b 38. b 39. a 40. c 41. b 42. c 43. c 44. a 45. c 46. c 47. a 48. a 49. c 50. a 51. c 52. c 53. d 54. a Copyright Cengage Learning. Powered by Cognero.

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Chap 04_15e 55. b 56. c 57. d 58. a 59. a 60. d 61. b 62. c 63. a 64. a 65. b 66. a 67. d 68. d 69. a 70. a 71. The United States Supreme Court has appellate jurisdiction to hear cases from all federal circuit courts of appeals, and in certain circumstances, from some state supreme courts. The decisions of each state’s highest court on all questions of state law are final. Only when issues of federal law are involved can the United States Supreme Court overrule a decision made by a state’s highest court. So, in order for Juan to get his case in front of the United States Supreme Court, the case must deal with a federal issue. The method used to bring a case before the Supreme Court is to request a writ of certiorari. A writ of certiorari is an order issued by the Supreme Court to a lower court requiring the lower court to send it the record of the case for review. The Court will not issue a writ unless at least four of the nine justices approve it. It is entirely within the Court’s discretion, and most petitions for writs are denied. A denial of the request to issue a writ of certiorari is not a decision on the merits of the case; it simply means that the lower court’s decision (in this case the state supreme court) remains the law in that jurisdiction.

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Chap 04_15e 72. An appellate court will reverse a lower court’s decision on the basis of the facts if the evidence does not support the findings or if it contradicts them. Appellate courts normally defer to a judge’s decision with regard to the facts of a case, however. There are a number of reasons for this. First, trial judges routinely sit as fact finders. As a result, they develop a particular expertise in determining what kind of evidence and testimony is reliable and what kind is not. Second, trial judges and juries have the opportunity to observe witnesses and tangible evidence first hand. The appellate court sees only a cold record of the trial court proceedings and therefore cannot make the kind of judgments about the credibility of witnesses and the persuasiveness of evidence that can be gleaned only from firsthand experience. (There are also constitutional reasons for an appellate court to defer to a jury verdict. If, based on the evidence presented to a jury, a reasonable person could have come to the same decision that the jury came to, an appellate court cannot reverse the jury’s decision with regard to the facts because this would, in essence, take away a person’s right to a jury trial.) An appellate court’s options after reviewing a case are to affirm the trial court’s judgment, to reverse it in whole, to reverse it in part, to modify the decision, or to remand the case for further proceedings.

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Chap 05_15e Indicate whether the statement is true or false. 1. If an appellate court affirms a jury’s finding on one issue, the court cannot remand the case for further proceedings on another issue. a. True b. False 2. With a motion to strike, a party asks a court for permission to delay the start of a trial in protest of certain aspects or conditions of the plan of litigation. a. True b. False 3. A motion to dismiss asserts that a claim has no basis in law. a. True b. False 4. On appeal of a court’s grant or denial of a motion for summary judgment, the appellate court must defer to the trial court’s ruling on the issue. a. True b. False 5. An appellate court can modify a trial court’s decision, in whole or in part. a. True b. False 6. Pro se representation refers to the attorneys that parties hire to represent them in court. a. True b. False 7. Appellate courts have no discretionary power to reject an appeal—appellate courts must accept all appeals. a. True b. False 8. Sanctions for spoliation of e-evidence can include the entire cost for restorative recovery efforts. a. True b. False 9. Failure to preserve electronic evidence sought by the opposing party in a case can force a company to agree to a settlement that is not in the firm’s best interest. a. True b. False 10. A party does not need to have legitimate grounds to appeal a trial court’s decision. a. True b. False

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Chap 05_15e 11. A default judgment is a judgment entered by a court in a case in which neither party prevails. a. True b. False 12. Picking a jury is an important aspect of litigation strategy. a. True b. False 13. Jurors must decide a case based only on the information that they learn during the trial. a. True b. False 14. Attempts to settle a case must be concluded before the litigation process begins. a. True b. False 15. Discovery is the process of serving a summons and a copy of a complaint on a defendant. a. True b. False 16. A prevailing party has no right to appeal a trial court’s decision, even if, for example, the party receives a smaller monetary award than sought. a. True b. False 17. In some jurisdictions, defendants who agree to waive formal service of process receive a reduction in the amount of an ultimate finding of liability. a. True b. False 18. Because expert testimony is effective with juries, there is no potential for the abuse in its use at trial. a. True b. False 19. A deposition can be used to impeach a party or witness who changes his or her testimony at trial. a. True b. False 20. Before a trial begins, the jury renders a preliminary verdict to indicate to the attorneys what they must attempt to prove during the course of the trial. a. True b. False 21. Misconduct by the participants in a trial can cause the judge to grant a motion for a new trial. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 05_15e 22. Voir dire refers to the jury selection process. a. True b. False 23. Electronic discovery can reveal significant facts that are not discoverable by other means. a. True b. False 24. A complaint contains a brief summary of the facts necessary to show the party filing the complaint is entitled to relief. a. True b. False 25. In considering a trial court’s judgment, an appellate court bases its opinion on its de novo review of the evidence. a. True b. False 26. A request for admission can lengthen a trial because the parties have to take the time to prove facts on which they may already agree. a. True b. False 27. Without a jury, there is no one to determine the truth of the facts alleged in a case. a. True b. False 28. Testimony by a party in court in support of a statement made by someone else who testified is referred to as gainsay evidence. a. True b. False 29. Failing to strictly follow the procedural rules and standards for determining disputes in courts is not likely to affect the outcome in a particular case. a. True b. False 30. Before a lawsuit is initiated, a plaintiff should consider whether the defendant is able to pay the damages sought. a. True b. False 31. In a response to an allegation of a defendant’s negligence, the defendant’s assertion of the plaintiff’s negligence is an affirmative defense. a. True b. False

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Chap 05_15e 32. A defendant’s motion for a directed verdict, if granted by the court, can end a trial before the defendant presents witnesses. a. True b. False 33. A motion for summary judgment can assert that the plaintiff failed to state a claim for which the court can grant relief. a. True b. False 34. To meet the standard of proof of preponderance of the evidence, a party must prove its case beyond a reasonable doubt. a. True b. False 35. The uncertainties of the litigation process are lessened by the fact that any judgment will be enforceable. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. Sportsfield Inc. files a suit against Tailgate Services. Before the trial, during the jury selection process, Sportsfield’s attorney asks, without providing any reason, that one of the potential jurors not be sworn in. This is a. an affirmative defense. b. a motion to dismiss. c. a challenge for cause. d. a peremptory challenge. 37. Suite Properties files a suit in a state court against Tower Offices. At the conclusion of the plaintiff’s case, the defendant files a motion asking the judge to direct a verdict in its favor on the ground that the plaintiff presented no evidence to support its claim. This is a motion for a. a judgment in accordance with the verdict. b. a judgment as a matter of law. c. a new trial. d. judgment n.o.v. 38. Radiant Supply wants to initiate a suit against Solar Power LLC by filing a complaint. The complaint should include a statement of the facts necessary to show that a. the defendant does not have a valid defense. b. the case can be disposed of without a trial. c. the solvency of the defendant is in question. d. the plaintiff is legally entitled to a remedy.

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Chap 05_15e 39. Bess files a suit against Chet over the sale of Dairy Farm. During the trial, after the plaintiff’s attorney is finished questioning the first witness, the witness is subject to a. cross-examination. b. direct examination. c. a closing statement. d. a preponderance of the evidence. 40. In Rebuild Company’s suit against Structural Engineers Inc., the plaintiff wants to introduce evidence that it claims is relevant. This is evidence that a. establishes the degree of probability of a fact or action. b. tends to disprove a fact in question. c. tends to prove a fact in question. d. all of the choices. 41. Petro Ltd. files a suit in a state court against Quality Gas. Before the trial, Petro requests from Quality relevant information stored electronically. In contrast to traditional discovery, this request can legitimately reveal a. privileged or confidential material. b. metadata. c. information to which Petro would otherwise be denied access by the right to privacy. d. hearsay. 42. Marin files a suit against Nagle over payment due on a lease of grazing land. The case proceeds to trial, after which the court renders a verdict. The case is appealed to an appellate court. After its review of Marin v. Nagle, the appellate court upholds the lower court’s verdict. The appellate court has a. affirmed the case. b. reversed the case. c. remanded the case. d. reversed and remanded the case. 43. In Roadwork Company’s suit against Street Fronts Inc., the jury returns a verdict in the plaintiff’s favor. Roadwork will now most likely ask the court to a. enter a judgment in accordance with the verdict. b. enter a judgment n.o.v. c. enter a judgment as a matter of law. d. order a new trial. 44. Shippers Warehouse initiates a suit against Trucking Company by filing a complaint. Trucking Company files a motion to dismiss, which asserts that a. even if the facts in the complaint are true, the defendant is not liable. b. the facts in the complaint are not true. c. even if the defendant is liable, the plaintiff cannot prove it. d. if the facts are true, the plaintiff has a right to judicial relief.

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Chap 05_15e 45. Cuisine Café files a suit in a state court against Dining Tables Inc., alleging a breach of contract. The case proceeds to trial, after which the court renders a verdict. Cuisine decides to appeal to a state appellate court. Its attorney must make sure that the clerk of the trial court sends to the clerk of the appellate court, within a prescribed period of time a. a brief including the arguments of both parties. b. a copy of the record on appeal. c. an explanation for the verdict. d. a statement of the grounds for reversal. 46. In the pretrial phase of litigation between Frozen Foods Company and Gourmet Kitchens Inc., the plaintiff directs to an interrogatory to the defendant. In Gourmet’s response, the defendant in good faith can a. attempt to refute any asserted claim. b. deluge the plaintiff with data. c. ask the court to impose sanctions. d. give away as little information as possible. 47. Grain Farm Inc. files a suit against Harvest Services. Before the court can exercise jurisdiction over Harvest, the court must have proof that a. Grain Farm is prepared to notify Harvest of the suit. b. Grain Farm did not act to precipitate a dispute with Harvest. c. Harvest committed the act of which Grain Farm complains. d. Harvest was notified of the suit. 48. Carly files a complaint against Delivery Corporation, charging that she has not been paid and wants to recover the unpaid amount, plus interest. The complaint and a summons will most likely be served on a. the secretary of state in the state where the firm incorporated. b. the corporation’s registered agent. c. the sheriff of the county in which the firm’s headquarters is located. d. anyone who is at least eighteen years old and is not a party to the suit. 49. Levon files a suit against Manufacturing Corporation. The defendant believes that even if the plaintiff’s statement of the facts is true, according to the law the defendant is not liable. Manufacturing Corporation should a. ask for a deposition. b. seek an admission of the truth of the matter relating to the trial. c. issue a summary judgment. d. file a motion to dismiss. 50. In a suit by Climate Action Now (CAN) against DeForest Inc., CAN serves a written request for the defendant to admit the truth of matters relating to the trial. DeForest’s admission in response a. conclusively establishes the matter for trial. b. completely absolves the defendant of the issue in question. c. is the basis for a default judgment in the plaintiff’s favor. d. is irrelevant.

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Chap 05_15e 51. In Lake Company’s suit against Marina Inc., the jury returns a verdict in the plaintiff’s favor. The defendant files a motion stating that even if the evidence is viewed in the light most favorable to the plaintiff, a reasonable jury should not have found in its favor. This is a motion for a. a judgment in accordance with the verdict. b. a judgment as a matter of law. c. a new trial. d. judgment n.o.v. 52. Fitch files a suit in a state court against Gas Stop, claiming employment discrimination. Gas Stop loses the suit and appeals. After the state’s highest court’s review of Fitch v. Gas Stop, either party can appeal the decision to the United States Supreme Court if a. a federal question is involved. b. a question of state law remains unresolved. c. the party is unsatisfied with the result. d. the state trial and appellate court rulings are different. 53. Bey files a suit against Cruises Inc. The defendant wants to respond that it appears from the pleadings the parties do not dispute the facts, that the only question is how the law applies to those facts, and that this response can be supported with witnesses’ sworn statements. Cruises should file a. a counterclaim. b. a motion for judgment on the pleadings. c. a motion for summary judgment. d. a motion to dismiss. 54. Loni files a civil suit against Meme’s Bridal Shop, seeking to recover the amount of a refund for an undelivered wedding dress. To succeed, the plaintiff must prove her case a. beyond a reasonable doubt. b. by a preponderance of the evidence. c. through a scintilla of evidence. d. to the extent promised in his attorney’s opening statement. 55. In response to a discovery request by Bakery LLC, the plaintiff in a pending suit against Cinnamon Rolls Inc., the defendant delays a response to gain time to alter some of the data. Subject to possible sanctions, this is a. hearsay. b. spoliation. c. a brief. d. voir dire. 56. Sharp Machine Company files a suit against Tseng Parts Ltd., alleging a defective shipment of goods. During the trial, the plaintiff’s attorney calls the first witness and asks questions. This questioning is called a. cross-examination. b. direct examination. c. an opening statement. d. hearsay. Copyright Cengage Learning. Powered by Cognero.

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Chap 05_15e 57. Hospital Inc. files a complaint in a federal district court against Inventory Management Company, asserting breach of contract. Under the Federal Rules of Civil Procedure, any allegations in the complaint that are not expressly denied by the defendant will be deemed by the court to be a. impliedly denied. b. subject to dispute during the trial. c. voir dire. d. admitted. 58. During the trial of a suit concerning liability for an accident involving Cartage Ltd. and Docking Inc., the plaintiff’s attorney presents evidence from Emma, a commercial accident reconstruction specialist. With respect to the evidence in the case that falls within Emma’s field, she can a. prevent other witnesses from testifying. b. describe only what she personally observed. c. testify only about the facts. d. offer her opinions and conclusions. 59. Barge Company and Cove Harbor dispute the meaning of their contract. Unable to agree on settlement, the parties prepare for trial. To obtain information, they engage in discovery. This includes gaining access to each other’s witnesses and other types of evidence by a. subterfuge and similar methods. b. improper requests and related tactics. c. voir dire and a writ of certiorari. d. depositions and other devices. 60. Dig LLC files a suit in a state court against Excavate Inc., claiming that the defendant leased and failed to return a bulldozer. The case proceeds to trial, after which the court renders a verdict. Excavate appeals to, and files a brief with, a state appellate court. Dig’s attorney may file within a prescribed period of time a. an advisory interrogatory. b. an answering brief. c. a request for a deposition. d. a responding motion for judgment on the brief. 61. Storage Facilities Inc. files a suit in a state court against TransShip LLC, seeking allegedly unpaid rent for a warehouse. TransShip losses the suit and decides to appeal. TransShip’s attorney must file, with the clerk of the trial court, within a prescribed period of time a. a formal refusal to abide by the verdict. b. a notice of appeal. c. a transcript of the trial and copies of the exhibits. d. the judgment order from which the appeal is taken.

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Chap 05_15e 62. During the trial of a suit concerning the terms of a contract between Marvel and Nina, the plaintiff’s attorney presents evidence from Ochre, who is not an expert in the field about which he is being questioned. Ochre can a. testify about any of the facts in the case. b. testify only about what he personally observed. c. offer his opinion about any of the evidence. d. offer his conclusion with regard to the case. 63. To prepare for a trial between Sky Quest Inc. and Telescope Company, the plaintiff’s attorney places the defendant’s chief executive officer (CEO) under oath. A court official makes a record of the attorney’s questions and the CEO’s answers. This is a. a cross-examination. b. a deposition. c. voir dire. d. hearsay. 64. Recreation Corporation files a suit against Spring Break Tours Inc. and seeks to examine certain documents in the defendant’s possession. A legitimate reason for this examination is that the documents contain a. information that is relevant to the case. b. private information about the defendant’s operations. c. public information about the defendant’s operations. d. irrelevant data that can be eliminated from consideration. 65. Nayda retains Olin, an attorney, on a contingency-fee basis to seek damages in a personal-injury suit against Price-Mor Stores Inc. Nayda does not win her case. She must pay a. Olin’s fee, but no other expenses related to the case. b. Olin’s fee, and any other expenses related to the case. c. expenses related to the case, but not Olin’s fee. d. none of the choices. 66. Ihlan initiates a lawsuit against Juno, alleging that Juno has not paid her rent for six months and Ihlan wants her to vacate her apartment. The sheriff serves a summons. Juno does not respond. Ihlan a. must file a motion for renewed service of process. b. must provide proof in support of the claim. c. must withdraw the complaint. d. will be awarded a default judgment. 67. In a suit by Fuel Products Corporation against Gears Inc., the jury returns a verdict in the plaintiff’s favor. The defendant files a motion asking the judge to set aside the verdict and begin new proceedings. This is a motion for a. a judgment in accordance with the verdict. b. a judgment on the pleadings. c. a new trial. d. judgment n.o.v.

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Chap 05_15e 68. Barney files a suit against Courtney, who fails to respond. Consequently, Courtney a. will have a second opportunity to respond at a pretrial conference. b. is considered to have denied the plaintiff’s claim. c. in effect refuted the suit, which will be dismissed. d. is subject to a judgment of default. 69. In Beta Roasters suit against Coffee Stand, alleging trademark infringement, the court issues a judgment in the defendant’s favor. The case is appealed. The appellate court will hear a. all of the evidence. b. most of the evidence. c. none of the evidence. d. select pieces of evidence. 70. Ove files a suit against Po, claiming that the defendant failed to pay for goods shipped in response to an alleged e-mail order. Po denies the charge. If the e-mail order exists, it is a. evidence. b. a deposition. c. an interrogatory. d. discovery. 71. Tech Inc. completes programming and other services for Uno IT Products Corporation. When Uno IT’s computer system crashes, the firm loses $500,000 worth of business and pays $100,000 to have the system reprogrammed. Uno IT announces to the media that the crash was due to Tech’s incompetence and files a complaint in a federal court against the firm. What are Tech’s options in response?

72. Chase is injured in an accident while driving an off-road vehicle made by Drivers Edge Inc., an out-of-state corporation. Chase files a suit against Drivers Edge, alleging negligence, and mails a summons and a copy of the complaint to the firm by certified mail, return receipt requested. The envelope is addressed in part to “Elvin, President, Drivers Edge, Inc.” The receipt is returned with the signature of “Francine,” a Drivers Edge employee. A U.S. Postal employee later testifies that Francine usually receives mail on Drivers Edge’s behalf. Drivers Edge does not respond to the suit. In a default judgment, Chase is awarded damages of $500,000. Later, Elvin claims that he was not notified of the suit and asks the court to set aside the judgment. What is the issue in this set of facts? What rule applies? What should be the result on the application of the rule? Why?

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Chap 05_15e Answer Key 1. False 2. False 3. True 4. False 5. True 6. False 7. False 8. True 9. True 10. False 11. False 12. True 13. True 14. False 15. False 16. False 17. False 18. False 19. True 20. False 21. False 22. True 23. True 24. True 25. False 26. False

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Chap 05_15e 27. False 28. False 29. False 30. True 31. True 32. True 33. True 34. False 35. False 36. d 37. b 38. d 39. a 40. d 41. b 42. a 43. a 44. a 45. b 46. d 47. d 48. b 49. d 50. a 51. d 52. a 53. c 54. b Copyright Cengage Learning. Powered by Cognero.

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Chap 05_15e 55. b 56. b 57. d 58. d 59. d 60. b 61. b 62. b 63. b 64. a 65. b 66. d 67. c 68. d 69. c 70. a 71. In response to the complaint, Tech (the defendant) may file an answer in which the firm admits the statements or allegations set out in Uno IT’s complaint or denies them and sets out any defenses that Tech may have. If Tech admits to the allegations, a judgment will be entered in favor of Uno IT. If Tech denies the allegations, the matter will proceed. In the answer, Tech may assert an affirmative defense—that is, admit the truth of the complaint but raise new facts to show that the firm should not be held liable for the damage sustained by Uno IT. Or Tech could deny Uno IT’s allegations and assert a counterclaim alleging that the crash occurred as a result of something Uno IT did. 72. The sufficiency of the service of process is at the center of this dispute. The requirements for sufficient service of process are that a summons and a copy of the complaint must be delivered to the proper party. Here, the defendant was a corporation, and the service was addressed to the corporation’s president. The documents were sent via first-class mail, return receipt requested. Generally, service of process is proper if the documents are delivered to a person authorized by a corporation to receive the service such as an officer or a registered agent. The court should not grant Drivers Edge and Elvin’s motion to set aside the judgment. Chase met the requirements for serving an out-of-state corporation. Significantly, he addressed the service to Elvin, not to the corporation. Francine was a Drivers Edge employee who regularly received mail on her employer’s behalf. Francine’s notice of the action can thus be imputed to Drivers Edge and Elvin.

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Chap 06_15e Indicate whether the statement is true or false. 1. The standard of reasonable care for a professional is the same as that of an ordinary person. a. True b. False 2. A business firm has a duty to exercise reasonable care to protect its business invitees. a. True b. False 3. An employer can use his or her power and control to engage in an intentional pattern of outrageous abuse against an employee without potential tort liability. a. True b. False 4. An act intended to make another person fearful of an immediate physical harm is an assault if the threat is reasonably believable. a. True b. False 5. An economically injurious falsehood about a business’s product can support a tort action for disparagement of property. a. True b. False 6. An award of grossly excessive punitive damages is normally available in a suit involving gross negligence. a. True b. False 7. To gain a share of a market, a businessperson can interfere in another’s business, even if the behavior is predatory. a. True b. False 8. A person will not be liable for wrongful interference if the interference results from legitimate competitive behavior. a. True b. False 9. If an owner consents to the taking of his or her property, a failure to return cannot be a tort. a. True b. False 10. Intentional physical contact with another is not a battery unless the contact is unexcused, harmful, or offensive. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 06_15e 11. In a tort action, a business firm can recover general damages equivalent to the actual value of damage sustained. a. True b. False 12. A false statement made with actual malice can constitute defamation, unless the statement is about a public figure. a. True b. False 13. If no legally recognized injury or harm results from a given negligent act, there is nothing to compensate—in effect, no tort exists. a. True b. False 14. In a successful tort suit, an individual is awarded compensatory damages to put him or her in a better position than the party who committed the tort. a. True b. False 15. Foreseeability is the test for proximate cause. a. True b. False 16. A business cannot use puffery without liability for fraudulent misrepresentation. a. True b. False 17. Proximate cause exists if “but for” a wrongful act, an injury would not have occurred. a. True b. False 18. When someone suffers injury because of another’s failure to live up to a required duty of care, negligence occurs. a. True b. False 19. In most states, a plaintiff can obtain an unlimited amount of noneconomic general damages in a tort action. a. True b. False 20. Intentional deceit for personal gain may be unethical but it does not give rise to liability for fraud. a. True b. False

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Chap 06_15e 21. It is the motive behind the intent—not the intent—that is important in tort law. a. True b. False 22. Taking personal property from its owner, without permission or just cause, is trespass—retaining it is conversion. a. True b. False 23. A false statement about a person’s business can give rise to liability for defamation. a. True b. False 24. A wrongful action that interferes with a person’s legal right to personal property can support a tort action in trespass. a. True b. False 25. False imprisonment occurs only when a person justifiably restrains another. a. True b. False 26. Publication of false information about another’s property is not a tort. a. True b. False 27. A person who wrongfully hurts another’s good name or reputation orally may be liable for libel. a. True b. False 28. Liability for injuries based on proportionate negligence is allowed by most states. a. True b. False 29. A person who enters into a risky situation, knowing the risk involved, can nevertheless recover for a resulting injury or harm for reasons of public policy. a. True b. False 30. In most states, a merchant can use undue force to detain a person suspected of shoplifting without liability for false imprisonment. a. True b. False 31. A defendant cannot be liable in an intentional tort action if he or she did not intend to cause harm to the plaintiff. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 06_15e 32. A landlord is expected to use reasonable care to ensure that his or her tenants are not harmed in common areas. a. True b. False 33. Intent can be transferred when an individual intends to harm one individual but unintentionally harms another. a. True b. False 34. A defendant cannot be liable for negligence unless he or she intended to harm the plaintiff. a. True b. False 35. Any time one party’s allegedly wrongful conduct causes injury to another, an action may arise under the law of torts. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. In a digital ad, Geo Treks, a retail sports equipment store, falsely accuses its competitor Headwaters of selling stolen kayaks and other gear. Headwaters’ sales decrease. Geo Treks has most likely committed a. conversion. b. none of the choices. c. slander of quality. d. slander of title. 37. Len, a MedCo Supplies salesperson, follows Nan, a salesperson for Optima Health Products (a MedCo competitor) as she visits locations to make sales. Len solicits each of Nan’s customers. Len is most likely liable for a. conversion. b. wrongful interference with a business relationship. c. wrongful interference with a contractual relationship. d. none of the choices. 38. Margo is harmed when Nell defames her. If Margo brings a successful tort action against Nell, she may be awarded general damages to compensate him for a. monetary losses, such as lost wages and benefits. b. nonmonetary aspects of the harm suffered, such as loss of reputation. c. the defendant’s reckless disregard of the effect on the life of another. d. all of the choices.

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Chap 06_15e 39. Evan is arrested for a theft committed by someone who stole his identity. A court orders his release, but due to a police error in Evan’s paperwork, he is held in jail for a month. The police are most likely liable for a. assault. b. false imprisonment. c. intentional infliction of emotional distress. d. defamation. 40. Outlet Sales Store unknowingly buys goods that were stolen from Quality Products Inc. Most likely, Outlet Sales can be ordered to return the goods or pay their true owner for their value in a suit for a. none of the choices. b. conversion. c. appropriation. d. wrongful interference with a business relationship. 41. Mick hosts an NCAA basketball championship viewing party at his home, where Neff imbibes too much alcohol. Driving drunk after the party, Neff causes an accident in which Otto is injured. Under a dram shop act imposing liability on social hosts, Otto must prove a. that Mick was negligent. b. that Neff was greater than 50 percent at fault. c. only the facts stated. d. none of the choices. 42. DIY, a retail hardware store, must use reasonable care on its premises to warn its invitees of a. all possible dangers. b. hidden dangers. c. dangers about which the business does not, or should not, know. d. no dangers. 43. Dian enters a car race, knowing that there is a risk of being injured in a crash. Dian assumes a. only those risks that she expressly agrees to assume. b. no risk in this situation. c. any risk—contemplated or not—associated with the race. d. the risk of being injured in a crash. 44. Fred, a clerk at a Games Store, takes a game player and a selection of games from the store without permission. Most likely, Fred is liable for a. trade libel. b. none of the choices. c. conversion. d. wrongful interference with a business relationship.

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Chap 06_15e 45. Buddy’s Burgers advertises so effectively that the regular customers of its competitor Slimy’s Sliders patronize Buddy’s instead of Slimy’s. This is a. conversion. b. wrongful interference with a business relationship. c. wrongful interference with a contractual relationship. d. none of the choices. 46. Hal posts online secretly recorded videos of Ida and includes her name, address, phone number, and Facebook page. Most likely, Ida could bring a successful tort action against Hal for a. invasion of privacy. b. defamation. c. assault. d. appropriation. 47. Ivy slips and falls on the deck of Jet’s Tour Boat and is injured. She incurs medical expenses of $500,000, and files a suit against Jet to recover. Under the “50 percent” rule, if Ivy is more than 50 percent at fault, she will recover a. nothing. b. half of the expenses. c. the amount of the expenses attributable to Jet’s fault. d. the entire amount of the expenses. 48. Bix backs out of City Parking Garage, colliding with Dill’s car. Dill may recover $7,500 to cover the cost of the repairs if Bix failed to act as a. a blameless person. b. a faultless person. c. an objective person. d. a reasonable person. 49. Dylan applies for a position with Electrical Works LLC. Dylan’s previous employer, Federal Circuits Inc., gives Electrical Works a review of Dylan that includes negative statements Federal Circuits knows are untrue. This is a. defamation. b. not defamation because Dylan was employed by Federal Circuits. c. not defamation because Dylan was not employed by Electrical Works. d. not defamation because the review was not published. 50. Without Research Data Corporation’s consent, Sia hacks into the firm’s computers and downloads trade secrets and other confidential information. Most likely, Sia is liable for the tort of a. trespass to land. b. conversion. c. appropriation. d. battery.

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Chap 06_15e 51. Larry takes Kyla’s textbook and hides it so that she cannot find it during the week before the exam. In taking the textbook, Larry most likely committed a. none of the choices. b. conversion. c. appropriation. d. trespass to personal property. 52. In an online blog, Oren states that Publicity Corporation invaded the privacy of individuals to collect marketing data for its clients. If the firm can prove all of the elements of defamation and Oren cannot assert a sufficient defense, Oren is most likely liable for a. contempt. b. malice. c. libel. d. slander. 53. Hilo tells the Internal Revenue Service that Jon “cheated on his taxes.” This can lead to Hilo’s liability for defamation if the statement is a. contemptuous. b. an opinion. c. true. d. false. 54. Rita brings a tort action against Santo and proves all of the elements of the claim. Santo’s successful defense will a. release the defendant from partial or full liability for the tortious act. b. impose liability on Rita for any harm to Santo arising from the suit. c. further no legitimate purpose and violate the due process clause. d. toll the statute of limitations. 55. Ichiro is injured in a two-car accident and sues Heather, the driver of the other vehicle, alleging negligence. Heather claims that Ichiro was driving more carelessly than she was. Comparative negligence may reduce Ichiro’s recovery a. even if Ichiro was only slightly at fault. b. only if Ichiro and Heather were equally at fault. c. only if Ichiro was less at fault than Heather. d. only if Ichiro was more at fault than Heather. 56. Cato is driving a car in which Diego is a passenger when an accident occurs. Diego is not injured. In Diego’s tort action against Cato for negligence, Cato can most likely assert as a successful defense that a. Diego breached his duty to warn the driver of the impending accident. b. Cato did not intend to cause an accident. c. the risk of a car accident was foreseeable. d. Diego was not injured.

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Chap 06_15e 57. Ciera is injured when a roofing tile breaks free, falls from the roof of a building, and strikes her. If Ciera brings a successful tort action against the building’s owner, she may be awarded special damages to compensate her for a. monetary losses, such as medical expenses. b. nonmonetary aspects of the harm suffered, such as pain and suffering. c. egregious or reprehensible conduct by the defendant. d. all of the choices. 58. Fran tells Gio that her Hyundai Kia has never been in an accident. This may give rise to an action for fraud if the statement is a. puffery. b. fact. c. false. d. opinion. 59. After a dinner at Rosa’s Restaurant, So believes that he was overcharged and shoves Tell, the waiter, who is injured when he falls. Tell sues So, alleging that the shove was a battery. So is liable if a. Rosario’s did not actually overcharge him. b. the shove was offensive. c. he acted out of anger. d. Rosa’s prices are too high. 60. Faro picks up an empty gas can on Gas Station’s property and throws it at Heylie, but misses and hits Izzy instead. For the tort of battery, Izzy can sue a. Gas Station. b. Heylie. c. Faro. d. no one. 61. Pete, a broker, advises Ollie to invest in Rocky Road Inc. When the share price of Rocky’s stock decreases, Ollie accuses Pete of fraud, claiming reliance on Pete’s advice. The reliance that gives rise to liability for fraud requires a. a threat of physical force. b. a misrepresentation of fact knowing that it is false. c. puffery. d. a statement communicated to at least one person other than the plaintiff. 62. Erol works for Food Packing Company. Erol’s supervisor Gwen writes a negative review of Erol’s performance. Gwen believes the statements are true, and limits their communication to the firm’s management. In a tort action for defamation, Gwen can most likely assert as a successful defense a. none of the choices. b. malice. c. contempt. d. privilege.

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Chap 06_15e 63. Ricard, an engineer, supervises the construction of a new mountainside roadway. The road collapses in a landslide due to faulty grading. Motorists injured in the collapse sue Ricard in a tort action for negligence. Under that theory, as a professional, Ricard is held to the same standard of care as a. ordinary persons. b. other engineers. c. other professionals, including doctors, dentists, and lawyers. d. those injured in the collapse of the bridge. 64. In a phone call to Lou, Mia makes statements about Nye that injures Nye’s reputation. If Nye can prove all of the elements of defamation and Mia cannot assert a sufficient defense, Mia is most likely liable for a. contempt. b. malice. c. libel. d. slander. 65. Good Samaritan statutes were passed largely to protect, in emergency situations, a. those in need, such as individuals hurt in accidents. b. landlords and other property owners. c. physicians and medical personnel. d. business invitees. 66. Don interferes with the business interests of Erin in a way not permitted by law, and Erin’s business is harmed as a result. To be liable to Erin for the commission of an intentional tort, Don must have a. intended to commit the act. b. intended to harm Erin’s business. c. acted with an evil motive. d. acted with a harmful motive. 67. A truck with defective brakes runs off the street and crashes into Lima’s home, damaging the property and injuring her. In a successful tort action against the truck’s owner for gross negligence, Lima may be awarded punitive damages to a. compensate for her total losses. b. put her into the same position she would have been in if the tort had not occurred. c. punish the defendant and deter others from similar wrongdoing. d. all of the choices. 68. For those who have suffered injuries as a result of the wrongful conduct of others, through tort law, society supports a. compensation. b. fines, imprisonment, and possibly death imposed on the wrongdoer. c. interference with the wrongdoer in a way not permitted by law. d. all of the choices.

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Chap 06_15e 69. Trespass to land is committed if, without the permission of the property owner, a person a. enters the property to assist someone in danger. b. causes water to back up onto the property. c. has a revocable license to come onto the property. d. all of the choices. 70. Bram knows that the pipes in his building leak, but he tells Cass, a potential buyer, that there are no leaks. On this assurance, Cass buys the building. On learning the truth, she may sue Bram for a. defamation. b. conversion. c. fraudulent misrepresentation. d. wrongful interference with a business relationship. 71. Data Analytics, Inc., and eProducts Corporation market competing software products. Data Analytics launches an ad campaign claiming that eProducts, instead of testing software before it is marketed, has customers “test” the software by using it. eProducts knows this is not true but begins to lose sales to Data Analytics. On what ground could eProducts sue Data Analytics for injury to eProducts’ reputation?

72. Dixie, a driver for Express Delivery Company, leaves the truck's motor running in neutral and carelessly forgets to set the parking brake while she makes a delivery. The truck rolls and crashes into a nearby gas station pump, igniting a fire that spreads quickly to a construction site a block away. A burned wall collapses onto a crane, which falls on Fazio, a bystander, and injures him. What must Fazio show to recover damages from Express Delivery?

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Chap 06_15e Answer Key 1. False 2. True 3. False 4. True 5. True 6. False 7. False 8. True 9. False 10. True 11. False 12. False 13. True 14. False 15. True 16. False 17. False 18. True 19. False 20. False 21. False 22. True 23. True 24. True 25. False 26. False

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Chap 06_15e 27. False 28. True 29. False 30. False 31. False 32. True 33. True 34. False 35. True 36. d 37. b 38. b 39. b 40. b 41. c 42. b 43. d 44. c 45. d 46. a 47. a 48. d 49. a 50. b 51. d 52. c 53. d 54. a Copyright Cengage Learning. Powered by Cognero.

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Chap 06_15e 55. a 56. d 57. a 58. c 59. b 60. c 61. b 62. d 63. b 64. d 65. c 66. a 67. c 68. a 69. b 70. c 71. eProducts could sue Data Analytics for defamation for the harm it is causing to eProducts’ reputation. Defamation occurs when a party makes a false statement that injures another’s reputation. In this problem, any defamatory statements likely take the form of libel (defamatory statements in written or printed form). To bring a suit on this ground, eProducts would have to show that Data Analytics published the false information—that is, communicated it to a third party. If eProducts is considered a public figure, it will also need to prove that Data Analytics made the statements with actual malice—that is, with either knowledge of their falsity or a reckless disregard for the truth. Publication of false information about another’s product, alleging that it is not what its seller claims, also constitutes the tort of slander of quality, or trade libel. To bring a suit on this theory successfully, eProducts would have to show not only that a third person refrained from dealing with it because of the improper publication but also that there were associated damages. eProducts might also include a claim based on the tort of misrepresentation, or fraud. Misrepresentation leads another to believe in a condition that is different from the one that actually exists. This tort requires several elements: (1) misrepresentation of facts or conditions with knowledge that they are false or with reckless disregard for the truth, (2) intent to induce another to rely on the misrepresentation, (3) justifiable reliance by the deceived party, (4) damages suffered as a result of the reliance, and (5) a causal connection between the misrepresentation and the injury.

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Chap 06_15e 72. To recover on the ground of negligence, Fazio must show that Express Delivery owed him a duty of care, that Express Delivery (through Dixie) breached that duty, that Fazio was injured, and that Express Delivery’s breach caused that injury. There is no question that in operating the truck, Dixie was acting on Express Delivery’s behalf and that her actions breached the duty of reasonable care necessary to park the truck. Also, Fazio was injured by a crane falling on him, not by his own negligence. Liability turns on whether Fazio can connect Dixie’s breach of duty to his injury. Fazio must show that the chain of events was a foreseeable result of Dixie’s carelessness. The issue of foreseeability is determined by the test of proximate cause, the connection needed for Fazio’s recovery of damages.

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Chap 07_15e Indicate whether the statement is true or false. 1. Strict liability is imposed only for an act that departs from a reasonable standard of care to cause an injury. a. True b. False 2. If a product was delivered in a safe condition and subsequent mishandling made it harmful to the user, the seller is usually strictly liable. a. True b. False 3. In deciding a claim of design defect, a court can consider the relative advantages and disadvantages of an alternative design for a product. a. True b. False 4. Some courts do not allow assumption of risk as a defense to a strict product liability claim because the theory focuses on the nature of a product, not the plaintiff’s conduct. a. True b. False 5. A seller who introduces into commerce an unreasonably dangerous product may be subject to a tort action for strict liability. a. True b. False 6. In a product liability suit based on a design defect, a manufacturer is liable only when the harm was not reasonably preventable. a. True b. False 7. The doctrine of strict liability applies to sellers of goods, including wholesalers. a. True b. False 8. The elements of an action in strict product liability include that a plaintiff must have incurred harm by the use or consumption of a product. a. True b. False 9. A product liability claim against the manufacturer of a product that is subject to extensive government regulation may be preempted. a. True b. False

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Chap 07_15e 10. Liability is imposed on a manufacturer for a manufacturing defect only when the manufacturer’s quality control efforts were “reasonable.” a. True b. False 11. In a product liability suit based on negligence, the plaintiff must show that the defendant’s conduct was the “cause in fact” of an injury. a. True b. False 12. A defendant may be able to limit liability for injuries caused by a defective product by showing that a plaintiff’s negligence contributed to the injuries. a. True b. False 13. To maintain an action in strict product liability, the plaintiff must show why and how the product became defective. a. True b. False 14. Holding defendants strictly liable for manufacturing defects encourages greater investment in product safety. a. True b. False 15. A defective product is an unreasonably dangerous product when it is dangerous beyond the expectation of the ordinary consumer. a. True b. False 16. Those who do not make goods, but only sell or lease them, cannot be held liable for harm caused by those goods to a consumer. a. True b. False 17. The manufacturer of a product may incur liability when a defect causes injury to a user but not when the defect causes property damage to a bystander. a. True b. False 18. Product misuse is recognized as a defense to a claim for product liability only when the particular misuse was reasonably foreseeable. a. True b. False

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Chap 07_15e 19. To bring a product liability lawsuit on the ground of misrepresentation, the plaintiff must not have relied on the misrepresentation. a. True b. False 20. To be liable on a theory of strict product liability, a defendant must be in a better position than the plaintiff to bear the costs associated with the harm caused by a product. a. True b. False 21. A product will be considered defective when the omission of reasonable warnings renders the product not reasonably safe. a. True b. False 22. A product made in conformity with a manufacturer’s design specifications is not considered defective regardless of a flaw in the design. a. True b. False 23. A manufacturer does not need to inspect and test any purchased components used in the final product to avoid product liability. a. True b. False 24. Only big businesses face potential liability for the products they sell. a. True b. False 25. Under the doctrine of strict liability, persons are liable only for the results of their intentional acts or their failure to exercise due care. a. True b. False 26. A person who is injured by a defective product can bring a negligence suit only if he or she was the one who purchased the product. a. True b. False 27. The types of product defects that have traditionally been recognized in product liability law include careless marketing. a. True b. False

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Chap 07_15e 28. For cause in fact to become a relevant issue in a product liability suit, a plaintiff must first establish proximate cause. a. True b. False 29. A manufacturer or seller has a duty to warn about a risk that is obvious or commonly known. a. True b. False 30. Generally, a seller is not liable for failing to warn consumers of the harm that can result from a foreseeable misuse of a product. a. True b. False 31. Courts apply a “reasonableness” test to determine if a warning adequately alerts consumers to a product’s risks. a. True b. False 32. For fraud to be the basis of liability in a product liability suit, the misrepresentation must have been intentional. a. True b. False 33. Manufacturers are commonly held liable when their negligence causes users of their products to be injured. a. True b. False 34. In a product liability case based on negligence, a defendant may be liable even if the plaintiff has not met the requirements for an action in negligence. a. True b. False 35. Under the doctrine of strict liability, a defendant’s liability depends on privity of contract. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. Fit Corporation makes running shoes. Gaby, a marathoner, files a product liability suit against Fit, alleging a design defect. In deciding whether to hold the company liable, the court may consider an alternative design’s a. popularity among consumers. b. weight and heft. c. aesthetics. d. advantages and disadvantages.

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Chap 07_15e 37. Baby Things Inc. makes and sells a crib to Cara. Baby Things fails to exercise “due care” to make the crib safe, and Cara’s child Dua is injured as a result. Baby Things is most likely liable for a. fraud. b. misrepresentation. c. negligence d. strict liability. 38. Bounce Company makes trampolines and other gym equipment. Chet files a product liability suit against Bounce, alleging a warning defect in one of its products. In deciding whether to hold Bounce liable, the court may consider that a manufacturer has no duty to warn about risks that are a. avoidable by an alternative design. b. foreseeable. c. contrary to the instructions for the use of the product. d. obvious. 39. Cold Play Corporation makes snowmobiles. Dale is injured when a defect unexpectedly accelerates the Cold Play vehicle he is driving, and he is thrown off. Esty, a hiker standing in the path of the unmanned vehicle, is struck and injured. In a suit based on strict product liability, Cold Play may be liable to a. Dale and Esty. b. Dale only. c. Esty only. d. none of the parties. 40. The explosive demolition of a rock formation by Mountain Blasters Inc. injures Noh, who is hiking on a nearby slope. Under the doctrine of strict liability, Mountain Blasters must pay for Noh’s injury a. only if the company failed to use reasonable care. b. only if the company was greater than 50 percent at fault. c. only if the company was entirely at fault. d. without regard to the fault of the company. 41. Motor Corporation (MC) makes cars and trucks. National Sales Company sells all MC vehicles. Open Road Inc. leases only the cars. Under product liability laws, liability for injuries or damage caused by an MC vehicle may be imposed on a. MC only. b. none of the parties. c. MC or National Sales only. d. MC, National Sales, or Open Road.

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Chap 07_15e 42. Ceramic Corporation makes commercial ceramic products, including heat-resistant tiles for industrial ovens. When damage occurs in an oven at Duramold Inc., strict product liability may be imposed on Ceramic if the tiles sold to Duramold were a. in perfect condition at the time of their sale. b. damaged by their use. c. substantially changed after their sale. d. in a defective condition that was the proximate cause of the damage. 43. Sail-Away Corporation makes sailboards, which are distributed by Tropical Marketing Company to UV Sports Stores Inc., which sells them to consumers. Wen is injured while using a Sail-Away board that he bought from UV Sports. In a product liability suit based on strict liability, Wen may recover from a. Sail-Away only. b. Sail-Away, Tropical, or UV Sports. c. UV Sports only. d. none of the choices. 44. Soda Bubbles Corporation makes soft drinks. Toby drinks a Soda beverage, which proves defective and injures him. One justification for holding Soda strictly liable for the harm caused to Toby is that a. Soda is in a better position than Toby to bear the cost of her injury. b. Toby is a consumer, not a corporation. c. making products is an abnormally dangerous activity. d. Soda and Toby are in privity. 45. Opal is working on a construction site when she is injured on the job in the collapse of a Plank Company-made ceiling beam. At the time, Opal is not wearing any safety gear. In Opal’s product liability suit against Plank, the company can most successfully raise the defense of a. preemption. b. inadequate warning. c. comparative negligence. d. product misuse. 46. Insulate Inc. makes and sells fire-retardant building materials. In a product liability suit against Insulate, a court would use a risk-utility analysis of the company’s product as designed to determine whether a. a risk of harm outweighs the products’ utility to the users and the public. b. the product performed as a consumer would reasonably expect. c. the product is as useful and as risky as the public expects. d. the risk of return on investment in the product supports its utility. 47. Bright n’ Clean Company makes shampoo and other hair care products. Cub is injured by the use of a Bright n’ Clean product and sues the company for product liability based on negligence. To win, Cub must show that a. Bright n’ Clean failed to use due care in making the product. b. Bright n’ Clean recklessly disregarded facts in its ad copy. c. Cub was not a hair care professional, such as a barber. d. Cub was in privity with Bright n’ Clean. Copyright Cengage Learning. Powered by Cognero.

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Chap 07_15e 48. Do-It-Rite Inc. makes and markets tools. Evan uses a Do-It-Rite power screwdriver to scrape grout—a purpose for which it was not intended—and is injured when the tool slips. Evan files a product liability suit against the maker. The defendant’s best defense is most likely a. commonly known danger. b. assumption of risk. c. inadequate warning. d. product misuse. 49. Safe-T Company makes electrical cords and other connectors for electronic devices. Tina files a product liability suit against Safe-T, alleging a warning defect. In deciding whether to hold Safe-T liable, the court may consider a. the public’s general failure to read the product’s warnings. b. the plaintiff’s specific failure to read the product warnings. c. the obvious risks of other products. d. the obvious risks of this product. 50. Epsilon Corporation makes scientific instruments that are subject to extensive government regulation and undergo a rigorous premarket approval process. In a design defect product liability suit against Epsilon by a party allegedly injured by one of the devices, the company can most successfully raise the defense of a. preemption. b. assumption of risk. c. comparative negligence. d. knowledgeable user. 51. Bedding Plus Inc. makes a pillow that Comfort Stuff sells to Demi. Bedding fails to exercise “due care,” and Demi is injured by toxic material used as fill in the pillow. Comfort Stuff is most likely liable for a. misrepresentation. b. none of the choices. c. negligence. d. product misuse. 52. Stan, an air conditioning and heating technician, files suit against Temp-Set Corporation, alleging that its thermostats are unreasonably dangerous due to the possibility of electrical shock while being installed. TempSet’s best defense is most likely a. assumption of risk. b. knowledgeable user. c. commonly known danger. d. none of the choices. 53. EquiMeds Company and GenDrugs Inc. make and distribute prescription drugs. In a product-liability suit against both parties, the court is most likely to impose market-share liability if it cannot be proved which of the parties a. was in privity with the injured plaintiff. b. exercised the least amount of due care in making the product. c. supplied the particular product that caused the injury. d. holds the largest share of the market for the product. Copyright Cengage Learning. Powered by Cognero.

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Chap 07_15e 54. Chem Company and Dura Plastics Inc. make and distribute a certain toxic chemical that is discovered in the water supply of the county in which their plants are located. In a product liability suit against both makers, market-share liability may be imposed on a. only the party who realized the most profit from the use of the chemical. b. only the party with the largest market share. c. both parties. d. only the party who most aggressively marketed its product. 55. Recharge Corporation makes batteries. Sol is injured when the Recharge battery in his phone bursts into flame. In Sol’s product liability suit against the maker, alleging a design defect, the court may consider a. Recharge’s knowledge of the uses of its battery. b. Recharge’s share of its market. c. Recharge’s advertising. d. an available alternative design. 56. Mai is struck and injured when the brakes fail on Novi’s all-terrain vehicle (ATV), which is damaged in the collision. Off-Road Inc. sold the ATV to Novi. Under product liability laws, Off-Road could be liable to a. Novi, but not Mai. b. Mai, but not Novi. c. none of the parties. d. Mai and Novi. 57. Overland Corporation makes trucks. The brakes on Pho’s Overland truck malfunction, but he continues to drive it. Unable to slow down, the truck crashes through a guardrail and careens off the road. In Pho’s product liability suit against Overland, the defendant can assert the defense of a. commonly known danger. b. assumption of risk. c. inadequate warning. d. product misuse. 58. Petro Parts Inc. makes and sells parts for the repair of motor vehicles. Olsen suffers a loss when a defective Petro part causes damage to her car’s engine. With respect to Olsen’s product liability suit against Petro, an applicable statute of repose a. restricts the time within which Olsen may file a suit. b. suspends the action until discovery is complete. c. places an outer time limit on bringing the suit. d. limits the amount of damages available. 59. DIY-Haul, Inc., makes, sells, and leases hauling equipment for consumer use. Ed files a product liability suit against DIY-Haul, alleging a design defect. In deciding whether to hold the maker liable, the court may consider a. the assumptions of DIY-Haul. b. the identity of DIY-Haul’s owner. c. the intentions of DIY-Haul. d. the expectations of the ordinary consumer. Copyright Cengage Learning. Powered by Cognero.

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Chap 07_15e 60. EZ Co-op Inc. sells Fill-Up cattle feed to ranchers. Gina buys and feeds Fill-Up to her herd. The feed is poisoned. Gina sues EZ for product liability based on negligence. To win, Gina must show a. why the feed was poisoned. b. how the feed became poisoned. c. that the feed caused her damage. d. all of the choices. 61. Grill Time Inc. makes commercial cooking appliances, including a grill in use by Haute Cuisine Food Cart. Inez, a Haute employee, is injured when the grill malfunctions. If the injury occurred as a result of a misrepresentation about the product, Grill Time is most likely liable for a. negligence. b. fraud. c. privity. d. puffery. 62. Airsoft, Inc. makes toys. Airsoft intentionally mislabels its packaged products to conceal a defect. Trusting and relying on the mislabeling, Bing buys an Airsoft product and suffers an injury. Airsoft is most likely liable for a. product misuse. b. fraud. c. privity of contract. d. comparative negligence. 63. Steps & Rungs Inc. makes ladders. Ty discovers that his Steps & Rungs ladder is defective and sues the maker for product liability based on strict liability. To win, Ty must show that a. Ty bought the ladder from Steps & Rungs. b. all of the choices. c. the ladder was in a defective condition when Steps & Rungs sold it. d. Ty is normally engaged in the business use of ladders. 64. Touch Screens Inc. makes and markets tablets. When problems develop with Touch products or sales, the company may be liable in product liability for any of the following except a. a manufacturing defect. b. a design defect. c. an inadequate warning. d. an ineffective marketing plan. 65. Sea Wind Corporation makes boats. Teresa files a product liability suit against Sea Wind, alleging a design defect. In deciding whether to hold the maker liable, the court may consider an alternative design’s a. popularity among boat designers. b. attractiveness to boat buyers. c. frequency of use among boat makers. d. effect on Sea Wind’s boat.

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Chap 07_15e 66. Wild Life LLC keeps and displays domestic and wild animals in a rural setting for an interested public. Strict liability is imposed on this activity because a. Wild Life is not a corporation. b. the public is considered inherently negligent. c. the activity is extremely risky. d. the amount of liability can be added to the costs of attendance. 67. Rev Motor Company buys plugs and points from Sparkplugs Inc. and puts them in Rev vehicles without changing their composition. If the parts are defective, strictly liable for any damage caused by the defects may be a. Rev only. b. Rev, Sparkplugs, and the owner and operator of the Rev vehicle. c. Rev and Sparkplugs. d. Sparkplugs only. 68. Stents Inc. makes medical devices. Toni files a product liability suit against Stents, alleging a warning defect with respect to its device. In deciding whether to hold the maker liable, the court may consider whether a. the omission of a warning rendered the device not reasonably safe. b. there was a reasonable alternative design. c. the maker used due care in making the device. d. the patient took due care of her health. 69. Felice is injured when a can of Ground-Up explodes into flames. Herbicides Inc. manufactured the Ground-Up. Under product liability laws, Felice’s options include a. any of the choices. b. ordering a halt to the production of Ground-Up. c. issuing a recall of all Ground-Up. d. suing Herbicides Inc. 70. Cultivator Inc. designs and makes tractors, balers, and other farm equipment. In a product liability suit based on negligence, Cultivator could be liable for failing to exercise due care with respect to all of the following except a. the inspection of components purchased to use in the equipment. b. the selection of materials used to make the equipment. c. the assembly and testing of the equipment. d. the growth of the equipment’s sales. 71. Meg is shopping in Nate’s Hardware Store when a nail gun in use by Ovid, one of the store’s employees, fires without warning and hits Meg in the leg. Nate checks the gun and discovers that it was assembled improperly. Meg files a suit against Power Tools Inc., the maker of the gun, on the ground of strict product liability. What are the elements for an action based on strict product liability? In whose favor is the court likely to rule and why?

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Chap 07_15e 72. Grass Green Company makes and sells hedge trimmers, which are designed to be safe if used properly. Hazel buys a Grass Green trimmer and lends it to her neighbor Ike. In his garage, Ike is using the trimmer as a prod to dislodge a box from a high shelf when the trimmer suddenly engages. Startled, Ike drops the trimmer, which swings around and cuts his leg. Ike files a product liability suit against Grass Green, on the ground of negligence. On what basis could the manufacturer prevail?

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Chap 07_15e Answer Key 1. False 2. False 3. True 4. True 5. True 6. False 7. True 8. True 9. True 10. False 11. True 12. True 13. False 14. True 15. True 16. False 17. False 18. False 19. False 20. False 21. True 22. False 23. False 24. False 25. False 26. False

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Chap 07_15e 27. False 28. False 29. False 30. False 31. True 32. True 33. True 34. False 35. False 36. d 37. c 38. d 39. a 40. d 41. d 42. d 43. b 44. a 45. c 46. a 47. a 48. d 49. d 50. a 51. c 52. b 53. c 54. c Copyright Cengage Learning. Powered by Cognero.

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Chap 07_15e 55. d 56. d 57. b 58. c 59. d 60. c 61. b 62. b 63. c 64. d 65. d 66. c 67. c 68. a 69. d 70. d 71. In an action based on strict product liability, a plaintiff must show that (1) a product was defective, (2) the defendant was in the business of distributing the product, (3) the product was unreasonably dangerous due to the defect, (4) the plaintiff suffered harm, (5) the defect was the proximate cause of the harm, and (6) the goods were not substantially changed from the time they were sold. A plaintiff does not have to show that there was a failure to exercise due care, and this distinguishes a product liability action based on strict liability from an action based on negligence, which requires proof of a lack of due care. If Meg establishes her case, the court in this question is most likely to rule in her favor, because the manufacturer would be strictly liable under the circumstances. Strict product liability allows a plaintiff to recover damages for injuries resulting from product defects without proof of fault.

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Chap 07_15e 72. A manufacturer or seller can prevail in a product liability suit based on negligence if the manufacturer designed its product to be safe for proper uses, even if the product was not designed to be safe for unforeseeable, improper uses, such as the use in this question. A manufacturer is negligent if it breaches the duty to exercise reasonable care in the design or manufacture of its product, or warnings about the product, and this breach causes injuries. In other words, liability may be found if a product is unsafe because of negligence in its manufacture, assembly, testing, or inspection. Even if all reasonable care is taken, the manufacturer may be liable if the design of the product makes it unreasonably dangerous for the uses for which the product is made. A manufacturer must also be liable for failing to include a warning if the manufacturer knows the product is dangerous when used as intended or as could reasonably be foreseen, and users are not likely to be aware of the danger. But a manufacturer has no liability, when its product is reasonably safe for proper uses and foreseeable, improper uses, and is used in an unforeseeable, improper way.

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Chap 08_15e Indicate whether the statement is true or false. 1. A patent applicant must demonstrate that an invention is useful to receive a patent. a. True b. False 2. An unusual or fanciful trade name is not protected under trademark law. a. True b. False 3. Certain business processes are patentable. a. True b. False 4. A descriptive term is protected under trademark law if it acquires a secondary meaning. a. True b. False 5. A licensor who allows a licensee to use a trademark as part of the licensee’s company name must also permit the licensee to use the mark on its products. a. True b. False 6. Each member country to the TRIPS agreement must include in its domestic laws broad intellectual property rights and effective remedies for violations. a. True b. False 7. Pricing information is not a trade secret. a. True b. False 8. To obtain copyright protection under federal law, a work must be original. a. True b. False 9. A copyright owner who sells a copy of a work retains the right to control the further distribution of that copy. a. True b. False 10. The need to protect intellectual property is recognized in the U.S. Constitution. a. True b. False

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Chap 08_15e 11. Trademark dilution cannot occur online. a. True b. False 12. A trade name is used to indicate all or part of a business’s name. a. True b. False 13. Once a manufacturer’s trademark is established, another manufacturer may use it without permission. a. True b. False 14. Service marks are not protected in the same way as trademarks. a. True b. False 15. The registration of a copyright is not evidence that the copyright is valid. a. True b. False 16. A license that limits the uses of a patent by the licensee is unlawful. a. True b. False 17. Only the federal government provides for the registration of trademarks. a. True b. False 18. Under the Madrid Protocol, the fees and procedures for trademark registration vary significantly among individual countries. a. True b. False 19. An unauthorized reproduction must be exactly the same as the original, and reproduce the original in its entirety, for infringement of copyright to occur. a. True b. False 20. With respect to a patented process, all steps or their equivalent must be copied for infringement to occur. a. True b. False 21. Some business processes can be protected as trade secrets. a. True b. False

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Chap 08_15e 22. Works that are copyrightable include product packaging. a. True b. False 23. Information that cannot be patented, copyrighted, or trademarked cannot be protected as a trade secret. a. True b. False 24. Intellectual property is property resulting from intellectual, creative processes. a. True b. False 25. The law does not prohibit the creation or shipment of counterfeit labels unless they are attached to products. a. True b. False 26. A trademark owner that successfully proves infringement can recover the profits that the infringer wrongfully received from the infringement. a. True b. False 27. The United States can prosecute foreign counterfeiters under U.S. law. a. True b. False 28. If a creative work is not copyrightable, other intellectual property law will not protect it. a. True b. False 29. Fanciful trademarks are sometimes considered to be the most distinctive trademarks. a. True b. False 30. Certain business processes are copyrightable. a. True b. False 31. To succeed in a suit for trademark infringement, the owner must show that the infringer acted intentionally. a. True b. False 32. The products involved in a trademark dilution suit must be similar. a. True b. False

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Chap 08_15e 33. Tapping into a competitor’s computer to obtain confidential business data is not a theft of trade secrets. a. True b. False 34. The European Union’s copyright rules limit the royalty protection for musicians to ten years. a. True b. False 35. After a patent is issued, there is a nine-month limit before it can be challenged. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. O-Ring Corporation allows Piston Company to incorporate O-Ring’s patented fuel-injection system into Piston’s product. This is a. a license. b. copyright infringement. c. trademark infringement. d. patent infringement. 37. Wendy works as a weather announcer for a TV station under the character name Weather Wendy. Wendy can register her name as a. none of the choices. b. a trade secret. c. a service mark. d. a trade name. 38. Like most successful companies, Phones Inc. has trade secrets. The law protects those secrets if the information is a. not revealed to outside parties. b. cataloged by the company as “confidential.” c. useful and is in fact used by the company. d. unique and has value to a competitor. 39. Gargantua Equipment Corporation registers its trademark as provided by federal law. This registration gives notice that the mark belongs exclusively to Gargantua. This notice is a. national. b. limited to Gargantua’s home state. c. limited to Gargantua’s market. d. limited to those who have actual notice of it.

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Chap 08_15e 40. Stig creates unique graphic works that feature characters of his own imagination. Copyright protection for Stig’s work is a. not possible. b. automatic. c. available only on registration with the U.S. Copyright Office. d. enforceable only if Stig places a circled “c” on the work. 41. Galaxy Research Inc. uses a mark associated with its name to distinguish its services from those of other tech firms. This mark is a. none of the choices. b. a trade secret. c. a service mark. d. a trade name. 42. Obtaining a court order to close down the domain name of a website is an effective tool that U.S. officials use to combat online sales of a. licenses. b. counterfeit goods. c. competing products. d. trademarks. 43. Bette choreographs a dance to accompany City Orchestra’s performance of a medley of movie scores. Dian, a dance instructor, distributes copies of a short portion of the choreography to her students. This is most likely a. copyright infringement. b. a “fair use.” c. legal only on a payment of royalties to Bette. d. legal only on a payment of royalties to City Orchestra. 44. France and the United States are signatories of the Berne Convention. Alain, a citizen of France, publishes a book first in France and then in the United States. Alain’s copyright must be recognized by a. France only. b. France and the United States only. c. all of the signatories of the Berne Convention. d. none of the choices. 45. To be protected under the Copyright Act, a work must be a. an inseparable idea and expression. b. original and fixed in a durable medium. c. a concept, principle, or discovery. d. none of the choices.

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Chap 08_15e 46. Chris operates the Devil’s Brew chain of coffee stands. “Devil’s Brew” is a. none of the choices. b. a trade secret. c. a service mark. d. a trade name. 47. Pseudo Drugs Inc. is convicted of trafficking in counterfeit prescription drugs. As a penalty, the company may be ordered to pay restitution to the trademark holders in an amount equal to a. their lost net profits. b. the retail prices of the genuine drugs. c. Pseudo’s profits from the sale of the counterfeit drugs. d. the retail prices of the counterfeit drugs. 48. Without the permission of the copyright owner, Faye copies the literary expression of Game of Thrones, changes the names of the main characters, and publishes the result as her own work. This is a. copyright infringement. b. a “fair use.” c. a legitimate creative act. d. none of the choices. 49. Apex Electrical Inc. agrees to allow Apex Foundations LLC to use the owner’s trademark “Apex” as part of its company name but not otherwise. The domain name apex.com can be used online by a. Apex Electrical only. b. both businesses but no others. c. neither business. d. both businesses and any others that own the mark. 50. GoodGro Inc. makes genetically modified seeds that are identical to Harvest Corporation’s patented seeds, without Harvest’s permission. This is most likely a. copyright infringement. b. patent infringement. c. trademark infringement. d. none of the choices. 51. Berry Good LLC registers its trademark with the U.S. Patent and Trademark Office, and uses it to market a distinctive line of ice cream products. Crabapple Inc. uses the mark without Berry’s consent to sell imitation frozen desserts. Berry has a cause of action against a. Crabapple. b. the U.S. Patent and Trademark Office. c. consumers who buy Crabapple’s desserts. d. all of the choices.

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Chap 08_15e 52. Don One decides to use his personal name for a line of clothing he is developing. In this circumstance, Don One will receive trademark protection under the law when a. Don begins to market his line of clothing. b. customers begin to associate the name with the source of the product. c. Don begins to make his line of clothing. d. all of the choices. 53. Predictive Data LLC makes and sells software that enables a business to target its advertising precisely. The company could successfully bring an action for copyright infringement against a competitor who copies a. the screen displays of the software. b. the parts of the software that can be read by humans. c. the menus of the software. d. any of the choices. 54. Sea Coast Café uses the trademark of Tacos del Mar without permission. This use of the mark is actionable as trademark infringement a. if consumers are confused. b. all of the choices. c. only if the two companies’ products are similar. d. if the use diminishes the distinctive quality of the mark. 55. Information that may be protected as trade secrets includes a. customer lists. b. pricing information. c. marketing techniques. d. all of the choices. 56. Brewed Beans Inc. makes and sells “CoCoCafe,” a chocolate-flavored coffee. Darkroast Inc. later markets a similar drink under the name “KoKoKafe.” This is most likely a. copyright infringement. b. patent infringement. c. trademark infringement. d. none of the choices. 57. Ruby invents a new type of pillow and obtains a patent for it. Sleep-Time Inc. believes that Ruby’s pillow infringes on one of Sleep-Time’s previously patented products. Sleep-Time must file a challenge to Ruby’s patent within a. nine months. b. twenty years. c. the life of the inventor plus seventy years. d. no specific time.

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Chap 08_15e 58. Organos Ltd. traffics in nutritional supplements that are marketed as genuine, trademark-branded products when in fact they are counterfeit. This is a crime a. only if the counterfeits have negative effects on legitimate businesses. b. only if the counterfeits present serious public health risks. c. under all circumstances. d. under no circumstances. 59. Without permission, Race Runners Inc. uses a trademark that is similar to the registered mark of Swiftfoot, Inc. This use of the mark constitutes trademark dilution a. if consumers are confused. b. all of the choices. c. only if the two companies’ products are similar. d. if the use diminishes the distinctive quality of the mark. 60. Serena invents a new, unique, long-life battery. A grant from the government that gives Serena the exclusive right to make and sell the battery for a certain period of time is a. a patent. b. a trademark. c. a copyright. d. a trade secret. 61. Prognosis Inc. owns a brain-computer interface that enables physicians to diagnose and treat some diseases quickly and accurately. Federal copyright protection extends to a. the general appearance of the app. b. the parts of the app that can be read by computers. c. the command structure of the app. d. all of the choices. 62. Works that are copyrightable include a. books. b. music videos. c. product packaging. d. all of the choices. 63. United Inc., a U.S. film production company, files a suit against Video Ltd., a Mexican production firm, for infringement of intellectual property rights under Mexico’s national laws. Both the U.S. and Mexico are signatories of the TRIPS agreement, under which United is entitled to a. more protection under Mexican law than Video. b. the same rights and protection under Mexican law as Video. c. fewer rights under Mexican law than Video. d. none of the choices.

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Chap 08_15e 64. Graphix S.A. traffics in labels that bear counterfeit trademarks. This is a crime a. only if the labels have negative effects on legitimate businesses. b. only if the labels are attached to counterfeit goods. c. under all circumstances. d. under no circumstances. 65. Gilda, marketing manager for Home Stuff LLC, is responsible for branding the company’s products. Aspects of branding that can be trademarked include a. a catchy phrase, such as “Stuff your home with Home Stuff!” b. the shape of a container, even if it does not aid in product identification. c. use of another party’s established trademark, with or without permission. d. none of the choices. 66. Paving Corporation taps into the computer network of Roadwork Inc., a competitor, and downloads confidential business data without Roadwork’s knowledge or authorization. This is most likely a. copyright infringement. b. patent infringement. c. trademark infringement. d. a theft of trade secrets. 67. The idea for “Price & Profit,” an app that businesses can use to track their revenue, profit, and payroll, is protected by a. copyright law. b. patent law. c. none of the choices. d. trade secrets law. 68. Leigh buys Masters of Business, a copyrighted book. Under the first sale doctrine, Leigh can legally a. sell the book to another person. b. republish the book as his own work. c. control the distribution of other copies of the book. d. none of the choices. 69. Salty Snacks Inc. markets a fish-shaped cracker. When Tasty Tidbits Inc. begins to sell a similar product, Salty files a suit against Tasty, alleging infringement and claiming that consumers are likely to be confused. The court will most likely a. rule in the plaintiff’s favor. b. dismiss the suit. c. order both parties to redesign their respective products. d. order both parties to destroy all remaining fish-shaped crackers.

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Chap 08_15e 70. Phoenix Inc. is a publisher. Phoenix uses a logo featuring a bird rising from a flame to identify its publications. The publications are printed in a unique process that includes a 3-D printer. Phoenix could most likely obtain trademark protection for its a. logo. b. publications. c. printing process. d. printer. 71. College Copy Shop (CCS) compiles, copies, and sells reading materials to students on the instructions of their professors, who indicate which parts of certain publications to include. These include texts published by Deep Topics, Inc. CCS does not obtain the permission of Deep Topics, or any of the other original publishers of the copied materials, and does not pay royalties on the sales of the compilations. Deep Topics and others file a suit against CCS, alleging infringement of the plaintiffs’ intellectual property rights. Which type of intellectual property is involved in this situation? What is CCS’s likely defense? How is a court most likely to rule? Explain.

72. Alpha Inc. announces a new computer operating system to be marketed under the name McSoftware. McDonald’s Corp. asserts that the use of this name infringes on the McDonald’s family of trademarks characterized by the prefix “Mc” attached to a generic term. Alpha responds that “Mc” has come into generic use as a prefix and therefore McDonald’s has no trademark rights to the prefix. Alpha files an action, seeking a judgment that the mark McSoftware does not infringe on McDonald’s trademarks. What factors will the court consider in deciding this issue? What will be the probable outcome of the case? Explain.

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Chap 08_15e Answer Key 1. True 2. False 3. True 4. True 5. False 6. True 7. False 8. True 9. False 10. True 11. False 12. True 13. False 14. False 15. False 16. False 17. False 18. False 19. False 20. True 21. True 22. True 23. False 24. True 25. False 26. True

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Chap 08_15e 27. False 28. False 29. True 30. False 31. False 32. False 33. False 34. False 35. False 36. a 37. c 38. d 39. a 40. b 41. c 42. b 43. b 44. c 45. b 46. d 47. a 48. a 49. a 50. b 51. a 52. b 53. b 54. a Copyright Cengage Learning. Powered by Cognero.

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Chap 08_15e 55. d 56. c 57. a 58. c 59. d 60. a 61. b 62. d 63. b 64. c 65. a 66. d 67. c 68. a 69. a 70. a 71. The intellectual property at issue in this situation is copyright—specifically, of course, the copyrights of the publishers of the materials that CCS copies and sells without permission. CCS is likely to assert the “fair use” doctrine in its defense. This doctrine includes exceptions to the general requirement that an owner’s permission be obtained before copyrighted material can be copied. CCS is probably likely to argue that its compilations are excepted because they are dedicated to “educational” uses. A court is most likely to conclude, however, that the copying and selling of the materials is not a fair use, because CCS profits from their sale, which undercuts the potential market for the copyrighted publications from which the copies are made. In determining fair use, a court considers four factors: the purpose and character of the use, the nature of the copyrighted work, the amount and substantiality of the portion used in relation to the copyrighted work as a whole, and the effect of the use on the potential market for or value of the copyrighted work. In this situation, the fourth factor is most significant and supports the conclusion that CCS’s use of the materials is not a fair use. 72. The most important factor in the court’s consideration of this issue would probably be the likelihood of confusion if Alpha used the “Mc” prefix. The court might conclude that “Mc” had not come into generic use and reason that consumer confusion was likely if the “McSoftware” name were used. The court might note that McDonald’s is the largest single-brand advertiser in the United States. Most Americans are familiar with its logo and its various “Mc” products, and many would be led to believe that McSoftware was affiliated with McDonald’s. To the court, Alpha’s use of the name McSoftware would likely appear to be a deliberate attempt to benefit by the goodwill and reputation of McDonald’s, and permanently enjoin Alpha from using the name.

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Chap 09_15e Indicate whether the statement is true or false. 1. The Digital Millennium Copyright Act protects copyrighted material from piracy online. a. True b. False 2. No court has held that it is legally acceptable for law enforcement to set up a phony social media account to catch a suspect. a. True b. False 3. In entering personal information to a banking site online, a person may have a reasonable expectation of privacy. a. True b. False 4. Online conduct gives rise to only a narrow variety of legal actions. a. True b. False 5. Many states require the sender of an e-mail ad to tell recipients how to opt out of receiving future e-mail ads from the sender. a. True b. False 6. Under the First Amendment, every U.S. citizen has a right to be forgotten with respect to outdated personal information otherwise searchable online. a. True b. False 7. Under the federal law protecting trademarks, “bad faith intent” is one element of a claim of illegal cybersquatting. a. True b. False 8. Criminal liability for the piracy of copyrighted materials extends only to persons who exchange unauthorized copies for profit. a. True b. False 9. Any party who gives information to the Federal Trade Commission concerning possible deceptive conduct in a foreign jurisdiction is immune from liability. a. True b. False

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Chap 09_15e 10. Anyone can circumvent encryption software or other technological antipiracy protection without penalty. a. True b. False 11. The Federal Trade Commission can effectively force a private company to consent to the agency’s review of the company’s privacy and data practices. a. True b. False 12. File-sharing can be used to download others’ stored music files without raising copyright issues. a. True b. False 13. A company that provides a phone to an employee for business use is not prohibited from intercepting personal communications made on it. a. True b. False 14. Digital sampling can constitute copyright infringement. a. True b. False 15. A license may limit the use of a software application to a specific device. a. True b. False 16. An Internet service provider can disclose personal information about its customers only when ordered to do so by a court. a. True b. False 17. A social media post cannot be used to invalidate a settlement agreement. a. True b. False 18. State law may protect individuals from having to disclose their social media passwords to potential employers. a. True b. False 19. Federal guidelines allow a company to disclose material information about itself through social media as long as investors are notified in advance. a. True b. False

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Chap 09_15e 20. Downloading music into a computer’s random access memory, or RAM, without authorization is copyright infringement. a. True b. False 21. “Fair use” cannot be asserted as a defense to a charge of copyright infringement in a dispute concerning digital sampling. a. True b. False 22. To protect a trademark against typosquatting, a company should attempt to register potential misspellings of the mark. a. True b. False 23. Employers are prohibited from taking actions against employees or applicants based on their social network postings. a. True b. False 24. Cybersquatting is legal when the person offering for sale a domain name that is the same as another’s trademark intends to profit from the sale. a. True b. False 25. Federal law permits the sending of unsolicited commercial e-mail to randomly generated e-mail addresses. a. True b. False 26. Under the Communications Decency Act, Internet service providers are liable as publishers of defamatory statements that come from a third party. a. True b. False 27. Because federal wiretapping law was enacted before social media networks existed, it does not apply to communications through social media. a. True b. False 28. In posting statements or photos to a social media site, a person clearly has a reasonable expectation of privacy. a. True b. False 29. An online retailer can track a user’s web activities with cookies without violating the person’s right to privacy. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 09_15e 30. An Internet service provider that terminates subscribers who infringe copyrights can qualify for a “safe harbor” under the Digital Millennium Copyright Act. a. True b. False 31. Using another’s trademark as a meta tag may be permissible. a. True b. False 32. A social media post is not subject to discovery in litigation. a. True b. False 33. To maintain a claim of trademark dilution, the products involved must be similar. a. True b. False 34. Cybersquatting occurs when the owner of a trademark registers the mark as a domain name but does not use it for that purpose. a. True b. False 35. Cybersquatting is illegal only if a domain name is identical to the trademark of another, not if the name is merely confusingly similar. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. To test computer security and conduct encryption research, Solutions Inc. circumvents the encryption software and other antipiracy protection of Tech Corporation’s software. Under the Digital Millennium Copyright Act, this is a. a violation of copyright law. b. prohibited but not a violation of copyright law. c. a “fair use” exception to the provisions of the act. d. permitted for reconsideration every three years. 37. Sales Corps Inc. provides tablets for its employees to use “in the ordinary course of its business.” Sales Corps intercepts the employees’ business communications made on these devices. Under the Electronic Communications Privacy Act, this is a. prohibited. b. a matter for which an employer must obtain employees’ consent. c. a subject for dispute resolution by an Internet service provider. d. permissible.

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Chap 09_15e 38. BeFriends Corporation uses the trademark of Community Life Inc., a social media site, as a meta tag without Community Life’s permission. This may be permissible a. if the appropriating site has nothing to do with the meta tag. b. if the two sites appear in the same search engine results. c. if the use constitutes trademark infringement. d. in none of these circumstances. 39. Interactive Entertainment Corporation markets its products online. Through the use of cookies, Interactive Entertainment and other online marketers can a. track individuals’ Web browsing activities. b. gain access to competitors’ servers. c. “sweet talk” consumers into buying certain products. d. attack competitors’ Web sites. 40. With respect to spam, thirty-seven states a. prohibit or regulate it. b. permit its use by business entities. c. prescribe its use. d. preempt the application of federal law on the same subject. 41. Broadband Inc., an Internet service provider, supplies information to the Federal Trade Commission concerning possible unfair or deceptive ads originating in a foreign jurisdiction. Under federal law, Broadband is a. immune from liability. b. subject to liability if the information is false. c. subject to liability if the ads were sent through Broadband’s service. d. subject to liability in the foreign jurisdiction, but not in the United States. 42. Prodigious Profit, LLC, and other companies operate social media Web sites, issue apps for mobile devices, obtain ad revenue from search engines, and sell directly to consumers from other sites. The privacy rights of the users of these products are frequently defined, not by the courts or legislatures, but by a. the companies that own the sites and the apps. b. retailers who have had to change their procedures to compete. c. spammers, cybersquatters, and typosquatters. d. Internet service providers. 43. Odell is an employee of Packing Corporation. She uses social media in a way that violates her employer’s stated social media policies. Packing disciplines Odell and then, after a second transgression, fires her. This is a. a violation of the Stored Communications Act. b. within the employer’s rights. c. a subject for dispute resolution by social media. d. a “business-extension exception” under the Electronic Communications Privacy Act.

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Chap 09_15e 44. Jade transfers selected musical recordings, without the copyright owners’ authorization, through her phone to her friends. Jade does not charge her friends for this “service.” This is a. copyright infringement. b. a license. c. goodwill. d. “fair use.” 45. Skye posts excerpts from comics and graphic novels on social networking sites without the permission of the owners of the copyrights to the illustrations and stories. This is a. copyright infringement. b. a license. c. goodwill. d. “fair use.” 46. Deals Inc. provides its sales representatives with phones to use in the ordinary course of business. Deals monitors the employees’ electronic communications made through the phones. This is a. a violation of the rights of the employees. b. within the rights of the employer even if it did not provide the phones. c. a subject for dispute resolution by the phone service. d. a “business-extension exception” under the Electronic Communications Privacy Act. 47. The employees of Eco Engineering Inc. share company-related resources among multiple computers without requiring a central network server. This is a. digital sampling. b. cybersquatting. c. cloud computing. d. peer-to-peer (P2P) networking. 48. Sound Financials Corporation sends daily e-mail ads to its previous customers and those who have opted to receive the notices. The state in which the company is physically located has enacted an antispam law. Under federal law a. the application of federal law to Sound’s ads is preempted. b. Sound’s ads are required to be reviewed by a federal agency. c. Sound’s ads are prohibited. d. the application of the state’s law to Sound’s ads is preempted. 49. Web Invest Inc. buys and sells domain names with the click of a mouse. A domain name can be bought and sold many times. Each change of owner is registered automatically as part of a mass registration. In this environment a. cybersquatting can flourish. b. typosquatting occurs unintentionally through clerical misspellings. c. brands and trademarks are automatically protected from cybersquatters. d. the Federal Trade Commission can sanction Web Invest.

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Chap 09_15e 50. Flash Inc., a maker of athletic shoes, registers and uses “flash” as its domain name. Later, Got Shoes Company begins to use “flast” (an intentional misspelling of “flash”) as its domain name. Got Shoes is most likely a. diminishing the quality of Flash’s mark. b. making a fair use of Flash’s mark. c. licensing the use of Flash’s mark to itself. d. engaging in lawful competitive conduct. 51. Dana downloads music into her computer’s random access memory, or RAM, without authorization. This is a. copyright infringement. b. within Dana’s rights as a computer user. c. a basis of liability for the computer maker if it does not act against Dana. d. none of the choices. 52. Mix Restaurant Corporation owns the trademark “Mix.” Remix Café Company begins to use the mark without authorization as a domain name. Mix files a suit against Remix on a theory of trademark dilution. This claim requires proof that a. none of the choices. b. consumers are likely to be confused by the names. c. the products involved are similar. d. Mix has registered all variations of the name “Mix.” 53. Payback Inc. discovers that defamatory statements about its policies are being posted in an online forum. Q Web Inc., the Internet service provider whose users are posting the messages, refuses to reveal the users’ identities. To obtain those identities, Payback should initially a. file a suit against the anonymous users. b. gain unauthorized access to Q Web’s servers. c. file a suit against Q Web. d. ask the U.S. Department of Justice to issue a subpoena. 54. Without authorization, Ben uses the trademark of Cielo Coffee Company to promote cheap, flavorless candy, which is not similar to Cielo’s products but diminishes the quality of the coffee company’s mark. This is a. cybersquatting. b. typosquatting. c. trademark infringement. d. trademark dilution. 55. InfoFree Inc. makes and sells devices and services for the circumvention of encryption software. Under the Digital Millennium Copyright Act, this is a. a violation of copyright law. b. prohibited but not a violation of copyright law. c. a “fair use” exception to the provisions of the act. d. permitted for reconsideration every three years.

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Chap 09_15e 56. Mobile Device Company (MDC) discovers that defamatory statements about its products are being posted in an online forum. NuView Inc., the Internet service provider whose users are posting the messages, can disclose their identity a. only when ordered to do so by a court. b. whenever and however the provider chooses. c. only in egregious circumstances. d. in no circumstances. 57. ConnectWeb, Inc., operates a subscription-based service that extends the software and storage capabilities of its subscribers. This is a. dilution. b. peer-to-peer (P2P) networking. c. cloud computing. d. a distributed network. 58. Russ registers a domain name—sweetfriedpotatos.com—that is a misspelling of a popular brand— sweetfriedpotatoes.com. This is a. cybersquatting. b. typosquatting. c. trademark infringement. d. trademark dilution. 59. Haute Dawgs Corporation allows its trademark to be used as part of a domain name for Haute Dawgs NY Inc., an unaffiliated company. Haute Dawgs NY does not obtain ownership rights in the mark. This is a. trademark infringement. b. fair use. c. a license. d. trademark dilution. 60. Employees of Bodega Inc. maintain a password-protected social media page to “vent about work.” Bodega learns of the page and intimidates the network that operates it into revealing the password. After reviewing the posts, Bodega fires the participants. Most likely, this is a. a violation of the Stored Communications Act. b. within the employer’s rights. c. a subject for dispute resolution by the network. d. a “business-extension exception” under the Electronic Communications Privacy Act. 61. Chong transfers pirated copies of movies of television programs to an Internet site that permits users to view them without downloading them. With respect to the Digital Millennium Copyright Act, this is a. a violation. b. a “fair use” exception. c. dilution. d. not subject to the act.

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Chap 09_15e 62. Afford Motors LLC, an auto broker, uses the trademark of Ford Motor Corporation in a meta tag without Ford’s permission. This is a. cybersquatting. b. a legitimate business practice. c. trademark infringement. d. trademark dilution. 63. CallTalk Corporation, a phone-time seller, uses its mark “calltalk” as its domain name. Later, Converse Inc. uses the domain name “callltalk” (a deliberate misspelling of “calltalk”) without CallTalk’s authorization, to sell sexually explicit phone conversations. This is a. a legitimate marketing technique. b. a fair use. c. a license. d. trademark dilution. 64. Volatile Investments Inc. sends e-mail ads to any e-mail address that the sender can find on the Web or otherwise generate. Under federal law, Volatile’s marketing method a. may be permitted. b. is prohibited. c. must be reviewed by a federal agency. d. is preempted. 65. Pilar registers a domain name—qualitytires.com—that is confusingly similar to the trademark of Quality Tires Inc. Pilar has a “bad faith intent” to profit from the mark by selling the name to Quality Tires. This is a. a legitimate business practice. b. illegal. c. a bid to obtain a license. d. trademark dilution. 66. Rue obtains permission from Saga Company to use the firm’s game app on Rue’s mobile devices. But Rue does not obtain ownership rights in the app. This is a. a license. b. a cookie. c. cloud computing. d. a violation of the law. 67. Outsourcing Inc. registers a domain name that is the same as the trademark of Resourcing LLC and offers to sell the name to the mark’s owner. This is a. cybersquatting. b. typosquatting. c. trademark infringement. d. trademark dilution.

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Chap 09_15e 68. Grain Mill Company brings a suit against Milled Grain Company under the Anticybersquatting Consumer Protection Act, alleging that Milled Grain is profiting from a domain name that is confusingly similar to Grain Mill’s trademark. If Grain Mill is successful, recovery may include a. actual damages and profits in any amount. b. statutory damages no greater than $1,000. c. statutory damages no less than $100,000. d. all of the choices. 69. Employees, clients, and others with authorization use World Transport Corporation’s network around the globe to share computer files. This is a. an invasion of privacy. b. trademark and copyright infringement. c. digital sampling. d. a distributed network. 70. Because of the loss of significant amounts of revenue as a result of unauthorized digital downloads, file-sharing has created problems for a. the motion picture industry. b. recording artists and their labels. c. the companies that distribute file-sharing software. d. all of the choices. 71. Sonya and other employees of TransGlobal Inc. maintain a password-protected social media page on which they post comments on work-related issues. The posts range from positive to negative, supporting the page’s purpose to “vent about work.” When TransGlobal learns of the page, the company intimidates Sonya into revealing the password, and after reviewing the posts, fires her and the other participants. Which federal law discussed in this chapter most likely applies to this situation? Has this law been violated? Discuss.

72. “Dawn” is a song included in the sound track of “eDay,” a movie produced and distributed by FasTrac Corporation. The song features a digital sampling of a few seconds of the guitar solo of one of George Harrison’s copyrighted sound recordings without permission. Does this digital sampling constitute copyright infringement on the part of FasTrac? Explain.

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Chap 09_15e Answer Key 1. True 2. False 3. True 4. False 5. True 6. False 7. True 8. False 9. False 10. False 11. True 12. False 13. False 14. True 15. True 16. True 17. False 18. True 19. True 20. True 21. False 22. True 23. False 24. False 25. False 26. False

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Chap 09_15e 27. False 28. False 29. True 30. True 31. True 32. False 33. False 34. False 35. False 36. c 37. d 38. d 39. a 40. a 41. a 42. a 43. b 44. a 45. a 46. d 47. d 48. d 49. a 50. a 51. a 52. a 53. a 54. d Copyright Cengage Learning. Powered by Cognero.

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Chap 09_15e 55. a 56. a 57. c 58. b 59. c 60. a 61. a 62. c 63. d 64. b 65. b 66. a 67. a 68. a 69. d 70. d 71. The federal law discussed in this chapter that most likely applies to the situation described in this question is the Stored Communications Act (SCA), which is part of the Electronic Communications Privacy Act (ECPA). And the SCA appears to have been violated here. The SCA prohibits intentional and unauthorized access to stored electronic communications and sets forth criminal and civil sanctions for violators. A person can violate the SCA by intentionally accessing a stored electronic communication. The SCA also prevents “providers” of communication services, such as cell phone companies and social media networks, from divulging private communications to certain entities and individuals. In this question, the employees of TransGlobal maintain a password-protected social media page on which they post comments on work-related issues. The company gains access by intimidating one of the employees, and after reviewing the posts, fires all of the participating employees. This appears to be a violation of the SCA because the company’s access was intentional and unauthorized—intimidation does not constitute authorization. As a result, the employees should be allowed to retain their social media page, be reinstated to their jobs, be given back pay, and possibly obtain compensatory and other damages.

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Chap 09_15e 72. Yes, the digital sampling described in this question most likely would be held to constitute copyright infringement. To transfer materially digitally, online or otherwise, it must be “copied.” So, generally, whenever a party downloads music or other software into a computer’s random access memory, or RAM, without authorization, a copyright is infringed. In other words, technology has vastly increased the potential for copyright infringement. Thus, digitally sampling a copyrighted sound recording of any length constitutes copyright infringement. In this question, a few seconds of the guitar solo of one of George Harrison’s copyrighted sound recordings has been digitally sampled without permission in “Dawn.” This song is then included in the film “eDay,” which is produced and distributed by FasTrac. The sampling involved “copying” the solo digitally into a computer. This constitutes copyright infringement.

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Chap 10_15e Indicate whether the statement is true or false. 1. Bribing foreign officials to obtain favorable business contracts is no crime. a. True b. False 2. The most potent weapons against white-collar criminals include the federal laws prohibiting mail and wire fraud. a. True b. False 3. The U.S. Constitution provides safeguards that apply not only in federal but also in state courts. a. True b. False 4. The Computer Access Device and Computer Fraud and Abuse Act prohibits cyber theft. a. True b. False 5. Crimes are offenses against society as a whole. a. True b. False 6. A statute that prohibits theft by means of false pretenses usually applies only to goods, not to services or cash. a. True b. False 7. Malware is a hacker whose purpose is to create a serious negative impact. a. True b. False 8. Fraudulent appropriation of another’s property with which a person has been entrusted is the crime of receiving stolen goods. a. True b. False 9. Every criminal statute prohibits certain behavior. a. True b. False 10. Embezzlement includes the making or altering of any writing in a way that changes the legal rights and liabilities of another. a. True b. False

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Chap 10_15e 11. The Fourth Amendment protects only against searches that violate a person’s reasonable expectation of privacy. a. True b. False 12. Most crimes require an act of commission. a. True b. False 13. A specified state of mind, or intent, is not necessary to establish criminal liability. a. True b. False 14. Phishing is a distinct form of identity theft and cyber fraud. a. True b. False 15. In a criminal case, the defendant must convince the court that based on the evidence it is more likely than not that the defendant is not guilty. a. True b. False 16. A criminal defendant has the right to confront accusers and to present his or her own witnesses. a. True b. False 17. In a criminal case, the state must prove its case beyond a reasonable doubt. a. True b. False 18. A corporation can refuse to produce business records that might subject the firm to criminal prosecution. a. True b. False 19. A crime is punishable, in some cases, by death. a. True b. False 20. In a criminal case, typically only three-fourths of the jurors need to agree in order to convict the defendant. a. True b. False 21. A mistake of fact can often excuse criminal responsibility. a. True b. False

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Chap 10_15e 22. If the evidence of a defendant’s guilt was obtained improperly, it normally cannot be used against the defendant in court. a. True b. False 23. An act of omission cannot be a crime. a. True b. False 24. It is not a crime to use income obtained from racketeering activity to buy an interest in a legitimate enterprise as long as the deal is otherwise legal. a. True b. False 25. A person who accesses a computer online without authority to obtain protected data is subject to criminal prosecution. a. True b. False 26. One of the purposes of criminal law is to compensate the victims. a. True b. False 27. All courts use the same test for legal insanity. a. True b. False 28. Warrants are required for searches of businesses in highly regulated industries. a. True b. False 29. An illegal act committed by a business using nonviolent means to obtain a business advantage is a white-collar crime. a. True b. False 30. A state’s prosecution of a crime prevents a separate federal prosecution relating to the same activity. a. True b. False 31. To constitute the crime of bribery, the bribe must consist of money. a. True b. False

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Chap 10_15e 32. The attempt to influence a public official to act in a way that serves a private interest is no crime. a. True b. False 33. Larceny involves force or fear, but robbery does not. a. True b. False 34. Crimes are sometimes prosecuted by crime victims rather than by a public official. a. True b. False 35. A belief in the possibility that a person committed a crime is sufficient probable cause to support the issuance of an arrest warrant. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. Zoey is accused of auto theft. She refuses to give information related to her alleged criminal activities because she suspects it will be used to prosecute her. This is a. a mistake of fact. b. entrapment. c. the privilege against self-incrimination. d. ignorance of the law. 37. Posing as eBank, Frank e-mails Grace, asking her to update her credit-card information through a link in the email. She clicks on the link and types in the data, which Frank promptly sells to Hector. This is a. hacking. b. no crime. c. phishing. d. cyberterrorism. 38. Evita, a police officer, wants to search the offices of Debit & Credit, Accountants. She asks Judge Bern to issue a warrant. No warrant for a search can be issued without a. double jeopardy. b. probable cause. c. reasonable doubt. d. immunity. 39. The Racketeer Influenced and Corrupt Organizations Act is an effective tool in attacking a. criminal activities occurring online. b. businesspersons who use bribery to secure foreign contracts. c. defenses that excuse criminal behavior. d. certain white-collar crimes. Copyright Cengage Learning. Powered by Cognero.

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Chap 10_15e 40. Luz is an employee of Motor Parts, an auto parts store. On the orders of his employer, he switches trademarks on parts that come into the store to be sold to consumers. This is most likely a. forgery. b. larceny. c. robbery. d. no crime. 41. Traditionally, the hundreds of thousands of acts defined as criminal in federal, state, and local laws have been grouped into broad categories, including a. private crime. b. public crime. c. property crime. d. personal crime. 42. Rosa, who operates a Street Tacos restaurant in her apartment, is charged with criminal violations of the local health and building codes, state license regulations, and federal environmental statutes. To obtain a conviction, the prosecution must a. convince the court it is more likely than not that the charges are true. b. show the evidence as reasonably permitting a guilty verdict. c. prove beyond a reasonable doubt that Rosa committed every essential element of an offense. d. persuade three-fourths of the jurors to agree on a guilty verdict. 43. Bert pushes Connie to the ground, grabbing her phone as she falls. The use of force or fear is required for this act to constitute a. embezzlement. b. any crime. c. larceny. d. robbery. 44. Andy causes a disturbance at Brew Pub. He is arrested and charged with disorderly conduct, a crime punishable by imprisonment up to one year. This crime is a. a misdemeanor. b. a felony. c. a civil wrong. d. a tort. 45. Syd offers Tina, a city inspector, money to overlook health code violations in his restaurant. Tina accepts the money and overlooks the violations. Syd is charged with the crime of bribery. The crime occurred when a. the health code was violated. b. the bribe was offered. c. the bribe was accepted. d. the violation was overlooked.

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Chap 10_15e 46. Bud works at a Cheap Stuff Store from which, without authorization, he takes merchandise that he has not paid for home for his own use. This is a. robbery. b. embezzlement. c. larceny. d. no crime. 47. Dru e-mails Ester, promising her a percentage of the amount in a foreign bank account if she will assist in transferring the funds to a U.S. bank account. Ester forwards her account number, but the funds are never sent. Instead, Dru quickly withdraws the funds in Ester’s account. This is a. no crime. b. identity theft. c. phishing. d. hacking. 48. Via the Internet, Britta enters false code into the computer control system of Chicken Company, a food maker, to alter the levels of ingredients so that consumers of the food become ill. Britta is a. a cyberterrorist. b. a phisher. c. malware. d. a prosecutor. 49. Franny is charged with a crime. Almost all federal courts and some state courts would not hold Franny liable if, at the time of the offense, as a result of a mental disease or defect, she lacked substantial capacity to obey the law and to appreciate a. the power of the police. b. the authority of the court. c. the wrongfulness of her conduct. d. the fruits of his crime. 50. Honi puts up a collection of sports memorabilia for bids on InstaBuy, an auction website. Jay makes the highest bid and sends the payment, which Honi receives, but she does not send the collection. This is a. no crime. b. identity theft. c. phishing. d. cyber fraud. 51. Hua is arrested at a warehouse in Industry Park and is charged with the crime of theft. Hua will be prosecuted by a. the victim of the crime. b. a district attorney or an attorney general. c. a judge. d. a jury.

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Chap 10_15e 52. Enrique accesses Finance Bank’s computer system without authority to obtain protected financial records. Under federal law, this is a. a felony if it was done for a commercial purpose. b. a felony if the bank brings a civil suit against Enrique. c. not a crime. d. a crime but not a felony. 53. Kohl receives from Lily a camera stolen from Mark. Kohl knows that the camera is stolen, and he intends to keep it. Kohl is a. tortiously liable. b. civilly liable. c. criminally liable. d. contractually liable. 54. Beca, a computer operator for Cloud Corporation, is arrested in her employer’s parking lot on suspicion of larceny. Beca must be informed of her right to a. a trial by jury. b. punishment. c. question witnesses. d. remain silent. 55. Khan, the owner of Lakeside Park, trusts Moira to manage the resort’s daily cash flow. One night, without Khan’s knowledge or consent, Moira takes and keeps $1,000 from the receipts. This is most likely a. robbery. b. embezzlement. c. larceny. d. no crime. 56. Olinda, an employee of People’s Bank, deposits into her account checks entrusted to the bank through its ATM system by customers to deposit into their accounts. This is a. robbery. b. embezzlement. c. larceny. d. wire fraud. 57. Kim takes off her ring and places it on her desk while she works. Without her knowledge or consent, her coworker Lum picks up the ring, puts it on, and walks away. Lum has likely committed a. robbery. b. embezzlement. c. larceny. d. no crime.

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Chap 10_15e 58. A speedy trial, a trial by jury, a public trial, and the right to confront witnesses are guaranteed by a. the Fourth Amendment. b. the Fifth Amendment. c. the Sixth Amendment. d. state law, not the U.S. Constitution 59. Quint, an employee of Reservations Inc. pays Siena, an employee of Reservations’ competitor Travel Inc., for a list of Travel’s clients. This is most likely a. bribery of a public official. b. commercial bribery. c. bribery of a foreign official. d. no crime. 60. Chic signs Del’s name, without authorization, to the back of Del’s paycheck, which was issued by Earth Foods Market. This is a. no crime. b. forgery. c. larceny. d. robbery. 61. Lloyd is accused of a crime. Evidence of his allegedly criminal activities can be excluded from a trial a. if the evidence will be used to prosecute him. b. if the police do not promise to keep the evidence confidential. c. if the evidence is “fruit of the poisonous tree.” d. under no circumstances. 62. Beau devises a scheme to send fraudulent e-mails—claiming that an arrest warrant has been issued for nonpayment of taxes—to individual taxpayers. By these false pretenses, Beau intends to obtain money and personal data. This is a. robbery. b. wire fraud. c. larceny. d. no crime. 63. Niles enters Omelet Café and points a gun at the cashier Pico. Niles forces Pico to open the register and give him all the money. Niles will most likely be charged with a. robbery. b. obtaining property by false pretenses. c. larceny. d. receiving stolen property.

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Chap 10_15e 64. Esau works for Family Dwellings Inc., an investment firm that buys, renovates, and rents foreclosed houses. Esau steals his employer’s digital files to start his own competing business, Good Homes LLC. This is a. wire fraud. b. robbery. c. larceny. d. no crime. 65. Raul uses social media to post links that, when clicked, secretly install software on others’ computers without the owners’ knowledge Raul’s software is designed to harm or disrupt the computers. This program is a. malware. b. a phish. c. entrapment. d. larceny. 66. Riley commits an act via e-mail against State Bank, a business in Texas, where the act is a cyber crime. Riley resides in Utah where the act is not a crime. Prosecution of Riley in Texas involves questions of a. jurisdiction. b. “maximum contacts.” c. the immunity of Internet service providers. d. encryption. 67. Sam, driving under the influence, causes a car accident that results in the death of Tanya. Sam is arrested and charged with a crime punishable by imprisonment for more than a year. This crime is a. a misdemeanor. b. a felony. c. a civil wrong. d. a tort. 68. Seymour is accused of a crime. To obtain information about the crime from Seymour, the state can a. bribe Seymour in a way that serves the public interest. b. force Seymour to provide information that can be used to prosecute him. c. grant Seymour immunity from prosecution. d. none of the choices. 69. Bruno buys and sells stocks and bonds. Bruno may be subject to penalties under the Racketeer Influenced and Corrupt Organizations Act a. for making an unprofitable, but legal, investment. b. for the commission of securities fraud. c. only if the situation involves a “racket.” d. only in the circumstances constitute organized crime.

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Chap 10_15e 70. Dean solicits investors for a nonexistent business, eApps. Dean is arrested and charged with “mail fraud.” This requires intent to a. claim that an item is “in the mail” when it is not. b. defraud postal authorities. c. use the U.S. mail. d. defraud the public. 71. Cameo is an accountant in the accounting department of Data Analytics Inc. Cameo’s son’s college tuition is due within a week, or he cannot continue taking classes. To meet the due date, Cameo transfers funds from Data Analytics to a fictitious bank account, planning to repay the firm within one month. The transfer is discovered before the firm is repaid, and Cameo is arrested. What crime, or crimes, if any, has Cameo committed? Explain.

72. Cloud Computing Services, Inc., suffers a security breach in its computer network. Before the company discovers the breach, the perpetrator obtains a large amount of confidential data, including corporate financial records, marketing plans, and other sensitive information. Has a crime been committed? If so, what are its elements? What steps might Cloud take to ensure that going forward only authorized users access the data on its computers? Whose efforts—those of the federal government or Cloud—are more important in securing the company’s computer infrastructure, and why?

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Chap 10_15e Answer Key 1. False 2. True 3. True 4. True 5. True 6. False 7. False 8. False 9. True 10. False 11. True 12. True 13. False 14. True 15. False 16. True 17. True 18. False 19. True 20. False 21. True 22. True 23. False 24. False 25. True 26. False

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Chap 10_15e 27. False 28. False 29. True 30. False 31. False 32. False 33. False 34. False 35. False 36. c 37. c 38. b 39. d 40. a 41. c 42. c 43. d 44. a 45. b 46. c 47. c 48. a 49. c 50. d 51. b 52. a 53. c 54. d Copyright Cengage Learning. Powered by Cognero.

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Chap 10_15e 55. b 56. b 57. c 58. c 59. b 60. b 61. c 62. b 63. a 64. c 65. a 66. a 67. b 68. c 69. b 70. d 71. Cameo committed at least embezzlement. The crime of embezzlement is committed when a person entrusted with another’s funds or property fraudulently appropriates it. That Cameo may have intended to repay the “borrowed” funds is no defense (although an embezzler who returns what has been taken may not be prosecuted because the owner may not wish to take the time to make a complaint, give depositions, and appear in court, or to reveal that the firm failed to have safeguards against embezzlement). Depending on how Cameo engineered the theft, he may have committed other crimes—forgery, larceny, or a cyber crime, for example.

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Chap 10_15e 72. The breach of Cloud’s computer network and the subsequent theft of data constitute a crime under the federal Counterfeit Access Device and Computer Fraud and Abuse Act. This act is commonly known as the Computer Fraud and Abuse Act (CFAA). It is the most important legislation targeting cyber crime. The CFAA provides that a person who accesses a computer online without authority to obtain classified, restricted, or protected data, or attempts to do so, is subject to criminal prosecution. The theft is a felony if it is committed for a commercial purpose or for private financial gain, or if the value of the stolen data (or computer time) exceeds $5,000. Penalties include fines and imprisonment for up to twenty years The voluntary efforts of Cloud and other private companies are an important factor in securing those firms’ computer infrastructure. Precautions that Cloud might take to safeguard its computer system in the future could start with tighter, more encrypted security, including the employment of a cyberspace security firm. These experts could help Cloud devise a more elaborate, ever-changing security system that might include passwords and codes for its customers. They could also install protective programs, such as firewalls and antivirus software, to limit outside access. They could further assist Cloud by constantly updating this technology to thwart the criminal attempts of outsiders who are updating theirs. The most successful protective measure is to encrypt the data. Of course, an encryption system must be updated as regularly as the systems of those who would break it.

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Chap 11_15e Indicate whether the statement is true or false. 1. Contract law does not distinguish between moral and legal obligations. a. True b. False 2. Insofar as possible, a reasonable, lawful, and effective meaning will be given to all of the terms of a contract. a. True b. False 3. A check is an informal contract. a. True b. False 4. In interpreting a contract, a court will give greater weight to the course of performance between the parties than to the express terms. a. True b. False 5. An offer that can be accepted simply by a promise to perform does not create a binding contract. a. True b. False 6. Any contract that is not in writing is not enforceable. a. True b. False 7. A payment of funds or a delivery of goods must take place for a bilateral contract to be formed. a. True b. False 8. To avoid a contract, both parties must fully perform their respective legal obligations. a. True b. False 9. Contests and lotteries are unilateral contracts. a. True b. False 10. If a voidable contract is ratified, both parties are released from it. a. True b. False 11. Contracting parties are bound only by terms that can be objectively inferred from promises made. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 11_15e 12. If one party to a contract has fully performed but the other has not, the contract is executory. a. True b. False 13. Anyone can avoid a contractual obligation by claiming that he or she did not read the contract. a. True b. False 14. A contract that only one of the parties can enforce in a court is not valid. a. True b. False 15. A promisee has the right to expect or demand that something will or will not happen in the future. a. True b. False 16. Contracts relating to real estate are governed by the common law. a. True b. False 17. What a party said when entering into a contract is a subjective fact. a. True b. False 18. An agreement to form a contract cannot modify the terms of a previous contract. a. True b. False 19. Only one party entering into a contract must possess characteristics that qualify him or her as competent for a valid contract to exist. a. True b. False 20. A declaration that binds the person who makes it to do a certain act is a promise. a. True b. False 21. A letter of credit is a type of formal contract. a. True b. False 22. An executed contract is one that has been fully performed by both parties to it. a. True b. False

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Chap 11_15e 23. Quasi contracts are imposed on parties in the interest of fairness and justice. a. True b. False 24. A signed agreement for a video streaming service is an express written contract. a. True b. False 25. The term consideration refers to the deference shown by contracting parties to each other. a. True b. False 26. A party who confers a benefit on someone else unnecessarily can obtain its fair value by invoking the doctrine of quasi contract. a. True b. False 27. One of the requirements of a valid contract is an adequate market for the deal’s goods or services. a. True b. False 28. Quasi contract are not actual contracts. a. True b. False 29. A contract is an implied contract if the conduct of the parties creates and defines some of the terms. a. True b. False 30. If what is written in a contract is clear, a court will enforce the contract according to its obvious terms. a. True b. False 31. Under the objective theory of contracts, a contract is not enforceable without a clearly defined objective. a. True b. False 32. A contract is considered to be unequivocal even when a term is susceptible to more than one interpretation. a. True b. False 33. The terms of service that a person agrees to before loading an app on a phone are not truly legally binding. a. True b. False

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Chap 11_15e 34. By supplying procedures for enforcing private agreements, contract law provides an essential condition for the existence of a market economy. a. True b. False 35. Once an offer is made, the offeror cannot revoke it. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. Jana, a nurse practitioner, renders aid to Kurtz, who is injured and unconscious. Jana can recover the cost of the aid from Kurtz a. on a quasi contract theory. b. only if Kurtz recovers because of the aid. c. only if Kurtz was aware of the aid. d. under no circumstances. 37. Ota asserts that a deal entered into with Pai to sponsor and host a motivational conference for independent sales representatives was formed as the result of a mistake. Ota’s best defense to the enforcement of this contract is a. a desire not to perform. b. insufficient capital. c. preliminary indications of unsatisfactory results. d. the lack of a party’s voluntary consent. 38. Bo signs a lease with Capri Properties to lease a studio apartment for the next year for $850 per month. Daisy signs on Capri’s behalf. Bo and Capri have a. no contract. b. an express contract. c. an implied contract. d. a simple contract. 39. Marketing Inc. offers to create a campaign to increase N’Ice Cream Inc.’s online business. N’Ice agrees to pay for the service. These parties have a. no contract. b. an express contract. c. an implied contract. d. a quasi contract.

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Chap 11_15e 40. Movers LLC promises to deliver a certain couch to Nora, who promises to pay for the service. If Movers does not perform, it may be required to a. none of the choices. b. make another promise. c. pay damages. d. perform a different service. 41. Sales Corporation and Real Estate Inc. negotiate an agreement under which only one of the parties can elect to avoid any duty to perform or to ratify the deal. With respect to this arrangement as a contract, if ratified, both parties a. are released. b. must perform their respective legal obligations. c. must renegotiate new or modified terms. d. can seek its enforcement on the ground of unjust enrichment. 42. Juno tells Liu she will give him her old car if he babysits her son Marc weekday evenings for six months. Liu agrees. Juno and Lee have formed a. a bilateral contract. b. a unilateral contract. c. a void contract. d. an unenforceable contract. 43. Boca claims that he intended to enter into a contract with Carla for tutoring, and she breached it. Carla responds that she never intended to enter into a contract with Boca. Their intent to enter into a contract is determined with reference to a. the intentional theory of contracts. b. the objective theory of contracts. c. the personal theory of contracts. d. the subjective theory of contracts. 44. Rough Water LLC and Schafer enter into a contract for the delivery of a certain number of river rafts. Until the rafts are delivered and paid for, the parties have a. an executory contract. b. no contract. c. a quasi contract. d. an executed contract. 45. Mel agrees to work as a freight broker for National Shipping Inc. In determining whether a contract has been formed, an element of prime importance is the parties’ a. intent. b. objectives. c. subjective beliefs. d. motives.

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Chap 11_15e 46. Odette, a certified public accountant, agrees to perform an audit for Personnel Inc. These parties are most likely to follow the rules of contract law in order to a. avoid potential disputes. b. acquire business acumen. c. obtain confidential information. d. satisfy a moral obligation. 47. Yuri agrees to zed.com’s terms of service and downloads the site’s app. Yuri then reverse-engineers the app to create a competing product. This is a. within the rights of a contracting party. b. a fair use of the app, with or without a contract. c. acceptable as long as the site’s owners are unaware of the activity. d. a breach of contract. 48. Saul claims that his agreement with Teri for saxophone lessons is voidable. If this contract is avoided, both parties a. are released from it. b. must fully perform their obligations under it. c. effectively postpone their obligations to fulfill it. d. are proscribed from making another contract on the same subject. 49. On Monday, Xi tells Yard Work Inc., that he will pay $500 if a variety of tasks are completed by Friday. On Wednesday, when Yard Work is more than half done with the work, Xi says that he has changed his mind. These parties had a. an expired contract when Xi said that he had changed his mind. b. a quasi contract when Xi said that he would pay for certain work. c. a unilateral contract as soon as Yard Work began to perform. d. no contract. 50. Darcy enters into a contract with Event Center Inc. to use its venue for a business meeting. If an ambiguity appears in the contract that outside evidence does not make clear, it will most likely be a. interpreted against the party responsible for creating it. b. struck from the deal. c. construed according to the court’s discretion. d. applied in favor of the party who drafted the contract. 51. Demi buys a lottery ticket. The ticket has the winning numbers for a prize. She submits the ticket to claim the prize. Demi accepted an offer for a. a bilateral contract. b. a unilateral contract. c. a quasi contract. d. an unenforceable contract.

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Chap 11_15e 52. Field Construction Inc. contracts with Mesa Ranch to build a new barn on Mesa’s property for which Mesa agrees to pay. If this is a valid contract, it will be partly because it includes the element of a. capability. b. legality. c. necessity. d. marketability. 53. Pavers Inc. contracts with a QuikStop store to repave the store’s parking lot for a certain price. To be enforceable, this contract must include an element of a. consideration. b. acceptability. c. achievability. d. practicality. 54. Alyssa hires Bret to mow Alyssa’s lawn every Friday. Although they do not discuss the terms of payment, after each of the first three Friday mows, Alyssa pays Bret on Saturday. The payment term is a. express. b. implied. c. quasi. d. non-existent. 55. Steel Mill Inc. makes an offer to Tag to enter into a contract to work as a mechanical engineer for a certain salary for one year subject to a five-year renewal based on his performance. Tag accepts the offer. This is a valid contract because it includes a. a price and a subject. b. a duration and a termination. c. an offer and an acceptance. d. specific quality standards. 56. Ocean Inc., a seafood distributor, agrees to buy from Paul, a commercial fisher, any “overstock” of fish that he catches in excess of the legal limit. This agreement is most likely a. enforceable. b. quasi. c. void. d. voidable. 57. Cheri drives into Domestic Auto Service and asks to have a tire replaced on her car. Domestic replaces the tire. Before Cheri pays for it, any contract between them is a. executed. b. executory. c. void. d. unenforceable.

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Chap 11_15e 58. On behalf of the jazz group Fusion, their manager Gabe agrees to a performance in Hilltop Amphitheatre on July 4. Gabe and Hilltop sign a written copy of the agreement. These parties have a. an express contract. b. an implied contract. c. a quasi contract. d. no contract. 59. Without a legal framework of reasonably assured expectations within which to make plans, businesspersons would most reliably be able to count only on others’ a. moral standards. b. empathy. c. good faith. d. innocence. 60. When price changes make performance of a contract costly, compliance with the terms may most certainly be obtained through a. the adversely affected party’s sense of duty. b. both parties’ good faith. c. the principles of contract law. d. the innocent party’s sense of rightness. 61. A letter-of-credit agreement between Rural Grain Corporation and Soy Farm Inc. requires Rural’s bank to pay Soy on receipt of invoices. This is a. a formal contract. b. an informal contract. c. an implied contract. d. a quasi contract. 62. Red offers to pay Sari to deliver certain documents within thirty minutes. Sari can accept the offer only by completing the task within the deadline. If she does, Red and Sari will have a. a bilateral contract. b. a unilateral contract. c. a void contract. d. an executive contract. 63. Flo tells Ginger during a phone call that she will buy her textbook from last semester for $65. Ginger agrees. These parties have a. no contract. b. an express contract. c. an implied contract. d. a quasi contract.

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Chap 11_15e 64. Fay offers to pay Grey $50 for a tennis lesson for Hetty. They agree to meet the day after tomorrow to exchange the cash for the lesson. These parties have a. a bilateral contract. b. a third-party contract. c. a unilateral contract. d. no contract. 65. When a storm erupts outside Reba’s Diner, Reba and Shaw quickly enter into an implied contract to split the revenue from Shaw’s sale of umbrellas to Reba’s customers. The terms of this contract are defined by a. the conduct of the parties. b. the written words of the parties. c. the unforeseeable storm that gave rise to the deal. d. the fortuity of the deal’s timing and the parties’ proximity. 66. Promises that are legally binding include a. a promise to take a friend to lunch. b. a promise to pay for items ordered online. c. a promise to watch a certain sporting event. d. all of the choices. 67. Macy offers to sell his fitness watch for $50 to Nona. Nona promises to pay Macy the price. Later, they exchange the watch for the funds. A contract was created when a. Macy offered to sell the watch. b. Macy delivered the watch. c. Nona promised to pay for the watch. d. Nona paid for the watch. 68. Sui enters into a contract with Trey to act as a personal sports trainer. If a dispute later arises over the parties’ promises, the court will interpret the contract according to a. the parties’ intent at the time they entered into the contract. b. what the promisor claims was the parties’ intent. c. what the promisee claims was the parties’ intent. d. what the parties now agree they intended. 69. Sy enters into a contract with Truck Company to work as a driver. If a dispute arises over the deal, under the plain meaning rule, the court cannot consider any evidence not contained in the document if a. the parties’ intent cannot be determined from the contract’s language. b. the contract lacks a provision on a disputed issue. c. the words in the contract appear clear. d. a contract term can be interpreted in more than one way.

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Chap 11_15e 70. Vicky asks Walt, a cobbler, to repair a pair of boots. There is no discussion of a price, and Vicky and Walt do not sign any documents. After the repair, Walt hands Vicky a bill. With respect to Vicky’s obligation to pay the bill, this is a. an express contract. b. an implied contract. c. a quasi contract. d. no contract. 71. Laz is a friend of Maya, the owner of Nuevo Dias, a coffee kiosk. Every day, Laz spends five minutes at the kiosk, looking at the goods and usually buying one or two cinnamon buns or bagels. One morning, Laz looks at the items, and picks up a one-dollar donut. He waves the donut at Maya without saying a word and walks on. Is there a contract? If so, how would it be classified in terms of formation, performance, and enforceability?

72. On May 1, Bok and Che orally agree that Che will guide a party from the base of Mount Denai to its summit and from the summit to a return to the base. Under the agreement, Bok will pay for the service after the completion of the climb on July 31. On May 1, is this contract express or implied? On July 31, after the climb has been made but before payment is paid, is the contract executed or executory?

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Chap 11_15e Answer Key 1. False 2. True 3. False 4. False 5. False 6. False 7. False 8. False 9. True 10. False 11. True 12. True 13. False 14. False 15. True 16. True 17. False 18. False 19. False 20. True 21. True 22. True 23. True 24. True 25. False 26. False

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Chap 11_15e 27. False 28. True 29. True 30. True 31. False 32. False 33. False 34. True 35. False 36. a 37. d 38. b 39. b 40. c 41. b 42. a 43. b 44. a 45. a 46. a 47. d 48. a 49. c 50. a 51. b 52. b 53. a 54. b Copyright Cengage Learning. Powered by Cognero.

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Chap 11_15e 55. c 56. c 57. b 58. a 59. c 60. c 61. a 62. b 63. b 64. a 65. a 66. b 67. c 68. a 69. c 70. b 71. The facts presented here indicate the presence of all the elements necessary for a valid contract. A serious offer and acceptance are made, consideration is exchanged (a donut for one dollar), each party has capacity, the selling of the items is legal, and no particular form is required for this type of contract. Thus, a contract exists. For the reasons given here, this contract is classified as valid, enforceable, and informal. In addition, this is a classic case of an implied contract. There is no explicit agreement between the parties. Rather, an agreement is implied by Laz’s action of waving the item and by his past conduct. By his conduct Laz is telling Maya that he will pay for the item later. The contract is also bilateral (as opposed to unilateral) because Maya impliedly promises to sell the item to Laz in exchange for his implied promise to pay. The contract is partially executory, as Laz has engaged to pay for the item in the future. Because the contract is for a legal purpose, both parties have capacity, and voluntariness of consent is not an issue, the contract is neither voidable nor void. 72. An express contract is one in which the terms are fully expressed, either in writing or orally. An implied contract is defined by the conduct of the parties, not their words. The contract between Bok and Che is an oral contract, in which the terms are fully expressed. That means their contract is an express contract. The contract between Bok and Che is an executory contract on May 31. An executed contract is a contract that has been fully performed on both sides. An executory contract is a contract that has not been fully performed. If, as in this problem, one party (Che) has fully performed but the other (Bok) has not—because payment has not yet been made as promised by a certain date—the contract, executed on one side and executory on the other, is classified as executory.

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Chap 12_15e Indicate whether the statement is true or false. 1. Two disinterested parties are required for an offer to be effective. a. True b. False 2. The offeree must accept the offer without adding or changing any terms. a. True b. False 3. A click-on agreement can indicate the acceptance of an online offer. a. True b. False 4. The offeror can revoke the offer only be expressing repudiating it. a. True b. False 5. The power of acceptance continues forever. a. True b. False 6. A request to negotiate is an offer. a. True b. False 7. An agreement to agree to the material terms of a contract at some future date may be enforceable. a. True b. False 8. Rejection of an offer is effective only when it is actually received. a. True b. False 9. Ordinarily, one can agree to a bargain without knowing that it exists. a. True b. False 10. The offeror’s intention to become bound by the offer must be subjectively clear. a. True b. False 11. An expression of opinion can indicate an intent to enter into a binding agreement. a. True b. False

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Chap 12_15e 12. In general, a price list may be construed as an offer. a. True b. False 13. An exchange of e-mails cannot create a complete and unambiguous binding agreement. a. True b. False 14. A offer can be revoked by the performance of an act that is inconsistent with the existence of an offer and that is made known to the offeree. a. True b. False 15. In effect, a counteroffer converts the original offeror into an offeree with the power of acceptance. a. True b. False 16. One element necessary for an effective offer is the offeror’s good faith belief in its reasonableness. a. True b. False 17. An offer must be expressed in plain language to be effective. a. True b. False 18. An offer terminates automatically when the period of time specified in the offer has passed. a. True b. False 19. If the offeror does not expressly specify a certain mode of acceptance, then acceptance can be made by any means, whether or not it is “reasonable.” a. True b. False 20. Shrink-wrap terms are enforceable even if a buyer does not discover them until after the parties have entered into a contract. a. True b. False 21. Merely inquiring about an offer constitutes rejection. a. True b. False 22. Acceptance of an e-contract must show that the offeree voluntarily assented to the offer’s terms. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 12_15e 23. The primary purpose of the Uniform Electronic Transactions Act is to create new rules for electronic contracts. a. True b. False 24. An offer can be accepted by the offeree or any third party. a. True b. False 25. Acceptance is timely if it is effective before the offer is terminated. a. True b. False 26. Acceptance may consist of words or conduct. a. True b. False 27. Because so much e-commerce involves parties in the United States, the preeminence of U.S. law in this area is not likely to be challenged in the future. a. True b. False 28. An invitation to submit bids is an offer. a. True b. False 29. Acceptance of an offer by a method not authorized by the offeror renders the offer invalid. a. True b. False 30. An offer made in undue excitement is an effective offer. a. True b. False 31. An agreement exists when one party offers a certain bargain to another party. a. True b. False 32. Before the UETA applies, each party to a transaction must agree to conduct it by electronic means. a. True b. False 33. A preliminary agreement can constitute a binding contract if the parties have agreed on all essential terms. a. True b. False

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Chap 12_15e 34. An offer must express reasonably definite terms to be effective—no term may be reasonably inferred. a. True b. False 35. Posting an item for sale on an online auction site is an offer to form a contract. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. Rafi offers to sell his sailboat, Sea Siren, to Tara for $50,000. Referring to the prices for similar vessels, Tara says, “I’ll pay no more than $40,000.” Rafi’s offer is a. still open. b. terminated. c. rejected and subject to a counteroffer. d. revoked. 37. Lon says to Misty, “I would like to sell you my sofa.” This statement is a. an offer. b. an invitation to negotiate, not an offer. c. an ad, not an offer. d. a request, not an offer. 38. Glen offers to sell Helen his iPad for $200. Under the mirror image rule, Helen’s response will be considered an acceptance if the terms of the acceptance a. exactly mirror those of the offer. b. change the items offered, but do not change the price. c. change the price, but do not change the items offered. d. change both the price and the items offered. 39. Maeve posts her motorcycle for sale on an online auction site. This is a. an offer. b. an invitation to negotiate, not an offer. c. a price list, not an offer. d. a request, not an offer. 40. Olen decides to sell his ranch, Pine Valley, in a live auction. When the auctioneer puts the property up for bids, it will be a. an offer. b. an invitation to submit offers, not an offer itself. c. a statement of future intent, not an offer. d. a price list, not an offer.

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Chap 12_15e 41. Brie buys a subscription to music provided by Concerto, an online streaming service. Before gaining access, Brie must agree to a provision stating that she will not make and sell copies of the music. This provision is a. a partnering agreement. b. a click-on agreement. c. a shrink-wrap agreement. d. a browse-wrap term. 42. Charter Company offers to provide an air-conditioned bus to Denny’s tour group for $1,500 plus the cost of the fuel. The mailbox rule applies if Denny accepts the offer by a. e-mail. b. phone. c. regular mail. d. any of the choices. 43. Bo admires Cid’s collection of coins. Bo asks, “Will you sell it?” This statement is a. an offer. b. not an offer, because it is an invitation to negotiate. c. not an offer, because it is an expression of intent. d. not an offer, because it is a request. 44. An ad for the New Plays Festival asks playwrights to submit their work and “we might produce it for the world.” Oded submits a play with a note that states, “I accept.” Between the Festival and Oded, there is a. a contract to produce Oded’s play. b. a contract to consider producing Oded’s play. c. a contract to negotiate with Oded to produce the play. d. none of the choices. 45. For a contact to be considered valid and enforceable, the parties to a deal must a. necessarily have it in writing. b. manifest their voluntary consent to the same bargain. c. know with certainty what kinds of promises will be enforced. d. subjectively intend to agree to the terms. 46. The U.S. Department of Justice needs to have construction work done on a federal courthouse. The agency asks contractors to submit bids. This is a. an offer. b. an invitation to submit offers, not an offer itself. c. a catalogue, not an offer. d. a price list, not an offer.

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Chap 12_15e 47. Hometown Bank posts on its website an offer of a reward for information leading to the apprehension of a certain criminal. This offer could normally be terminated by a. a post on the website. b. any of the choices. c. payment of the reward. d. apprehension of the criminal. 48. Rico, an auctioneer, puts a semi-truck and trailer up for auction. Rico is a. the offeror. b. the offeree. c. the bidder. d. none of the choices. 49. For a court to determine if a contract has been breached and to give an appropriate remedy, the offer must include terms that are at least a. accurately precise. b. reasonably definite. c. unequivocally approximate. d. vaguely uncertain. 50. Fresh Agro Inc. offers to deliver produce to Growers’ Market for a certain price. Fresh’s intent to extend an offer is determined by reference to Fresh’s a. market assumptions. b. all of the choices. c. subjective, unexpressed intentions. d. words and actions. 51. Khe says, “I plan to sell my Apple stock.” This is not an offer because a. the statement is not addressed to a specific offeree. b. the offeror has only committed to negotiate the terms in good faith. c. a statement of future intent to do something in the future is not an offer. d. an expression of opinion does not indicate an intent to enter into a deal. 52. Nevin negotiates a deal for the sale of twenty-five acres of farmland to Otis. Nevin promises to hold the offer open in return for a small payment but does not state an exact period of time. With respect to this offer a. the deal is binding except for the promise to hold the offer open. b. a reasonable period of time is implied. c. the offer must be held open for an indefinite period. d. the deal is done.

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Chap 12_15e 53. Rena asks Sully, “Do you want to pay me to repair your forklift?” This is a. an offer. b. not an offer, because the terms are not definite. c. not an offer, because Rena did not express an intent. d. not an offer, because Sully did not respond. 54. Larry advertises a reward for the return of his lost dog. Miguel does not learn of the reward, but finds and returns the dog. With respect to Miguel, Larry’s ad is not an offer because it lacks the element of a. communication. b. definite terms. c. serious intent. d. none of the choices. 55. Vida, a user of phone-app.com’s website, can download apps for free by first clicking on “I accept” after viewing certain terms. This is a. a contract that does not include the terms. b. a contract that includes the terms. c. not a contract but the terms are enforceable. d. unenforceable. 56. Kelly offers to sell a certain used forklift to Lumber Outlet, but Kelly dies before Lumber Outlet accepts. Most likely, Kelly’s death a. does not affect the offer. b. shortens the time of the offer but does not terminate it. c. extends the time of the offer. d. terminates the offer. 57. Coffee Beans Inc. offers to buy Brewing Company’s roasting services for a certain price. Brewing responds that the price is too low and thereby rejects the offer. The offer is a. terminated. b. valid for a reasonable time. c. valid for the period of time prescribed by a state statute. d. valid until Coffee Beans revokes the offer. 58. Gaia tells Franco that she will pay him $50 to haul lawn debris from her property. Franco’s acceptance is complete a. as soon as he says he will do the job. b. once he starts to work. c. only after he hauls away the debris. d. when he hears the offer.

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Chap 12_15e 59. Megan gives out a business card with an e-mail address on it. It is reasonable to infer that Megan has consented to a. transact business electronically. b. submit to the recipient’s jurisdiction. c. respond to e-mail sent to that address. d. nothing. 60. Shipping Corporation enters into contracts with distributors and other buyers in e-commerce and in traditional commerce. Between Shipping and its customers, the UETA applies if the parties agree to conduct transactions by a. electronic means. b. paper documents. c. any of the choices. d. verbal communication. 61. To control specific offers for goods or services and thus the resulting contracts, important terms to provide online include a. a provision relating to the resolution of any dispute. b. a detailed history of the particular business. c. positive reviews from customers or clients. d. an updated list of the goods or services. 62. Pastries Inc. sends Rollo its catalogue showcasing a variety of baked goods for certain prices. This is a. an offer. b. an invitation to negotiate, not an offer. c. an ad, not an offer. d. a request, not an offer. 63. Shep offers to make digital copies of Reliable Company’s business conference videotapes, CDs, DVDs, and other media for $500. Under the mailbox rule, Reliable’s acceptance by e-mail will be considered effective when a. received. b. sent. c. followed up by a confirmation letter sent by regular mail. d. composed on a Reliable computer. 64. Domestic Gas Company offers to sell Energy Ltd. a certain quantity of liquefied natural gas. If Energy sends an acceptance via Domestic’s authorized mode of communication, it will be effective when it is a. in transit. b. received. c. sent. d. written.

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Chap 12_15e 65. Anton tells Brooke, who has no knowledge of Shakespearean comedy, that he will tutor her in the subject for $50. As an offer, this is a. effective. b. not effective because comedy is not a serious subject. c. not effective because Anton’s tutoring will be subjective. d. not effective because Brooke has no knowledge of the subject. 66. Simone offers Tom a dozen guitar lessons for a certain price per lesson but conditions the deal on Tom accepting the offer by April 1. Simone may revoke the offer a. before Tom accepts it. b. before April 1, whether or not Tom has accepted it. c. only after Tom accepts it. d. only after April 1. 67. Global Dispatch Corporation and Heavy Hauling Inc. agree in advance to terms that apply to their future etransactions. This is a. a partnering agreement. b. a click-on agreement. c. a shrink-wrap agreement. d. a browse-wrap term. 68. Fabien offers to sell his Graphic Signs LLC business to Hanna for $100,000. Hanna replies, “The price is too high. I will buy it for $75,000.” Hanna has a. accepted the offer. b. made a counteroffer without rejecting the offer. c. rejected the offer and made a counteroffer. d. rejected the offer without making a counteroffer. 69. Pye tries to start his car with no success. He yells that he will sell the car to anyone for $10. Qua, a passerby, hears Pye’s yell. This is not an effective offer because it lacks a. communication. b. definite terms. c. serious intent. d. practicality. 70. On May 1 Meat Company offers to cure and smoke Natural Farm’s products, and promises to keep the offer open until June 1. On May 3 Meat mails Natural a letter revoking the offer. The farm receives the letter on May 5 and responds on May 6. The company’s revocation of the offer became effective on a. May 3. b. May 5. c. May 6. d. no date because the offer is irrevocable.

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Chap 12_15e 71. Business Software Corporation (BSC) sells business apps—wage, price, and inventory coordinating programs, for example—in different combinations and packages, at different prices, downloadable online. To complete a deal, a purchaser clicks on a button that, with reference to certain terms, states, “I agree.” What is this agreement called? Do the parties have a binding, enforceable contract that includes the terms? Explain.

72. On December 1, Petroleum Inc. sent Quito & Rosa (Q&R) a letter, via overnight delivery, offering to employ Q&R to review Petroleum’s tax situation for the current year for $10,000. In the letter, the company stated that Q&R had ten days to accept. On December 5, Q&R sent an e-mail message that stated, “The price for the tax analysis seems too low. Would you consider paying $15,000?” Petroleum received the message without responding immediately. The next day, Smith & Taylor, a Q&R competitor, offered to conduct the appraisal for $8,000. On learning of this offer, Q&R immediately e-mailed Petroleum, agreeing to do the work for $10,000. Petroleum received this message on December 7. Explain why Q&R and Petroleum do, or do not, have a contract.

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Chap 12_15e Answer Key 1. False 2. True 3. True 4. False 5. False 6. False 7. True 8. True 9. False 10. False 11. False 12. False 13. False 14. True 15. True 16. False 17. False 18. True 19. False 20. False 21. False 22. True 23. False 24. False 25. True 26. True

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Chap 12_15e 27. False 28. False 29. False 30. False 31. False 32. True 33. True 34. False 35. False 36. b 37. b 38. a 39. b 40. b 41. b 42. c 43. d 44. d 45. b 46. b 47. b 48. b 49. b 50. d 51. c 52. b 53. b 54. a Copyright Cengage Learning. Powered by Cognero.

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Chap 12_15e 55. b 56. d 57. a 58. c 59. a 60. a 61. a 62. c 63. b 64. b 65. a 66. a 67. a 68. c 69. c 70. c 71. This is a click-on agreement, which occurs when a buyer, to complete a transaction on a computer, indicates his or her assent to be bound by the terms of an offer by clicking on a button that says, for example, “I assent,” or, in this question, “I agree.” Such an agreement is likely to be enforceable if the party who agreed to the terms had an opportunity to read them before the contract was made (unless the terms are objectionable on grounds that apply to contracts generally). If the terms were not revealed until after the agreement was made, however, they are unlikely to be considered part of the deal. In this question, the parties would probably have a binding contract that includes the terms. The question states that the button referred to the terms, meaning that the buyer knew, or should have known, what he was agreeing to. 72. Q&R and Petroleum have a contract. Q&R effectively accepted Petroleum’s offer to perform a review of the corporation’s tax situation. An attempt to change the terms of an offer rejects that offer, terminates it, and makes a counteroffer. Here, however, the fax did not indicate an intent to reject the offer, and a reasonable person in Petroleum’s position would not conclude that the fax was a rejection. Q&R’s fax was simply an inquiry about the offer. Q&R was still considering the offer. Learning of Smith & Taylor’s offer did not act as a revocation of Petroleum’s offer to Q&R (although the offer would have been revoked if Q&R had accepted Smith & Taylors’s offer, and Q&R had learned of this acceptance). In accepting Petroleum’s offer, Q&R used a medium that was reasonable under the circumstances because Petroleum did not expressly specify any particular method of acceptance. Thus, Q&R’s acceptance was timely sent and received. Consequently, the acceptance was effective on dispatch. Copyright Cengage Learning. Powered by Cognero.

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Chap 13_15e Indicate whether the statement is true or false. 1. To enforce a contractual promise, there must be an exchange of consideration underlying the bargain. a. True b. False 2. A preexisting duty may arise out of a previous contract. a. True b. False 3. A preexisting duty may be imposed by law. a. True b. False 4. If a party is already bound by contract to perform a certain duty, that duty can serve as consideration for a second contract. a. True b. False 5. To apply the doctrine of promissory estoppel in a given situation, there must exist no clear or definite promise. a. True b. False 6. Providing accounting services is “something of legally sufficient value.” a. True b. False 7. Adequacy of consideration refers to “how much” consideration is given. a. True b. False 8. Painting a garage can constitute “something of legally sufficient value.” a. True b. False 9. If a debt is liquidated, an accord and satisfaction cannot take place. a. True b. False 10. A release enables recovery beyond that specified in its terms. a. True b. False 11. The elements of consideration, in a bilateral contract for a sale of goods, are the sale and the goods. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 13_15e 12. With respect to consideration, the application of the rule regarding preexisting duty is meant to prevent extortion. a. True b. False 13. An accord and satisfaction is an agreement in which one party gives up the right to pursue a legal claim against another party. a. True b. False 14. Consideration refers to the objective determination of how much a bargain is worth. a. True b. False 15. Consideration must provide the basis for the bargain struck between contracting parties. a. True b. False 16. A promise is illusory when its performance depends solely on the discretion of the promisor. a. True b. False 17. Normally, a court will evaluate the adequacy of consideration based solely on the comparative value of the things exchanged as part of agreement. a. True b. False 18. Situations in which agreements lack consideration include those involving a preexisting duty. a. True b. False 19. The performance of an action that one is not otherwise obligated to undertake is not legally sufficient consideration. a. True b. False 20. Exceptions to the preexisting duty rule include unforeseen difficulties. a. True b. False 21. To pay on receipt of certain goods is “something of legally sufficient value.” a. True b. False 22. In general, courts question the adequacy of consideration. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 13_15e 23. Consideration refers to one party’s assessment of the other party to a contract. a. True b. False 24. Two parties can mutually agree to rescind a contract only to the extent that it has been executed—otherwise, there is nothing to rescind. a. True b. False 25. Forfeiting a right to sue to recover further damages can constitute consideration. a. True b. False 26. A promise to do something that one has no prior legal duty to do is not legally sufficient consideration. a. True b. False 27. To be legally sufficient, consideration must be something of value in the eyes of the law. a. True b. False 28. With respect to consideration, a bargained-for exchange refers to the location, such as a stock exchange, where the contracting parties negotiated their deal. a. True b. False 29. An option to cancel the performance of a contract before it begins does not make the promise illusory. a. True b. False 30. Shockingly inadequate consideration can indicate fraud in a contract. a. True b. False 31. Exceptions to the preexisting duty rule include rescission. a. True b. False 32. Consideration is the value given in return for a promise or in return or a performance. a. True b. False 33. A promise to pay a previous debt barred by a statute of limitations can be enforced without consideration. a. True b. False

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Chap 13_15e 34. A promise made in return for an act or event that has already taken place is fully enforceable. a. True b. False 35. When the doctrine of promissory estoppel is applied, the promisor is estopped, or barred, from performing the promise. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. Don slips and falls on a patch of ice on Ella’s property. Ella offers Don $10,000 if he promises not to pursue any slip-and-fall legal claim against her. Don agrees, but later discovers that it will cost $40,000 in medical expenses for a latent injury. In Don’s suit against Ella, Don will most likely recover a. $30,000 to pay the costs over what Ella already paid Don. b. nothing. c. the estimated amount to pay the costs and any other liability. d. the exact amount to pay the costs and no more. 37. Buck and Cady are in an auto accident. Buck offers Cady $20,000 for her promise not to pursue a legal claim against him arising out of the accident. Cady agrees. This agreement is a. past consideration. b. an illusory promise. c. a release. d. promissory estoppel. 38. Holes Inc. begins digging a foundation at a construction site for Investment Company under a contract for a certain price. After six months, Holes demands a higher price because of extraordinary difficulties that were totally unforeseen at the time the contract was formed. An agreement to pay the higher price is a. enforceable as the consideration is past. b. enforceable due to unforeseen difficulties. c. unenforceable as an illusory promise. d. unenforceable due to the preexisting duty rule. 39. Fritz offers to buy a guitar owned by Holle for twice what she paid for it. She accepts and hands the guitar to Fritz. Holle’s delivery of the guitar is a. not consideration because its adequacy is unfair. b. not consideration because the exchange is not a bargain. c. consideration. d. not consideration because the value is not legally sufficient.

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Chap 13_15e 40. EcoEnergy LLC files a suit against Fiber Optics Inc., claiming that the consideration for their contract is inadequate—that the plaintiff will not realize sufficient financial benefit from the deal to make it worthwhile. Most likely, the court will a. evaluate the fairness of the bargain. b. ask “how much” consideration was given. c. not question the adequacy of consideration. d. not determine whether consideration was exchanged. 41. Jen promises to pay Kam $500 because “she does not have as much money as other people.” Jen’s promise is a. enforceable because society wants people to keep their promises. b. enforceable because the redistribution of wealth is a valid social goal. c. not enforceable because Jen could have paid Kam more. d. not enforceable because Kam has not given consideration in return. 42. Ann’s Sandwich Shop and Bob’s Coffee Bar are adjacent businesses. Ann, whose small shop has little room for her customers to sit, offers Bob a discount on purchases if he will allow her customers to sit at the tables on the sidewalk in front of his store. Bob’s forbearance from asking Ann’s customers not to use his tables is legally sufficient consideration a. because Bob has a legal right to restrict the use of his tables. b. because Ann’s customers will undoubtedly use Bob’s tables. c. because Ann’s small shop has little room for her customers to sit. d. under no circumstances. 43. Marketing Solutions Inc. promises to employ Niki as a software engineer. In reliance on the promise, Niki quits her job with Online Ad Agency, but Marketing Solutions does not hire her. Most likely, Marketing Solutions is a. liable to Niki under the concept of rescission. b. liable to Niki under the doctrine of promissory estoppel. c. liable to Niki under the preexisting duty rule. d. not liable to Niki. 44. Kris buys Liz’s house for $300,000, which is the fair market value of the house. If the contract is later disputed in court, the court is likely to declare Kris’s consideration a. inadequate. b. past. c. legally sufficient. d. illusory. 45. Maria is the sheriff of Narez, Texas. Oscar robs a Narez gas station and a $500 reward is offered for his capture. When, later, Maria finds and arrests him, with respect to the reward, she can a. collect it. b. not collect it because she had a preexisting duty to capture Oscar. c. not collect it because it is not legally sufficient consideration. d. not collect it because it is an illusory promise.

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Chap 13_15e 46. While sailboarding, Jolie is injured when Kirby carelessly crosses her path. Kirby’s insurance company offers Jolie $50,000 to release Kirby from liability, and she accepts. Later, she learns that her injuries are more serious than she realized. The release is a. enforceable. b. unenforceable because Jolie’s injuries are unforeseeably difficult. c. unenforceable because Kirby has a preexisting duty to pay. d. unenforceable because the release is an illusory promise. 47. Sports Bar and Tasty Tacos are adjacent businesses with adjoining parking lots. Sports Bar offers Tasty a discount on purchases if the restaurant will not tow the cars of Sports Bar’s patrons who park in the restaurant’s lot. The discount is legally sufficient consideration a. because it is a promise of something of value. b. because on acceptance, it will become a preexisting duty. c. because the offeror considers it to be adequate. d. under no circumstances. 48. Ros contracts with Spicy Pizza to deliver its products. After the deal has been partially performed, both parties inform each other that they would like to cancel the contract. Ros and Spicy may rescind a. their entire contract. b. their contract to the extent that it is executory. c. none of their contract. d. their contract to the extent that it has been executed. 49. Onsite Restoration Inc. begins renovating houses for Property Company under a contract for a stated amount per house. After six months, Onsite demands an extra $20,000 per house, stating no reason for the extra $20,000, but asserting that it will stop work if it is not paid. The agreement is a. enforceable as the consideration is past. b. enforceable due to unforeseen difficulties. c. unenforceable as an illusory promise. d. unenforceable due to the preexisting duty rule. 50. Cindy, a real estate agent, sells her friend Doug’s house without charging a commission. In return, Doug promises to give Cindy $1,000. This promise is not an enforceable contract because a. the house has already been sold—the consideration is past. b. selling the house was the agent’s preexisting duty. c. selling the house was a foreseen difficulty. d. the promise of a payment of $1,000 is illusory. 51. Etan is indebted to Finance Credit Corporation for $100,000. Etan agrees to pay, and Finance Credit agrees to accept, a lesser amount than the creditor originally claimed was owed. This agreement is a. an accord. b. a release. c. a satisfaction. d. an illusory promise. Copyright Cengage Learning. Powered by Cognero.

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Chap 13_15e 52. Kim promises to pay Leo $500 to install a sump pump in Kim’s warehouse. Leo completes the installation. The act of installing the pump a. imposes a moral obligation on Kim to pay Leo. b. imposes no obligation on Kim unless she is satisfied with the job. c. is not sufficient consideration because it is not goods or money. d. is the consideration that creates Kim’s obligation to pay Leo. 53. National Trucking Company begins transporting crude for Oil Inc. under a contract for a stated amount per load. After six months, National demands an increase in the stated amount because ordinary business expenses have increased. Oil’s agreement to pay the increased amount is a. enforceable as the consideration is past. b. enforceable due to unforeseen difficulties. c. unenforceable as an illusory promise. d. unenforceable due to the preexisting duty rule. 54. Si promises to pay his personal assistant Tery $50,000 in consideration of the services she provided over the years. Si never makes the payment. Si’s promise is a. enforceable for the entire $50,000. b. enforceable to the extent of what Tery’s services were actually worth. c. not enforceable because the consideration is in the past. d. not enforceable because the failure to pay is an unforeseen difficulty. 55. Under a contract with Soy Farms, Tai begins grading a terraced hillside for planting. Halfway through the project, Tai asks for $5,000 over the contract price, claiming an increase in the “cost of doing business.” The farm agrees but later refuses to pay. The agreement to pay more is a. unenforceable because Tai’s performance was a preexisting duty. b. unenforceable because the farm’s promise was illusory. c. enforceable. d. unenforceable because Tai’s request modified the contract. 56. Bistro Caterers contracts with Corporate Towers to cater the firm’s business meetings. Later, the contract between Bistro and Corporate is completely rescinded. Even later, Bistro offers to make a new deal. Corporate is willing to deal, but for a new price. Bistro and Corporate a. may agree to a new contract, but it cannot include a new price. b. may agree to a new contract that includes the new price. c. must perform their original contract. d. must perform the part of their original contract that is executory.

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Chap 13_15e 57. Molly’s motorcycle is damaged in an accident caused by Luc’s negligence. Luc agrees to pay Molly $25,000 if she agrees to release him from further liability. Molly agrees. If Molly’s damages ultimately exceed $25,000, she can a. recover the balance for lack of consideration. b. recover the balance because the consideration was past. c. recover the balance due to unforeseen events. d. not recover the balance. 58. Expo Center Inc. and Festival Music LLC have an executory contract. They agree to rescind it and simultaneously enter into a new contract. If the previous contract was subject to a preexisting duty, the new contract will most likely be a. invalid. b. enforceable. c. valid. d. voidable. 59. A fire threatens to engulf a commercial building in Middletown. The building’s owner promises a cash reward to the Middletown Fire Department to extinguish the blaze. The firefighters cannot claim the reward because a. extinguishing the fire is the firefighters’ preexisting duty. b. extinguishing the fire represents past consideration. c. extinguishing the fire is a foreseen difficulty. d. the promise of a cash reward is illusory. 60. Recovery of Bud’s debt to Credit Corporation is barred by a statute of limitations when Bud makes a partial payment. The creditor a. needs new consideration to recover more than the partial payment. b. can sue to recover the entire debt without consideration. c. is estopped from asserting a right to recoup the rest of the debt. d. can obtain no more on the debt due to the statute of limitations. 61. Cloud Storage Inc. promises to pay its employees a year-end bonus “if profits continue to be high and management agrees at the time.” This is a. an enforceable contract. b. an illusory promise. c. accord and satisfaction. d. past consideration. 62. Sol offers Tiff $1,000 for her collection of rare coins. She accepts. If a dispute arises, a court would likely a. enforce the deal after questioning the adequacy of consideration. b. not question the adequacy of the consideration. c. rewrite the deal after questioning the adequacy of consideration. d. set aside the deal after questioning the adequacy of consideration.

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Chap 13_15e 63. Raj defends against a breach-of-contract suit by Student Loan Corporation by claiming that their deal—a student loan—was unfair because the consideration for the contract was inadequate. With respect to Raj’s defense, the court will most likely rule in favor of the lender on the ground that a. Raj promised to do something that he had no prior legal duty to do. b. Raj performed an act that he was not otherwise obligated to undertake. c. Raj refrained from an act that he had a legal right to undertake. d. the adequacy of the consideration is not for the court to determine. 64. Apps Inc. promises to give stock options to Belden, a creative coder, for processes he has already designed. This promise is a. enforceable because it is a new contract. b. enforceable because it is an illusory promise. c. enforceable because it is supported by past consideration. d. unenforceable. 65. Dore’s Aunt Em tells her, “If I feel you deserve it at the time, I will give you a new car when you graduate from college.” Em’s promise is a. illusory. b. enforceable. c. a forbearance. d. a preexisting duty. 66. Rory questions whether there is consideration for his contract with Silver Spurs Club to exchange his performance of country music on certain dates for Silver’s payment of a certain amount. To constitute consideration, the value of whatever is exchanged must be a. objectively worthy. b. precisely adequate. c. legally sufficient. d. practically sound. 67. Adequacy of consideration refers to a. “how much” consideration is given. b. legally sufficient value in the eyes of the law. c. the intangible value to a contracting party of a thing exchanged. d. the substantiality of the consideration exchanged. 68. Key promises to pay Liv, his niece, $5,000 if she obtains her degree at Metro College, where she is in her third year. Liv graduates. Key must pay because a. Liv was already enrolled at Metro. b. obtaining a degree benefits Liv. c. a job can be hard to find after college. d. Liv obtained a degree at Metro.

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Chap 13_15e 69. Gwen is indebted to Home Loan Company for $75,000. Gwen agrees to pay, and Home Loan agrees to accept, a lesser amount than the lender originally claimed was owed. The performance of this agreement is a. an accord. b. a release. c. a satisfaction. d. an illusory promise. 70. To constitute consideration, there must be a. a payment. b. a performance. c. a bargained-for exchange. d. serious thought underlying each party’s intent to contract. 71. Dean, the president of Billing & Credit Company, promises to pay his employee Ewing, who is dangerously obese, $10 for every pound that he loses within the next two years. Ewing agrees, diets and exercises, loses 154 pounds, and asks Dean for $1,540. Dean refuses to pay, saying that he does not remember the promise, but that even if he did make it, there was no consideration, and Ewing’s improved health is a sufficient benefit for his effort and sacrifice. Ewing files a suit against Dean. In whose favor is the court likely to rule, and why?

72. Centre City Properties, Inc., owns and manages a warehouse. DIY Home Improvement Stores agrees to lease the warehouse for six years. Under the lease, DIY is obligated to pay all of the utility costs. Two years into the term, DIY asks Centre City to modify the lease to provide that the utility costs will be split equally between them. The landlord agrees, but later decides it does not want to share the costs and refuses to pay. Is Centre City bound to its agreement to share the utility costs? Why or why not?

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Chap 13_15e Answer Key 1. True 2. True 3. True 4. False 5. False 6. True 7. True 8. True 9. True 10. False 11. False 12. True 13. False 14. False 15. True 16. True 17. False 18. True 19. False 20. True 21. True 22. False 23. False 24. True 25. True 26. False

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Chap 13_15e 27. True 28. False 29. False 30. True 31. True 32. True 33. True 34. False 35. False 36. b 37. c 38. b 39. c 40. c 41. d 42. a 43. b 44. c 45. b 46. a 47. a 48. b 49. d 50. a 51. a 52. d 53. d 54. c Copyright Cengage Learning. Powered by Cognero.

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Chap 13_15e 55. a 56. b 57. d 58. a 59. a 60. b 61. b 62. b 63. d 64. d 65. a 66. c 67. a 68. d 69. c 70. c 71. A court is most likely to rule against Dean and in favor of Ewing. Generally, a waiver of a legal right in this case, the right to eat to obesity at the request of another party is sufficient consideration to support a promise. Here, Ewing provided legally sufficient consideration by losing 154 pounds in weight over the stipulated two-year period. The promise in the question was the payment of $10 for every pound lost. It does not matter that the performance—the loss of weight—also benefited Ewing. 72. Centre City Properties, Inc., the landlord, is not bound to its agreement to share utility costs with DIY Home Improvement Stores, its tenant. Under the preexisting duty rule, a promise to do what one already has a legal duty to do does not constitute legally sufficient consideration. The preexisting legal duty may arise out of a previous contract. And if a party is already bound by contract to perform a certain duty, that duty cannot serve as consideration for a second contract. Thus, a modification of a contract requires consideration to be binding. In this question, the agreement to split the utility costs was a modification of the original terms of the parties’ lease. Centre City is not bound because the landlord did not receive any consideration in exchange for the agreement to split the utility costs.

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Chap 14_15e Indicate whether the statement is true or false. 1. A lender who makes a loan at an interest rate above the lawful maximum commits usury. a. True b. False 2. A contract provision that deprives one party of the benefits of the agreement may seem unfair but a court is not likely to consider it unconscionable. a. True b. False 3. A contract to do something that is prohibited by statutory law is void from the outset. a. True b. False 4. The performance of a contract cannot be rendered illegal by a statute after the parties have already entered into the contract. a. True b. False 5. Any contract entered into with an unlicensed party is enforceable. a. True b. False 6. A contract entered into by an intoxicated person can be voidable. a. True b. False 7. Restraints of trade interfere with free competition. a. True b. False 8. A court usually will enforce a covenant not to compete provided its restrictions are reasonable. a. True b. False 9. The lack of a license in certain occupations bars the enforcement of work-related contracts. a. True b. False 10. The general rule is that any party to an illegal contract can recover for performance rendered. a. True b. False

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Chap 14_15e 11. Contracts entered into by mentally incompetent persons may be disaffirmed. a. True b. False 12. The contracts entered into by a minor are voidable at the option of that minor. a. True b. False 13. To disaffirm a contract is to deny its existence. a. True b. False 14. A landlord can avoid liability for injuries that occur on rental property by including an exculpatory clause in the lease. a. True b. False 15. A minor can enter into any contract an adult can, without exception. a. True b. False 16. Contracts entered into by mentally incompetent persons are not valid under any circumstances. a. True b. False 17. When a covenant not to compete is unreasonable in its essential terms, a court will refuse to reform the covenant. a. True b. False 18. A promise to refrain from competing in business with another is considered to be unconscionable. a. True b. False 19. The general rule is that no party to an illegal contract can sue for breach. a. True b. False 20. All persons can make legally binding contracts in all situations. a. True b. False 21. A party to a contract who has no reason to know that the contract is illegal can often obtain restitution on a partially executed contract. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 14_15e 22. A party may have the capacity to enter into a valid contract and the right to avoid liability under it. a. True b. False 23. Generally neither party to an illegal contract can sue for breach. a. True b. False 24. An unconscionable contract is one in which the terms of the agreement are oppressive, unscrupulous, or grossly unfair. a. True b. False 25. If intoxication is purely voluntary, the intoxicated person’s contracts are not voidable. a. True b. False 26. A minor can ratify a contract and thus make it enforceable. a. True b. False 27. A contract to do something that is prohibited by statutory law is illegal but not void from the outset. a. True b. False 28. If an illegal contract is executory, either party can enforce it. a. True b. False 29. If a person was sufficiently intoxicated to lack mental capacity, his or her contracts are void. a. True b. False 30. Goods and services that are reasonably needed to maintain a minor’s standard of living, such as food, clothing, shelter, and medical services, are known as utilities. a. True b. False 31. Contracts in restraint of trade always violate one or more federal or state statutes. a. True b. False 32. A contract clause that releases an employer from liability for any injury to an employee, no matter who is at fault, is generally enforceable. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 14_15e 33. Generally, any party to an illegal contract can recover for performance rendered. a. True b. False 34. A minor can disaffirm a contract at any time but remains legally obligated to perform it. a. True b. False 35. A contract that calls for an action contrary to public policy is illegal but not unenforceable. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. Cass agrees to sell her Daily Donut shop to Ernie. In the agreement, there is a covenant not to compete that prohibits Cass from operating a donut shop within a certain distance. If the restriction is unreasonable, a court will most likely a. award Cass damages. b. order Ernie to stop doing business. c. reform the covenant. d. prohibit both parties from operating donut shops. 37. At Mattress Store, Nate signs a contract to buy bedroom furniture. The contract sets a schedule of $500 monthly payments, subject to a late fee of 150 percent. Nate finds the language of the contract difficult to understand. This is most likely a. an exculpatory contract. b. procedural unconscionability. c. substantive unconscionability. d. an enforceable contract. 38. In determining procedural unconscionability, a court is most likely to consider whether a. none of the choices. b. any provision left one party without a remedy for nonperformance. c. any provision deprived one party of the benefits of the agreement. d. the buyer had an opportunity to ask questions about the contract. 39. A lease between Mia and Niles for residential property contains an exculpatory clause. This clause is most likely a. enforceable as a matter of public policy. b. enforceable if either party is in a business important to the public. c. enforceable if an event occurs to which the clause applies. d. unenforceable.

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Chap 14_15e 40. Ada agrees in writing to pay Bob to damage Ada’s car, which is fully insured. Bob damages the car, but Ada’s insurer refuses to pay for the damage. In Ada and Bob’s suit against each other for breach of contract, the court is most likely to a. enforce the contract. b. allow Ada to recover. c. allow Bob to recover. d. none of the choices. 41. Jac enters into a contract with Knut, an unlicensed contractor. This contract may be enforceable if a. the statute’s purpose is to protect the public from unauthorized practitioners. b. the lack of a license in Knut’s occupation bars the enforcement of work-related contracts. c. the statute expressly affirms the barring of a contract’s enforceability. d. the statute does not expressly affirm the barring of a contract’s enforceability. 42. Von, a minor, wants to return a set of skis that he bought from Winter Sports. He used—and wrecked—the skis. In a state in which a duty of restitution is imposed, Von most likely a. can return the skis “as is” and avoid further liability. b. is not required to return the skis due to his or her minority. c. must return the skis and pay for the damage. d. cannot return the skis unless they can be fully restored. 43. Intoxicated, Obo enters a contract for the sale of his business, Precision Parts, to Quad for less than its market value. This contract is voidable if, at the time, a. Obo’s intoxication was purely voluntary. b. Quad fraudulently induced Obo to become intoxicated. c. Quad was also intoxicated. d. Obo understood the legal consequences. 44. Intoxicated, Hans enters a contract for the sale of ten acres of timberland to Ira for less than its market value. Later, Hans seeks to cancel the deal. In determining whether Hans can avoid his duties under the contract, a court is most likely to look at a. only Hans’s intoxicated mental state. b. only factors other than the Hans’s intoxicated mental state. c. Hans’s intoxicated mental state and other factors. d. none of the choices. 45. Through fraudulent means, Duke induces Emma to sign a contract to invest with him the profits from her business. When Emma learns the truth, she may a. withdraw from the deal. b. recover what she invested. c. enforce the contract. d. any of the choices.

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Chap 14_15e 46. Lazlo and Mac bet illegally on the outcome of a sporting event. Before the event is held, Lazlo changes his mind about the wager. Lazlo can a. not withdraw from the deal without Mac’s consent. b. not withdraw from the deal under any circumstances. c. withdraw from the deal by giving notice. d. not withdraw from the deal without paying Mac’s expenses. 47. A contract to do something that is prohibited by statute is a. enforceable if the parties are aware of the prohibition. b. enforceable if the parties are ignorant of the prohibition. c. enforceable if the contract does not negatively affect society. d. unenforceable. 48. Foy, a minor, misrepresents his age when entering into a contract to buy a car from Gas Hogs Inc. Foy takes possession of the car, but makes no payments on the contract and tries to disaffirm it. Most likely, Gas Hogs can recover a. an amount equal to the wholesale value of the car. b. the car, but not any of the balance due on the contract. c. the balance due on the contract. d. nothing. 49. The purpose of the right to disaffirm a contract is to a. recognize the legitimate interests of those who contract with minors. b. protect minors. c. restore persons to positions they held before contracting. d. ratify a contract and make it enforceable. 50. Oscar owns Payroll Company, a bookkeeping service. Oscar pays Remy $5,000 to steal a list of a competitor’s clients. This deal is a. enforceable. b. void. c. voidable at the option of either party. d. voidable at the option of the party having less bargaining power. 51. Quest enters into a contract to buy a thoroughbred from Rancho Mesa. Quest can disaffirm the contract a. only by words. b. only by conduct. c. by words or conduct. d. none of the choices.

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Chap 14_15e 52. Evelyn is a minor. As a minor, she a. is not usually legally bound by a contract. b. has the right to avoid liability under a valid contract. c. has the capacity to enter into a valid contract. d. all of the choices. 53. Reed agrees to sell his Sports Equipment store to Taylor. As part of the sale, Reed promises not to open a similar, competing store anywhere. This promise is most likely a. invalid because it is part of a sale of an ongoing business. b. invalid because of the unreasonable terms of area and time. c. valid because it is part of a sale of an ongoing business. d. valid if both parties are justifiably ignorant of the facts. 54. Opal is a minor. In at least some states, Opal can enter into a legally binding contract when she a. reaches the age of majority. b. gets married. c. is emancipated from her parents. d. all of the choices. 55. Fagin and Gretel agree to hijack a truck carrying a load of almonds. If Fagin later refuses to go through with the crime, Gretel can a. enforce the agreement. b. obtain damages in the amount of her partner’s share of the illegal profits. c. obtain damages in the amount of her own share of the illegal profits. d. none of the choices. 56. Bern, a minor, signs a contract to buy a Caterwauler jet boat from Dahl, an adult. Dahl a. can avoid the contract without Bern’s consent. b. cannot avoid the contract. c. can avoid as much of the contract as Bern elects to avoid. d. must obtain Bern’s consent to avoid the contract. 57. Bianca, a minor, enters into a contract to buy two all-season passes from Chalet Ski Park. The contract will be made enforceable if Bianca a. ratifies it. b. disaffirms it. c. nullifies it. d. voids it.

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Chap 14_15e 58. Owen, the owner of Parts Company, pays Quint to obtain a competitor’s design patent. Quint keeps the money but does not deliver. Owen can a. none of the choices. b. recover from Quint. c. enforce the contract with Quint. d. recover from the competitor. 59. Les, a minor, enters into a contract to buy a dirt bike from Motocross LLC. Les can ordinarily disaffirm the contract a. in a timely manner. b. at any time during minority. c. for a reasonable time after coming of age. d. all of the choices. 60. Horse racing, video poker games, and charity-sponsored bingo are a. forms of gambling not allowed or regulated by any state. b. forms of gambling allowed and regulated by many states. c. forms of gambling allowed and regulated by all states. d. not forms of gambling. 61. Deb is a minor. She can enter into any contract an adult can, provided a. the adult is willing to enter into contracts with minors. b. Deb is willing to disaffirm the contract. c. the contract is not one prohibited by law for minors. d. an adult is willing to ratify the contract. 62. The state of Nevada enacts a usury statute. With respect to different types of transactions, including ordinary loans, the purpose of the statute is to a. set a maximum rate of interest. b. regulate certain forms of gambling. c. specify clauses that must be included in certain contracts. d. prohibit certain contracts based on their subject matter. 63. Intoxicated, Efron enters a contract for the sale of his business, Freight Dispatch, to Gretel for less than its market value. This contract is enforceable if, at the time, a. Efron’s intoxication was purely voluntary. b. Gretel fraudulently induced Efron to become intoxicated. c. Gretel was also intoxicated. d. Efron understood the legal consequences.

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Chap 14_15e 64. Dari, a minor, wants to disaffirm a contract that she entered into with Echo, a cell service company. The law in Dari’s state, as in all states, permits minors to disaffirm a. fully executed contracts only. b. executory contracts only. c. executory and fully executed contracts. d. none of the choices. 65. Gretchen is adjudged by a court to be mentally incompetent. Gretchen a. can enter into a valid contract and cannot avoid liability under it. b. can enter into a valid contract but has the right to avoid liability under it. c. cannot form a legally binding contract with another party. d. is presumed to have contractual capacity. 66. Twig is fifteen. In most states, for contractual purposes, Twig would be considered a minor until she is a. sixteen. b. seventeen. c. eighteen. d. twenty-one. 67. Insurance Company violates a state licensing statute when selling a policy to Jay, in whose state it is not licensed to sell insurance. As a member of the class of persons protected by the statute, Jay can a. none of the choices. b. enforce the policy and recover from the insurer. c. obtain a license to sell insurance and a list of the insurer’s customers. d. collect benefits under the policy immediately. 68. Accepting and giving legal force to an obligation that previously was not enforceable is a. disaffirmance. b. emancipation. c. ratification. d. illegal. 69. Seth is mentally incompetent but has not been adjudged by a court to be incompetent. Seth enters into a contract with Toby for the cleaning and maintenance of Seth’s warehouse. Most likely, the contract is a. voidable if Seth did not comprehend the consequences. b. enforceable if Toby did not know that Seth was mentally incompetent. c. enforceable if the warehouse needs cleaning and maintenance. d. void.

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Chap 14_15e 70. Among the requirements for a valid contract, courts generally presume the existence of a. none of the choices. b. minority. c. mental incompetence. d. contractual capacity. 71. Game Corporation hires Hale, a minor, to create new customized game software for certain clients. Hale signs a contract that requires her to work for Game for eighteen months. Before beginning work, however, Hale tells Game that she will not create new software for Game and that she is going to work for Imagine Inc., a Game competitor. Is Game’s contract with Hale enforceable? Why or why not?

72. Best Products Inc. hires Cole to develop and implement an e-commerce strategy for marketing Best’s products. Cole signs a contract that includes a clause prohibiting him from competing with Best during and after the employment. Before the strategy is implemented, Cole resigns from Best’s employ and opens a business to compete with Best. In Best’s suit against Cole, to determine whether Cole may compete with Best, what is the most important factor the court should consider?

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Chap 14_15e Answer Key 1. True 2. False 3. True 4. False 5. False 6. True 7. True 8. True 9. True 10. False 11. True 12. True 13. False 14. False 15. False 16. False 17. False 18. False 19. True 20. False 21. True 22. True 23. True 24. True 25. False 26. True

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Chap 14_15e 27. False 28. False 29. False 30. False 31. False 32. False 33. False 34. False 35. False 36. c 37. b 38. d 39. d 40. d 41. d 42. c 43. b 44. c 45. d 46. c 47. d 48. c 49. b 50. b 51. c 52. d 53. b 54. d Copyright Cengage Learning. Powered by Cognero.

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Chap 14_15e 55. d 56. b 57. a 58. a 59. d 60. b 61. c 62. a 63. d 64. c 65. c 66. c 67. b 68. c 69. a 70. d 71. The contract is not enforceable. Hale is a minor, so any contract that she enters is voidable by her. In other words, Hale had the option to disaffirm the contract. A contract entered into by a minor can be disaffirmed at any time during minority, or for a reasonable time after the minor comes of age. Hale’s announcement that she would not be bound by the contract was sufficient to disaffirm it. Hale had not received anything under the contract with Game, so there is nothing to return under a duty of restitution. Also, there is no significance to Hale’s agreeing to work for Imagine, Game’s competitor.

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Chap 14_15e 72. In determining whether Cole may compete with Best, the court should consider, most importantly, whether the covenant not to compete is necessary to protect Best’s legitimate business interests. A covenant not to compete can violate the public policy to promote competition in the economy. If so, it would be an unreasonable restraint of trade. To be enforceable, a covenant not to compete should be ancillary to an otherwise enforceable contract, which, in this question, is the employment contract. A covenant not to compete should contain reasonable restrictions in terms of duration and geographic area. The covenant should not unreasonably burden the party who is prohibited from competing. If the restrictions are unreasonable, a court can void or reform the covenant. Whether a party resigns under an employment contract does not affect the enforceability of a covenant not to compete. In this question, the covenant not to compete appears to be unreasonable, and thus it is not likely to be enforced. The covenant does not specify a limit of time—an open, unending period of time would be excessive. In fact, what constitutes a reasonable time period may be shorter in the online environment than in conventional employment contracts because the restrictions apply worldwide. The restriction on competition may be aimed at protecting a legitimate business interest, but this covenant is greater than necessary to protect that interest.

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Chap 15_15e Indicate whether the statement is true or false. 1. In general, a person should not rely on a non-lawyer’s statement about a point of law. a. True b. False 2. Generally, a unilateral mistake does not give the mistaken party any right to relief from the contract. a. True b. False 3. Undue influence can arise from a confidential relationship or a relationship based on trust. a. True b. False 4. A fact that is important and central to the subject matter of a contract is a material fact. a. True b. False 5. Exaggeration is an element of fraud. a. True b. False 6. Because of the potential for punitive damages, plaintiffs often include a claim for fraudulent misrepresentation in their contract disputes. a. True b. False 7. The first element of proving fraud is to show that the innocent party is not easily fooled. a. True b. False 8. Persuasion that induces a person to act according to the will of a dominant party is undue influence. a. True b. False 9. The essential feature of undue influence is that a party being taken advantage of suffers from a mental or physical impairment. a. True b. False 10. If a mistake concerns the quality of the object of the contract, the mistake is one of fact. a. True b. False

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Chap 15_15e 11. A party who can show that he or she did not genuinely agree to the terms of a contract has a defense against its enforcement. a. True b. False 12. Reliance on a misrepresentation is justified even if the innocent party knows the true facts. a. True b. False 13. The party on whom duress is exerted can choose to carry out the contract. a. True b. False 14. An innocent party who does not suffer harm as a result of a misrepresentation can nevertheless collect damages. a. True b. False 15. Forcing a party to enter into a contract under the fear of threats constitutes undue influence. a. True b. False 16. The distinction between “seller’s talk” and facts allows sellers to tout their products and services, thereby creating potential liability for fraud. a. True b. False 17. A bilateral mistake occurs if one party to a contract is mistaken about a material fact and the other party knew or should have known that a mistake was made. a. True b. False 18. Even if the defects on a piece of property are obvious, the buyer can justifiably rely on the seller’s misrepresentations concerning those defects. a. True b. False 19. The party on whom duress is exerted can choose to avoid the entire transaction. a. True b. False 20. Because value is variable, mistakes of value affect the enforceability of contracts. a. True b. False

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Chap 15_15e 21. When both parties to a contract are mistaken about the same material fact, a unilateral mistake has occurred. a. True b. False 22. If contracting parties attach materially different meanings to a contract word or term subject to more than one reasonable interpretation, the contract is void. a. True b. False 23. An otherwise valid contract is enforceable even if the parties have not genuinely agreed to its terms. a. True b. False 24. If a contractor’s bid was significantly low because he or she made a mistake in adding up the total estimated costs, any contract resulting from the bid is still normally enforceable. a. True b. False 25. Only a mistake of value or quality makes a contract voidable. a. True b. False 26. For purposes of fraudulent misrepresentation, scienter clearly exists if a party asserting a fact knows it is not as stated. a. True b. False 27. One type of bilateral mistake can occur when a word or term in a contract is subject to more than one reasonable interpretation. a. True b. False 28. Ordinarily, every party to a contract has a duty to come forward and disclose facts. a. True b. False 29. Consent to the terms of a contract is voluntary even if one of the parties is forced into the agreement. a. True b. False 30. Each party to a contract assumes the risk that the value of the object of the deal will change in the future. a. True b. False

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Chap 15_15e 31. Generally, a contract will be set aside because certain pertinent information is not volunteered. a. True b. False 32. Voluntary consent to a contract is not lacking if one of the parties is mistaken about an important fact concerning the subject matter of the bargain. a. True b. False 33. In the context of fraudulent misrepresentation, an opinion is objective and verifiable, whereas a fact is subject to debate. a. True b. False 34. Misrepresentation of law does not ordinarily entitle a party to avoid a contract. a. True b. False 35. The presence of fraud does not affect the authenticity of the innocent party’s consent to a contract. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. Ray, an employee of Shipping Company, makes a substantial mathematical mistake in totaling estimated transportation costs for Tonnage Inc., which is seeking bids. Consequently, Shipping’s bid is substantially low. Any contract with Tonnage that includes the mistake may be rescinded a. if the mistake was made inadvertently and without gross negligence. b. if the mistake was intentional. c. if the mistake was unilateral. d. under no circumstances. 37. Alvin induces Beth to enter into a contract for the purchase of a Chef’s Burger restaurant. Alvin knowingly misrepresents a number of material features about the restaurant and the business. When Beth discovers the truth, she can rescind the contract on the basis of a. fraudulent misrepresentation. b. undue influence. c. mistake. d. none of the choices.

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Chap 15_15e 38. Ked, a real estate agent, assures Lida that a certain parcel of commercial property fronts on the most highly trafficked street in Metro City. Lida buys the property and then discovers that the street has no more traffic than any other in its vicinity. Lida may recover damages for a. the city’s undue influence. b. the agent’s fraudulent misrepresentation. c. the buyer’s mistake. d. none of the choices. 39. County Title Company processes information furnished by others to transfer title to real estate from Dali to Ezra. The furnished information is mistaken. The contract between Dali and Ezra may be rescinded because the mistake a. may be rescinded because the mistake is about a material fact. b. may be rescinded if the mistake is subject to only one interpretation. c. none of the choices d. may be rescinded because the mistake affects a third party. 40. Ned threatens physical harm to force Omar to pay for “protecting” Omar’s restaurant, Pasta Plates, from vandalism. Most likely, Omar may a. rescind the contract or refuse to comply with its terms. b. do nothing once he has agreed to pay. c. recover from his insurer for the cost. d. recover from the local police for their failure to protect his restaurant. 41. Open Range agrees to sell Pinewood Ranch a remote parcel of land for $15,000. Both parties believe the land to be worthless, but beneath it is shale rock containing oil. A court would a. not rescind the contract. b. rescind the contract on the basis of a mistake of quality. c. rescind the contract on the basis of a mistake of value. d. rescind the contract on the basis of a mistake of opinion. 42. Car Lot’s salesperson Dirk offers to sell Espy, who is twenty years old, a car. Dirk intentionally misrepresents the vehicle’s use and repairs. In reliance, Espy buys the car. To prove fraud, Espy does not have to show that a. Dirk intentionally deceived Espy. b. Dirk misrepresented material facts. c. Espy is under twenty-one. d. Espy justifiably relied on Dirk’s misrepresentation. 43. In selling a 300-acre tract to Organic Farm, Peyton tells the buyer that the land “will be worth twice as much by next year.” This statement is not likely to support rescission of the contract because it is a. a material fact. b. a misrepresentation. c. a mistake. d. an opinion.

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Chap 15_15e 44. Fra enters into a contract with Global Shipping Ltd. to insure and ship a painting from Holland to the United States for a certain price. Global makes a mistake in adding the costs, which results in a contract price that is $1,000 less than the true cost. Most likely, a court would a. allow the parties to rescind the contract. b. award damages to Fra for the mistake. c. award damages to Global for the mistake. d. enforce the contract as is. 45. A contract that includes a bilateral mistake may be rescinded if the mistake involves a. a material fact. b. any fact. c. an opinion. d. none of the choices. 46. Big Dig LLC makes an offer to perform an excavation and related tasks for Commercial Development Corporation, but due to a substantial mathematical mistake, significantly underprices the work. Commercial accepts the offer. Data Big’s best defense against enforcement of the contract is that Commercial knew a. a bilateral mistake supports the cancellation of a contract. b. a mistake of value supports the cancellation of a contract. c. a unilateral mistake supports the cancellation of a contract. d. the price was below the prices of comparable services. 47. Restaurant Food Inc. intends to sell a certain quantity of beef for $1,100. In e-mail, however, the firm’s sales representative mistakenly offers to sell the beef to Steak House for $1,000, Steak’s manager immediately accepts. The seller a. is bound to the deal at the offered price. b. can rescind the deal. c. is bound to the deal but can charge the intended price. d. can rescind the deal and recover damages for the mistake. 48. In entering into a contract with Marc for the sale of a cold storage warehouse, Nan fails to reveal the fact that the freezers do not consistently maintain a proper temperature. Most likely, this is fraudulent misrepresentation if a. Nan is not aware of the fact. b. the fact concerns the value or quality of the freezers. c. the fact is a serious defect known to Nan but not to Marc. d. any of the choices. 49. A misunderstanding concerning a basic assumption on which a contract is made will support the rescission of the deal if the mistake is a. bilateral. b. unilateral. c. lateral. d. any of the choices.

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Chap 15_15e 50. Dana believes that a new phone to be sold by Ear Fruit Inc. will become the most popular phone in the market. Dana enters into a contract to buy 500 shares of Ear Fruit stock, anticipating an increase in its value. The phone does not become popular, and the price of the stock does not rise. Dana can recover a. nothing. b. the amount of the purchase price. c. the amount of the purchase price plus the expected increase. d. the amount of the purchase price plus the unexpected decrease. 51. Dim threatens physical harm to force Eb to sell his Flower Shop to Dim for a below-market price. This is a. duress. b. fraudulent misrepresentation. c. mistake. d. undue influence. 52. Data Inc. offers to provide certain services to Enterprise LLC, but mistakenly transposes some of the digits in the price so that $15,400 appears in the offer as $14,500. Enterprise accepts the written offer. Enterprise’s best argument in favor of enforcement of the contract is a. a bilateral mistake does not afford relief from a contract. b. a mistake of value does not afford relief from a contract. c. a unilateral mistake does not afford relief from a contract. d. the price was below the prices of comparable services. 53. Huey, a tennis pro, convinces Ian, who has no athletic ability, that he has considerable skill and induces him to pay $1,000 for tennis lessons. This is most likely a. fraudulent misrepresentation. b. undue influence. c. mistake. d. none of the choices. 54. Dyan enters into a contract with Eli, who claims to have access to a stock-trading algorithm that will multiply an investment many times over. When the results do not match this claim, Dyan learns that Eli does not have access to the algorithm and files a suit, alleging fraud. Dyan must show harm to a. recover damages. b. rescind the contract. c. undo Eli’s influence. d. punish the defendant. 55. Raoul, who is Stef’s guardian, convinces her to buy a certain parcel of land from Tyrone at a greatly inflated price. Raoul may be liable for a. duress. b. fraudulent misrepresentation. c. mistake. d. undue influence.

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Chap 15_15e 56. Mary owns two all-terrain vehicles (ATVs), worth $1,000 and $500, respectively. Neil enters into a contract to buy “Mary’s ATV” for $750. Mary believes, in good faith, that she is selling the $500 ATV. Neil believes, in good faith, that he is buying the $1,000 ATV. In this situation a. Mary is entitled to $750 for the $500 ATV. b. Neil is entitled to the $1,000 ATV for $750. c. Neil must buy both ATVs for $1,500. d. the contract is not enforceable. 57. Beryl enters into a contract with Clay for a guided tour of Deep Canyon. Clay represents that he is an experienced, knowledgeable guide, when in reality he has never been in the canyon. Most likely, Beryl a. could exert duress to obtain a new guide. b. can rescind the deal based on fraudulent misrepresentation. c. might recover damages for the mistake. d. must comply with the contract because the representation is an opinion. 58. Ewa is induced by her guardian Filo to sign a contract to invest funds in Gold Inc. through Filo’s investment firm. Unknown to Ewa, Filo realizes a commission from the investment. Most likely, Ewa can rescind the contract on the basis of a. duress. b. fraud. c. mistake. d. undue influence. 59. Carlos and David contract for the sale of five hundred head of Carlos’s cattle for $195 per head. Unknown to either party, an unforeseen storm has struck the herd and many of the cattle have died. David is a. entitled to recover the value of the lost cattle. b. not required to pay due to the bilateral mistake. c. not required to pay due to the unilateral mistake. d. required to pay because he assumed the risk the cattle might die. 60. Bram, a salesperson for Cruisin’ Motors, promises Dot a certain car will give her a “smooth ride.” Bram offers a test drive, which Dot declines. She buys the car but soon realizes its suspension is in poor condition. Dot can rescind the contract on the ground of a. the salesperson’s fraudulent misrepresentation. b. the car maker’s undue influence. c. the buyer’s mistake. d. none of the choices.

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Chap 15_15e 61. Fess convinces Gwyn to enter into a contract for the purchase of a Falafel Waffle Food Cart by knowingly misrepresenting a number of material features about the facility and the business. Most likely, Gwyn can rescind the contract on the basis of a. fraudulent misrepresentation. b. negligent misrepresentation. c. innocent misrepresentation. d. none of the choices. 62. Hua applies to Inventory Corporation for a position as a coder. Hua has no training in coding. After Hua is hired, Inventory learns the truth. The employer can rescind the contract on the basis of a. none of the choices. b. fraudulent misrepresentation. c. mistake. d. undue influence. 63. Orin, an employee of Plumbing LLC, makes a substantial mathematical mistake in totaling the estimated costs for a project for which Quality Built Inc. is seeking bids. Consequently, Plumbing’s bid is significantly low. Any contract with Quality Built that includes the mistake may be rescinded a. if Quality Built knew or should have known of the mistake. b. if Orin’s supervisor did not know of the mistake. c. if Plumbing knew or should have known of the mistake. d. under no circumstances. 64. Ralph enters into a contract with Skye to buy her land based on her assertion that the land is open to development. After the sale, Ralph learns that only a small section of the land can be built on. A local law prohibits construction on the rest of the property. Ralph can a. not avoid the contract because persons are assumed to know the law. b. avoid the contract due to a bilateral mistake. c. avoid the contract due to undue influence. d. avoid the contract due to fraud. 65. Denis sells a motorcycle to Elton without disclosing that the odometer, which reads 10,000 miles, was disconnected 100,000 miles ago. Denis is most likely liable for a. fraudulent misrepresentation. b. none of the choices. c. mistake. d. puffery.

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Chap 15_15e 66. Analytics LLC processes misinterpreted data furnished by Botch Services to propose a marketing plan for Clientele Inc. Analytics and Clientele are both ignorant of the mistaken data. Their contract can be rescinded on the basis of a. a bilateral mistake. b. a mistake of quality. c. a unilateral mistake. d. none of the choices. 67. Eugene, an accountant, convinces his client Faye to enter into a contract to invest her savings in Gathering, a non-existent social media site. There is clear and convincing evidence that Faye did not act out of her free will. This is a. fraudulent misrepresentation. b. undue influence. c. mistake. d. duress. 68. At an auction, Ben bids on a 1957 Chevy coupe, believing that it is worth more than the price asked. When the car proves to need more repairs than Ben estimated, and thus is worth less as is, Ben is a. still liable on the bid. b. not liable on the bid because he underestimated the cost of repairs. c. not liable on the bid because the auctioneer misrepresented the value. d. not liable on the bid because the need for repair is not a material fact. 69. Luc, a vehicle dealer, offers to sell Mel a truck and trailer, which Luc claims can haul a certain weight. He knows nothing about the capability of the truck, but it is not as he asserts. Mel buys the truck. On learning the truth, Mel confronts Luc, who says he was not trying to fool Mel—he was only trying to make a sale. This is a. a mistake of value. b. a valid defense to a charge of fraud. c. fraudulent misrepresentation. d. puffery. 70. In selling a vacant building, Riley, a real estate broker, tells Saki that the property has a certain capacity, making it suitable for a nightclub. Riley knows nothing about the capacity of the building, but it is not as he specifies. Saki buys the building. Saki’s best course of action is most likely to a. scam Riley. b. induce Riley to remit to Saki the commission on Riley’s next sale. c. recover damages or rescind the contract to buy the building. d. sabotage Riley’s career with bad publicity.

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Chap 15_15e 71. Nero is an elderly man who lives with his nephew Mervyn. Nero is dependent on Mervyn for support. Mervyn advises Nero to “invest” in Mervyn’s “professional gambling” venture, or Mervyn will no longer support him. Nero liquidates his other investments and signs a contract with Mervyn, to whom Nero gives the funds. Can Nero set aside this contract?

72. Health Source Inc. offers to buy Medico Supplies Corporation. On June 1, Medico gives Health Source copies of Medico’s financial statements for the previous year. The statements show an inventory of $10 million. On June 15, Medico discovers that the previous year’s inventory is overstated by $500,000, but does not inform Health Source. On July 1, Health Source, relying on the financial statements, buys Medico. On July 10, Health Source discovers the inventory overstatement. Can Health Source succeed in a suit against Medico? Explain.

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Chap 15_15e Answer Key 1. True 2. True 3. True 4. True 5. False 6. True 7. False 8. True 9. False 10. False 11. True 12. False 13. True 14. False 15. False 16. False 17. False 18. False 19. True 20. False 21. False 22. False 23. False 24. False 25. False 26. True

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Chap 15_15e 27. True 28. False 29. False 30. True 31. False 32. False 33. False 34. True 35. False 36. a 37. a 38. b 39. a 40. a 41. a 42. c 43. d 44. a 45. a 46. d 47. a 48. c 49. a 50. a 51. a 52. c 53. b 54. a Copyright Cengage Learning. Powered by Cognero.

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Chap 15_15e 55. d 56. d 57. b 58. d 59. b 60. d 61. a 62. b 63. a 64. a 65. a 66. a 67. b 68. a 69. c 70. c 71. This situation describes undue influence, which arises from a relationship in which one party can, through unfair persuasion, influence or overcome the free will of another. Other examples of such relationships include business partners, attorney-client, and doctor-patient. A contract entered into under undue influence lacks voluntary consent and is voidable. In this question, the influence of Evan over Nero is buttressed by Nero’s reliance on Mervyn for support. Nero does not have a claim for duress, but Mervyn’s influence over Nero’s investment decision is an exercise of undue influence. The contract is primarily for the benefit of Mervyn, and Mervyn used unfair persuasion in securing Nero’s funds. Nero can avoid the contract.

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Chap 15_15e 72. Yes, Health Source can succeed in a suit against Medico. The basis for the suit could be fraud because Medico had a duty to disclose that the inventory was overstated as soon as Medico learned of that fact. The elements of an action for fraud are (1) the misrepresentation of a material fact, (2) the intent to deceive, and (3) the innocent party’s justifiable reliance on the misrepresentation. Ordinarily, no party to a contract has a duty to come forward and disclose facts. Each party is responsible for the use of common sense and normal business sense in negotiating a contract. An action for fraud can be based on a failure to disclose material facts when there is a certain relationship between the parties such as between partners in a partnership or when a party could not reasonably discover a fact known to the other party. An action may also be maintained if, as here, a party that misstates a material fact later learns of the misstatement but does not disclose it to the other party. This is misrepresentation by conduct. Here, by providing financial statements, Medico made certain representations. Those representations were false, however, as Medico learned. Medico’s knowledge of the overstated inventory and failure to disclose this to Health Source indicated intent to deceive. Health Source’s reliance on Medico’s statements was reasonable and justifiable.

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Chap 16_15e Indicate whether the statement is true or false. 1. An agreement made before marriage that defines each partner’s interest in the other partner’s property is a collateral promise. a. True b. False 2. To be enforceable, a memorandum evidencing an oral contract must identify the consideration. a. True b. False 3. An oral contract that should be in writing to be enforceable under the Statute of Frauds may be enforceable if it has been partially performed. a. True b. False 4. An oral promise to sell certain real property is enforceable without more, but the actual sale must be in writing to be enforceable. a. True b. False 5. In an effort to prevent fraud, the Statute of Frauds denies enforceability to certain contracts that do not comply with its requirements. a. True b. False 6. Any contract involving consumer goods must be in writing to be enforceable. a. True b. False 7. Parol evidence can be introduced at trial to correct an obvious clerical error in a contract if the error clearly does not represent the parties’ agreement. a. True b. False 8. A contract for the sale of land does not ordinarily include physical objects attached to the real property, such as buildings, fences, and trees. a. True b. False 9. Under the Statute of Frauds, a contract involving an interest in land must be in writing to be enforceable. a. True b. False

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Chap 16_15e 10. A unilateral promise to pay a sum of money or to give property in consideration of a promise to marry must be in writing. a. True b. False 11. To clarify the terms of a written contract, a court will admit any parol evidence. a. True b. False 12. A party’s signature must be at the end of a writing for the writing to constitute an enforceable contract. a. True b. False 13. A promise to pay a primary obligation normally must be in writing to be enforceable. a. True b. False 14. An oral sales contract for goods priced at less than $500 is unenforceable. a. True b. False 15. A memorandum evidencing an oral contract must contain every term of the deal to be enforceable. a. True b. False 16. A contract must be in writing to be enforceable if the contract makes performance possible within any definite period of time. a. True b. False 17. An oral contract for customized goods may be enforced in certain circumstances. a. True b. False 18. Reliance on a certain type of oral contract can be enough to remove it from the Statute of Frauds. a. True b. False 19. An agreement that involves an option to buy real property need not be in writing for the option to be enforced. a. True b. False 20. A contract must be in writing to be enforceable if it cannot by its terms be performed within one year from the day after the contract’s formation. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 16_15e 21. A contract that is oral is always enforceable against a party to the agreement who does not wish to follow through with it. a. True b. False 22. The assumption of direct financial responsibility for a debt does not need to be in writing to be enforceable. a. True b. False 23. A written contract or a written memorandum signed by the party who seeks to enforce it will satisfy the Statute of Frauds. a. True b. False 24. In a dispute regarding an insurance claim, if a term in the written policy is ambiguous, parol evidence is admissible to show the meaning. a. True b. False 25. An agreement subject to the writing requirement must be written on paper. a. True b. False 26. A promise to pay another’s debt only if that party fails to pay does not need to be in writing to be enforceable. a. True b. False 27. The purpose of the Statue of Frauds is to ensure that, for certain types of contracts, there is reliable evidence of the contracts and their terms. a. True b. False 28. To satisfy the UCC’s Statute of Frauds, a writing evidencing a sales contract need only state the price term. a. True b. False 29. A written contract must consist of a single document to constitute an enforceable contract. a. True b. False 30. For a particular contract to fall under the one-year rule, the parties must subjectively believe that its performance is impossible to complete within a year. a. True b. False

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Chap 16_15e 31. A contract must be in writing to be enforceable if its performance is not likely within a year of its formation, even if that performance is possible. a. True b. False 32. Because the Convention on Contracts for the International Sale of Goods incorporates a Statute of Frauds provision, most nations require contracts to meet certain writing requirements to be enforceable. a. True b. False 33. Any confirmation, invoice, sales slip, check, or e-mail may constitute a writing that satisfies the Statute of Frauds. a. True b. False 34. A party who seeks the performance of an oral contract must prove that the contract existed. a. True b. False 35. An oral contract that would otherwise be unenforceable under the Statute of Frauds will not be enforced under the doctrine of promissory estoppel. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. Rough Canyon Adventures Inc. and Swampcraft Inc. enter into an oral contract for Swampcraft’s sale to Rough of five rafts for $2,000 each. Before Rough takes possession of the rafts, this contract is enforceable by a. Swampcraft only. b. Rough only. c. any interested third party, such as a Rough tour guide or client. d. none of the choices. 37. Lew tells a representative of Music Inc. that he will pay for Nora’s trumpet if she does not. Lew does not secure any personal benefit for this promise. This promise is enforceable as a contract a. any of the choices. b. only if Nora agrees to it. c. only if the value of the trumpet is more than $500. d. only if it is in writing. 38. Farah agrees to assume a debt owed by Guitars Inc. to Home Bank. The agreement is not in writing. To be enforceable under the “main purpose” rule, the promise must be for the benefit of a. any third party, such as a Guitars Inc. customer. b. Farah. c. Guitars Inc. d. Home Bank. Copyright Cengage Learning. Powered by Cognero.

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Chap 16_15e 39. Mako and Nico agree to buy and develop certain real estate. The parties intend their written contract to be a final statement of the terms, which are complex, lengthy, and subject to many conditions. This writing is a. a completely integrated contract. b. a partially divisible contract. c. a partially integrated contract. d. a completely severable contract. 40. Builders Corporation files a suit against Concrete Company to enforce a written contract. If the court finds that the parties intended the contract to be the final statement of their agreement, parol evidence can be admitted to prove a. an orally agreed-on condition. b. terms discussed before the contract but not contained in it. c. terms discussed at the time of the contract that contradict the writing. d. nothing. 41. Dick’s Burgers enters into an oral contract with Equipment Warehouse for the purchase of a single-spindle milkshake mixer for $300. Assuming the terms can be proved, the contract is enforceable by a. Dick’s or Equipment. b. the manufacturer of the mixer. c. any third party with a material interest, such as one of Dick’s suppliers. d. none of the choices. 42. Ranchland Properties and Prairie State Investments sign a written contract for a sale of land. In some states, to be enforceable, this contract must include a. a correct title, such as “Land Transfer” or “Real Estate Agreement.” b. a declaration of the contract’s purpose. c. a statement of the source of financing. d. a description of the land. 43. Guardian Security Inc. and Hedge Fund Corporation enter into an oral contract under which Guardian agrees to provide services for Hedge’s offices for as long as needed. This contract may be enforceable by a. Guardian only. b. Hedge only. c. any interested third party, such as one of the firms’ employees. d. either Guardian or Hedge. 44. Real Fries Inc. and Spud Farm discuss periodic deliveries of potatoes. Despite the absence of an invoice or other writing evidencing the terms of a deal, Spud begins to perform, and Real accepts the deliveries but refuses to pay. As a contract, this arrangement is most likely enforceable against a. neither party. b. Spud only. c. Real only. d. Spud and Real, at least to the extent of the performance.

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Chap 16_15e 45. Physicians Clinic orders by phone seven cases of disposable nitrile gloves from Quality Medical Supplies, Inc. After three cases are delivered and accepted, the clinic repudiates the contract. Quality Medical can enforce the contract to a. any extent because the order was placed orally. b. no extent because the order was placed orally. c. the extent of the three accepted boxes. d. the extent of the four undelivered boxes. 46. Representatives of Oil Inc. and Petro Corporation discuss the terms of a contract for shipments of refined oil. Petro e-mails Oil a note that summarizes the points on which they agreed. Between these parties, there is a. an oral contract only. b. a tentative contract only. c. a written contract. d. no contract. 47. Solar Power LLC and Trey enter into an oral contract under which Solar agrees to provide Trey with lifetime employment. This contract may be enforceable by a. Trey only. b. Solar only. c. any interested third party, such as a Solar supplier. d. either Solar or Trey. 48. ActioNOW and Becca enter into an oral contract in which Becca agrees to work on a project for ActioNOW for eighteen months. This contract is enforceable by a. ActioNOW. b. Becca. c. any third party, such as ActioNOW’s clients. d. none of the choices. 49. According to most states’ laws, to be enforceable as a contract under the Statute of Frauds, a writing must a. contain both contracting parties’ signatures. b. describe the parties. c. name the parties. d. recite the parties’ contractual motivations. 50. Omar orally agrees with Pi Pizza to provide delivery service to its customers for nine months. This contract is enforceable by a. none of the choices. b. either Omar or Pi. c. any interested third party, such as a Pi customer. d. Pi only.

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Chap 16_15e 51. Hardware Store Company and Indestructible Tools Inc. sign a written contract for a sale of goods. To be enforceable, this written contract must include a. a correct title, such as “Purchase Order” or “Sales Invoice.” b. a date, such as “October 2019” or “10/2019.” c. a quantity term, such as “50 hammers” or “100 boxes of assorted nails.” d. the parties’ contact information. 52. Rye agrees to sell his Taco Delight restaurant to Sati. The parties intend their written contract to be a final statement of the terms of their agreement. Later, the parties dispute some of the provisions. In litigation, Sati offers evidence to contradict the written terms. Most likely, the court will a. exclude the evidence. b. reform the written terms to match the evidence. c. strike a balance between the evidence and the written terms. d. dismiss the case. 53. Ben makes an appointment for a $50 haircut, buys a bike for $250, and agrees to work for Coding Associates for one year for $5,000 per month, starting at the beginning of next month. To be enforceable, a writing is required for a. the appointment. b. the purchase. c. the employment agreement. d. none of the choices. 54. Gusher Irrigation Inc. and Heartland Farm enter into a contract for a sale of irrigation equipment for $50,000. To be enforceable, the contract should be in writing and identify a. the source of payment. b. the price. c. the terms of payment. d. the quantity. 55. To cater a holiday banquet, Food Service LLC agrees to buy one hundred pumpkin pies from Great Desserts Inc. To be enforceable, the agreement must be in writing if the pies cost at least a. $100. b. $250. c. $499. d. $500. 56. Lumber LLC files a suit against Mill Company to enforce an oral contract that would otherwise be unenforceable under the Statute of Frauds. The court could enforce such a contract if a. Lumber foreseeably and justifiably relied on Mill’s promise. b. Mill denies the existence of any contract. c. neither party has begun to perform. d. the deal does not involve customized goods.

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Chap 16_15e 57. Air Flo, Inc., and Banyan Grove Apartments enter into an oral contract in which Air Flo agrees to provide airconditioning and heating maintenance for Banyan Grove’s facilities for two years. This contract is enforceable by a. Air Flo. b. Banyan Grove. c. any third party, such as a HVAC supplies provider. d. none of the choices. 58. Pumps Inc. agrees to assume a debt of Quality Parts Company to Reliable Finance LP. The agreement is not in writing. To be enforceable, the promise must be for the benefit of a. all of the choices. b. Pumps. c. Quality. d. Reliable. 59. Blake and Carla sign a contract for the sale of Blake’s Bakery to Carla. The parties intend their written contract to be a final statement of most, but not all, of the terms of their agreement. In a dispute between the parties, with respect to the terms, a court is most likely to admit evidence that is a. ambiguous. b. consistent. c. contradictory. d. clear. 60. Natalie promises to pay for medical services provided by Otto to Polly. Natalie receives no personal benefit for the promise. To be enforceable, the promise must be in writing if a. Natalie promises to pay only if Polly does not pay. b. Natalie assumes primary financial responsibility for the cost. c. Otto’s services will be provided in installments with separate payments. d. Polly also promises to pay. 61. Daredevil Rides Inc. owes debts to Equipment Company and Food Supplies, Inc. Equipment orally agrees to assume Daredevil’s debt to Food to prevent the concessionaire from filing a suit against Daredevil. This agreement is enforceable by a. none of the choices. b. Daredevil, Equipment, or Food. c. Daredevil only. d. Equipment only. 62. Kee and Lu enter into a contract for the sale of Mountain Valley Ranch. To be enforceable, this contract must be a. substantiated by reliable, external evidence. b. signed in a sufficient manner by both parties. c. in writing or evidenced by a written memorandum. d. all of the choices.

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Chap 16_15e 63. Duane and Evan orally agree to a transfer of forty acres of farmland. Evan asks Finance Bank to lend him the funds to buy the land. Under the Statute of Frauds, the agreement between Duane and Evan is enforceable by a. Duane or Evan. b. Duane, Evan, or Finance Bank. c. Finance Bank. d. none of the choices. 64. Merl buys a tablet for $500, running shoes for $200, and a set of the Game of Crowns books for $100. To be enforceable as a contract, a writing is required for the purchase of a. the books, the shoes, and the tablet. b. the shoes and the tablet only. c. the tablet only. d. the books only. 65. Grain Co-op LLC and Hearty Cereals Inc. discuss the terms of a contract for deliveries of corn over a two-year period. This transaction falls within the provision of the Statute of Frauds involving a. collateral promises. b. the one-year rule. c. all of the choices. d. transfers of interests in real property. 66. Elena offers to invest a certain amount in Falco’s business if Falco marries Elena’s daughter Glenna. This promise is enforceable a. only if it is in writing. b. only if the amount of the investment is more than $500. c. only if Glenna agrees to marry Falco. d. under no circumstances. 67. To be enforceable, a contract that is required to be in writing must include a. no particular signatures. b. the signatures of all of the parties to the agreement. c. the signature of the party against whom enforcement is sought. d. the signature of the party who is seeking enforcement. 68. Quinn and Ruth orally agree on the sale of Seafood Shippers Inc. and jot down the terms on the back of one of Seafood’s blank invoices, which they both sign. A written memorandum evidencing an oral contract that would otherwise be unenforceable must contain a. all terms. b. the essential terms. c. the preliminary terms. d. the quality terms.

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Chap 16_15e 69. Rocco orally agrees to sell his Spring Beverage Company to Thirsty Inc. Rocco notes the terms on a sheet of Spring stationery and signs it. This agreement is most likely enforceable against a. no one. b. Spring and Thirsty. c. Rocco. d. Thirsty. 70. Char and Dill sign a written contract for the sale of Dill’s BBQ Food Truck to Char. The parties intend their written contract to be a final statement of the terms of their agreement. Later, Dill disputes some of the provisions in the deal with Char. If the dispute results in litigation, a court will most likely exclude evidence that a. supports the written terms. b. contradicts the written terms. c. duplicates the written terms. d. reinforces the written terms. 71. Waterfront Hotel Corporation in Boston offers a job to Carol, who lives in Denver. Carol orally agrees to work for Waterfront for two years. She moves her family to Boston and begins work. Three months later, she is fired for no stated cause. She files a suit against the employer for reinstatement or pay. Waterfront pleads the lack of a written contract. In whose favor is the court likely to rule, and why?

72. In a transaction for the sale of a warehouse, Storage Company tells Truck Dispatch Corporation that the office furniture is included. The contract says nothing about furniture, but does state, “This document supersedes all oral promises relating to the sale.” Is the furniture part of the sale? Why or why not?

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Chap 16_15e Answer Key 1. False 2. True 3. True 4. False 5. True 6. False 7. True 8. False 9. True 10. True 11. False 12. False 13. False 14. False 15. False 16. False 17. True 18. True 19. False 20. True 21. False 22. True 23. False 24. True 25. False 26. False

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Chap 16_15e 27. True 28. False 29. False 30. False 31. False 32. False 33. True 34. True 35. False 36. d 37. d 38. b 39. a 40. a 41. a 42. d 43. d 44. d 45. c 46. c 47. d 48. d 49. c 50. b 51. c 52. a 53. b 54. d Copyright Cengage Learning. Powered by Cognero.

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Chap 16_15e 55. d 56. a 57. d 58. b 59. b 60. a 61. b 62. c 63. d 64. c 65. b 66. a 67. c 68. b 69. c 70. b 71. The court might conclude that under the doctrine of promissory estoppel, the employer is estopped from claiming the lack of a written contract as a defense. This oral contract may be enforced because the employer made a promise on which the employee justifiably relied in moving, the reliance was foreseeable, and injustice can be avoided only by enforcing the promise. If the court strictly enforces the Statute of Frauds, however, the employee may be without a remedy because a contract that cannot be performed within one year from the day after its making must be in writing to be enforceable. 72. No, the furniture is not part of this deal. Under the parol evidence rule, if a writing that is integrated, or constitutes the parties’ entire agreement, includes a clause that no oral statements are incorporated, then no evidence of prior negotiations, prior agreements, or contemporaneous oral statements may be used to change the terms. In other words, a party cannot introduce in court evidence of any contradictory negotiation or agreement that occurred before the contract was formed or any contradictory oral agreements that were made at the time the contract was formed. Thus, here, the fact that the written contract did not mention the furniture and the clause in the document stated it superseded any oral promises means that the parties do not have a deal for the furniture.

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Chap 17_15e Indicate whether the statement is true or false. 1. When the performance of a contract depends on the personal skill of the obligor, a delegation of the duty is prohibited. a. True b. False 2. No special form is required to make a delegation of duties—as long as the delegator expresses an intention to make the delegation, it is effective. a. True b. False 3. Any beneficiary to a contract who is not deemed an intended beneficiary is an incidental beneficiary. a. True b. False 4. Once the obligor receives proper notice, only performance to the assignee can discharge the obligor’s obligation. a. True b. False 5. An accountant can delegate his or her contractual duty to another accountant, even if the contract expressly prohibits it, because accounting is a delegable skill. a. True b. False 6. Expressly designating a third party as a beneficiary in a contract indicates that the beneficiary is intended. a. True b. False 7. A surgeon can delegate his or her contractual duty to operate on a certain patient because the rendering of medical services is not personal performance. a. True b. False 8. Under an assignment of “all rights” on a contract, the assignor is absolved from any liability for performance under the contract. a. True b. False 9. On a delegation of contract duties, the delegator is absolved from any liability for performance under the contract. a. True b. False

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Chap 17_15e 10. Rendering contract performance directly to a third party does not indicate whether that party is an incidental or an intended beneficiary. a. True b. False 11. The assignment of the same contract right to two different persons creates parallel and equal rights and obligations. a. True b. False 12. After a transfer to a creditor by an investor of a right to receive payments on a business loan, the creditor can demand those payments from the borrower. a. True b. False 13. An incidental third party beneficiary cannot sue to enforce the contract because the benefit is unintentional. a. True b. False 14. A contracting party’s transfer of the contract rights or duties to another person is an exception to the rule of privity of contract. a. True b. False 15. Following a transfer by a lender of a right to receive payments on a mortgage, the homebuyer must continue to make those payments to the original lender. a. True b. False 16. In a contract for a sale of goods, the right to receive payment on an account may be assigned unless the sales contract prohibits such an assignment. a. True b. False 17. The unconditional assignment of rights under a contract extinguishes any defenses that the obligor had against the assignor. a. True b. False 18. A debt collector who is delegated the right to payments on a student loan owes no obligation to the debtor arising under the original terms of the loan. a. True b. False

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Chap 17_15e 19. On an assignment to a loan broker by an auto dealer of the payments due on an auto loan, the broker obtains only those rights that the dealer originally had. a. True b. False 20. Until the obligor has notice of assignment, the obligor can discharge his or her obligation by performance to any party. a. True b. False 21. The unconditional assignment of rights under a contract extinguishes the rights of the assignee. a. True b. False 22. An insurance policy cannot be assigned if the assignment will significantly alter the risks to, or the duties of, the insurer. a. True b. False 23. A creditor beneficiary cannot sue a promisor directly to enforce a contract. a. True b. False 24. As a general rule, any duty can be delegated. a. True b. False 25. A third party’s right to control the details of performance of a contract indicates that the third party is an intended beneficiary. a. True b. False 26. A bank’s sale of its right to receive payment on a loan to a third party is a transfer but not an assignment. a. True b. False 27. A transfer of contract rights to a third party is an incidental benefit. a. True b. False 28. An investor cannot effectively object to the delegation of the selection of his or her investments under a contract with one financial advisor to another. a. True b. False

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Chap 17_15e 29. When the original parties to a contract agree that its performance should directly benefit a third party, that party can sue the promisor directly for breach. a. True b. False 30. Personal services are unique to the person rendering them, but the right to receive those services is not and can therefore be assigned. a. True b. False 31. Privity of contract establishes the basic principle that contracting parties have a right to privacy in the information expressed in their contracts. a. True b. False 32. In most states, the assignment of ownership rights in real estate cannot be prohibited because that would be contrary to public policy. a. True b. False 33. If a statute expressly prohibits assignment, the particular right in question cannot be assigned. a. True b. False 34. An obligee can legally refuse performance from a delegatee only if the duty delegated is one that cannot be delegated. a. True b. False 35. If it were not possible to assign contract rights, many businesses could not continue to operate. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. Elin owes Floyd $10,000. Floyd assigns the claim to Gary. Gary does not notify Elin of the assignment. Later, Floyd assigns the same claim to Holly. Holly immediately notifies Elin of the assignment. Holly has priority to payment in a. all states. b. states that follow the English rule. c. no state. d. most states.

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Chap 17_15e 37. Retail LLC contracts with Paving Inc. to grade and pave a parking lot. The contract provides that it cannot be assigned without Retail’s consent. Later, Paving assigns the contract to Roadwork Company without obtaining Retail’s consent. Retail could most successfully argue that the contract cannot be assigned because a. the assignment is prohibited by statute. b. the contract is personal. c. the assignment will materially change a risk. d. the contract prohibits assignment. 38. Jim and Kiel agree that Jim will fix the refrigeration unit in Kiel’s Food Truck in exchange for payment of a debt that Jim owes to Lenders Bank. Under this contract, the intended beneficiary is a. Kiel’s Food Truck. b. Lenders Bank. c. Jim. d. any customer, client, or employee of Kiel’s Food Truck or Lenders Bank. 39. Beck and Call enter into a contract under which Beck agrees to cater Call’s wedding. The contract expressly prohibits any transfer of rights without the assignee’s consent. Call may transfer the right to receive Beck’s services to Dion a. if Beck consents. b. if Call decides to use a different caterer. c. if Dion is also getting married. d. under no circumstances. 40. Harry assigns his rights under a contract with Irma to his college roommate, Jake. Neither Harry nor Jake notifies Irma of the assignment. The assignment a. will not be effective until notice is given to Irma. b. will become effective after thirty days even if no notice is given to Irma. c. is effective immediately. d. is invalid. 41. Beau borrows $15,000 from Credit Center to buy a car. The lender assigns the right to receive the loan payments to Debt Collections Inc. If Beau does not pay the debt, the assignee can a. extinguish the contract rights of the assignor. b. demand performance of the deal from any of the original parties. c. enforce the payment in court. d. none of the choices. 42. Molly is a third party beneficiary under a contract between Ned and Otis. Ned and Otis can modify or rescind their contract to take away Moly’s rights under the contract without her consent a. at any time. b. at no time. c. after Molly’s rights have vested. d. before Molly’s rights have vested.

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Chap 17_15e 43. Generally, the duties under a contract can be delegated a. unless the contract expressly prohibits delegation. b. unless the delegation involves only a payment of money on the deal. c. unless the rights under the contract have previously been assigned. d. under no circumstances. 44. Desu, an accountant, and Engineers PA enter into a contract under which Desu agrees to perform audits for Engineers. Desu can delegate the duty to perform the audits to a. any reputable accountant. b. any accountant working at Desu’s firm. c. any accountant performing other financial services for Engineers. d. no other party. 45. Apps LLC enters into a contract with Birk, the chief executive officer of Corporate Sales Inc., to create an app for the firm. To fulfill the contract, Apps hires Dave as a student intern. With respect to the app contract, Dave is a. an intended beneficiary. b. an incidental beneficiary. c. a promisee. d. a promisor. 46. Music Masters Inc. enters into a contract to pay Nag for a dozen original songs. Nag transfers the right to payment under the contract to Omni Artists. After the transfer, Nag’s contract right to the payment is a. unaffected. b. extinguished. c. conditional. d. secondary. 47. Lau enters into a contract to mow Macy’s yard every week for the summer. Macy sells her house and yard to Nona, and assigns the right to receive Lau’s services to Nora. Macy is a. the obligor. b. a third party beneficiary. c. the assignee. d. the assignor. 48. To create a valid delegation of duties requires a. a special form. b. the delegator’s expressed intent to make the delegation. c. the delegator’s use of the word delegate. d. none of the choices.

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Chap 17_15e 49. For a price, Recycle LLC agrees to empty the dumpster behind Sushi Café. Recycle delegates this duty to Trash Inc. Sushi is a. the obligor. b. a third party beneficiary. c. the obligee. d. the delegatee. 50. The rights under a contract for personal services can normally be assigned a. if all that remains on the deal is a payment of money. b. if the contract is executory. c. if the personal services are unique to the party rendering them. d. under no circumstances. 51. Leo contracts to install watering troughs in Ken’s dairy barn. When Leo becomes seriously ill, he contracts with Jay to do the work. Jay is unreliable and never shows up. Ken hires Ike to do the installation. To recover for any loss on the deal, Ken can sue a. no one. b. Jay or Ike. c. Leo only. d. Jay or Leo. 52. Beta contracts to design and deliver marketing materials to Cesar. Beta cannot delegate this duty to Devon a. if performance depends on Beta’s personal skill. b. if the delegatee’s performance will match the obligee’s expectations. c. if special trust has not been placed in the obligor. d. under any circumstances. 53. For a price, Ray agrees to unload trucks that make deliveries to Shoppers Warehouse. Ray delegates this duty to Tim, who then owes performance of the duty to the warehouse. Ray is a. the obligor. b. a third party beneficiary. c. the obligee. d. the delegatee. 54. For a price, Rose agrees to unload the catch from fishing boats that dock at Seafood Shipping. Rose delegates this duty to Tina, who then owes performance of the duty to the warehouse. Tina is a. the obligor. b. a third party beneficiary. c. the obligee. d. the delegatee.

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Chap 17_15e 55. Laminate LLC agrees to buy factory equipment from Metalwork Company on the seller’s misrepresentation that it meets certain specifications. Metalwork assigns the right to payment on the deal to Nations Credit Corporation. When the buyer discovers the fraud, the firm returns the equipment and cancels their contract. Laminate a. must pay the entire contract price to Nations Credit. b. need not pay any of the contract price to Nations Credit. c. must reimburse Nations Credit for costs with respect to the assignment. d. must pay a prorated amount of the contract price to Nations Credit. 56. If a contract stipulates that it cannot be assigned, then it cannot be assigned unless the assignment a. involves ownership rights in real estate. b. is contrary to public policy in most states. c. is pursuant to a contract for a sale of goods. d. operates only in favor of the concerned parties. 57. Steel Mill Inc. and Transport Delivery LLC enter into a contract. UniOil Corporation will indirectly benefit from the deal. Under the principle of privity, UniOil has the right to a. sue Steel Mill for breach. b. require Transport to perform. c. none of the choices. d. demand performance from both original parties. 58. Marlo and Nita enter into a contract for the sale of Marlo’s apartment for which Nita agrees to pay $250,000. Nita assigns her right to buy the apartment to Owen. Owen is a. the obligor. b. a third party beneficiary. c. the assignee. d. the assignor. 59. The rights under an insurance policy can normally be assigned a. if the assignment involves only a payment of benefits. b. if the assignment significantly changes the risk to the insurer. c. if the assignment significantly alters the duties of the insurer. d. under no circumstances. 60. A contract between Max and Nye provides for an “assignment of all rights.” Max “assigns the contract” to Olin. Because a court will normally construe this wording as implying both an assignment of rights and a delegation of duties, if Olin fails to perform a. the contract is void. b. the contract is discharged. c. Nye is liable. d. Max is liable.

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Chap 17_15e 61. Lew and Mavis enter into a contract for the clearing and plowing of Mavis’s 350-acre tract for which she agrees to pay $1,000. Lew transfers his duty under this contract to Nye. With respect to the duties under the original contract, this transfer a. does not relieve Lew of the potential obligation to perform. b. extinguishes Lew’s obligation to perform. c. is an invalid transfer of a non-transferable obligation. d. requires a special form to constitute a valid transfer. 62. In a state in which a statute prohibits an employee from assigning the right to receive workers’ compensation benefits, the employee can assign the right a. if all interested parties consent. b. if the employee is fully advised of his or her rights. c. if there is no significant change to the obligor’s risk or duties. d. under no circumstances. 63. Under a contract, an assignment of negotiable instruments a. cannot be prohibited. b. can be prohibited only by an anti-assignment clause. c. can be prohibited only by the obligor. d. is prohibited under any circumstances. 64. If performance under a contract will vary materially on a delegation of its duties to a third party from that expected by the obligee, the delegation is a. prohibited. b. permitted on sufficient notice by the obligor. c. permitted if the performance does not require the obligor’s personal skill. d. permitted if special trust has been place in the obligor. 65. Fez makes and sells camping gear. Fez and Gobi enter into a contract for a delivery of the gear to Gobi’s Outfitters retail locations for an invoiced price. Fez transfers the right to payment under the contract to Haulers Distribution Inc. This transfer is a. a delegation. b. an assignment. c. a third party beneficiary contract. d. prohibited. 66. Ira owes Jess $1,000. Kerr owes Ira $1,000. Ira unconditionally assigns to Jess the right to Kerr’s payment. Jess’s right to the $1,000 is subject to the defenses that a. Jess had against Ira. b. Kerr had against Ira. c. Ira had against Kerr. d. none of the choices.

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Chap 17_15e 67. Kip enters into a contract with Life Insurance Company for a policy that designates Mia as the beneficiary. Kip reserves the right to change the designated beneficiary. Mia’s rights under the policy are a. not affected by the reservation. b. subject to any change that Kip makes. c. subject to the first-in-time rule. d. terminated by the reservation. 68. Commercial Rebuild LLC enters into a contract to remodel Dockside Marina, agreeing to use only products from Eagle Supplies. Halfway through the project, Commercial refuses to finish the job. The contract can be enforced against Commercial by a. Dockside only. b. Eagle only. c. Dockside or Eagle. d. any interested third party, including a contracting party’s employee. 69. Jan is obligated under a contract to pay Katie $500. Katie assigns the right to receive the funds to Loren. If Jan does not pay the debt, the obligee can a. extinguish the contract rights of the obligor. b. demand performance of the deal from any of the original parties. c. enforce the payment in court. d. none of the choices. 70. Mesa County contracts with New Construct Inc. to build a courthouse. New Construct hires Odell to excavate the site. Odell’s work damages adjacent properties. Mesa files a suit against the excavator, who argues that the county is not named in his contract with New Construct. Most likely, the court will hold that Odell is a. not liable because Mesa is not named in Odell’s contract. b. not liable because Odell’s contract was with New Construct, not Mesa. c. liable on the ground that Mesa is an incidental third-party beneficiary. d. liable on the ground that Mesa is an intended third-party beneficiary. 71. Paolo borrows $5,000 from Quality Auto Sales to buy a car. When Paolo does not pay the loan or return the car, Quality wants to transfers the right to the payment to Rapid Collection Agency. Rapid agrees to pay Quality for this right, but for a price that is less than the amount owed. Can Quality transfer this right to Rapid without Paolo’s consent? If so, and Quality committed fraud in the deal with Paolo, could Paolo legitimately refuse to pay Rapid? Explain.

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Chap 17_15e 72. A-One Landscapers, Inc., owes Finance Company $5,000. A-One enters into a contract with Office Park under which A-One promises to maintain the landscaping on Office Park’s property. Under the contract, Office Park promises to pay Finance the amount that will be due A-One until A-One’s debt to Finance is paid. A-One performs as promised, but Office Park does not pay Finance. Can Finance succeed in a suit against Office Park? Why or why not?

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Chap 17_15e Answer Key 1. True 2. True 3. True 4. True 5. False 6. True 7. False 8. False 9. False 10. False 11. False 12. True 13. True 14. True 15. False 16. False 17. False 18. False 19. True 20. False 21. False 22. True 23. False 24. True 25. True 26. False

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Chap 17_15e 27. False 28. False 29. True 30. False 31. False 32. True 33. True 34. True 35. True 36. b 37. d 38. b 39. a 40. a 41. c 42. d 43. a 44. d 45. b 46. b 47. d 48. b 49. c 50. a 51. d 52. a 53. a 54. d Copyright Cengage Learning. Powered by Cognero.

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Chap 17_15e 55. b 56. a 57. c 58. c 59. a 60. d 61. a 62. d 63. d 64. a 65. b 66. b 67. b 68. c 69. c 70. d 71. Quality can transfer the right to receive Paolo’s payment in an assignment to Rapid. The parties in an assignment are the assignor, the assignee, and the obligor. The party originally entitled to the payment of the money is the assignor (Quality), the party who agreed to pay is the obligor (Paolo), and the party who receives the right to the payment is the assignee (Rapid). The obligor’s consent is not necessary for an effective assignment. On an assignment, the rights of the assignor are extinguished, and the assignee has a right to demand performance— in this question, payment—from the obligor. The assignee takes only those rights that the assignor originally had, however, subject to the defenses that the obligor has against the assignor. Thus, if Quality fraudulently procured the right to Paolo’s payment, Paolo can raise this fraud as a defense against payment to Rapid. 72. Finance could succeed in a suit against Office Park. When a party promises to perform under a contract with the express intent that the other party’s payment benefit a third party, the third party is an intended beneficiary. Assuming a contract is otherwise enforceable, an intended beneficiary can successfully sue to enforce the contract under which he or she will benefit. The contract between A-One and Office Park expressly states that Office Park’s payment for A-One’s performance is to go directly to Finance. Thus, it is a third party beneficiary contract. Finance, the third party beneficiary, is, under the terms of the contract, an intended beneficiary. As such, Finance can successfully sue Office Park to enforce its promise to pay A-One’s debt.

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Chap 18_15e Indicate whether the statement is true or false. 1. For mutual rescission of a contract to take place, both parties must provide additional consideration. a. True b. False 2. A statute of limitations limits the amount of damages that the nonbreaching party can obtain for a breach. a. True b. False 3. Most contracts need to be performed to the personal satisfaction of each contracting party. a. True b. False 4. An accord and its satisfaction do not discharge an original contractual obligation. a. True b. False 5. When a party’s performance is perfect, it is complete. a. True b. False 6. Under a construction contract that requires a builder to meet certain specifications, complete performance is required to avoid material breach. a. True b. False 7. There is only one way to discharge a contract—all parties must fulfill their contractual duties. a. True b. False 8. A buyer who offers to pay for goods has tendered payment but cannot yet demand delivery. a. True b. False 9. When a lapse of time and a change in circumstances make it substantially more burdensome for the parties to perform, a contract is discharged. a. True b. False 10. Any breach of contract allows the breaching party to negotiate to receive additional benefits in order to remedy the breach. a. True b. False

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Chap 18_15e 11. Contractual obligations will be discharged when the specific subject matter of the contract is destroyed. a. True b. False 12. When the subject matter of a contract is personal, the performance need only satisfy a reasonable person. a. True b. False 13. A breach of contract occurs when a party fails to perform part or all of the required duties under a contract. a. True b. False 14. Any breach of contract effectively excuses both parties from performing. a. True b. False 15. If a condition to a lease for university housing that the tenant must be a student is not satisfied, the landlord’s obligations under the lease are discharged. a. True b. False 16. If a contract condition is not satisfied, the obligations of the parties are not discharged. a. True b. False 17. A seller who places goods at the disposal of a buyer has tendered delivery but cannot yet demand payment. a. True b. False 18. To provide a point at which contracting parties can know that their duties have ended, the duty to perform a contract is always absolute. a. True b. False 19. Anticipatory repudiation of a contract is treated as a present, material breach in order to give the non-breaching party an opportunity to seek a similar deal elsewhere. a. True b. False 20. Any breach discharges the breaching party from the contract. a. True b. False 21. A contract is substantially performed when one party receives most of the benefits promised in the deal. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 18_15e 22. Once performance has been tendered, the party making the tender has done everything possible to carry out the terms of the contract. a. True b. False 23. If one party’s performance on a contract is substantial, the other party’s duty to perform need only comport with the level of the rendered performance. a. True b. False 24. Performance becomes commercially impracticable when a foreseeable, added burden of performing increases the cost slightly. a. True b. False 25. Under the policy that a contract can be terminated if major difficulties arise, a material breach discharges the non-breaching party from a contract. a. True b. False 26. In most contracts, promises of performance are conditioned. a. True b. False 27. Any contract can be discharged by agreement of the parties. a. True b. False 28. Whether performance under a contract is substantial is decided on a case-by-case basis, examining all of the facts of the particular situation. a. True b. False 29. There is no difference between complete and substantial performance. a. True b. False 30. A contract promise that is absolute must be performed, or the party who made the promise will be in breach. a. True b. False 31. A novation requires the contracting parties to make restitution of whatever they received under the contract. a. True b. False

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Chap 18_15e 32. Tender is an unconditional offer to perform by a person who is ready, willing, and able to do so. a. True b. False 33. If performance of a contract is not substantial, there is a material breach, which excuses the nonbreaching party from performance. a. True b. False 34. Only contracts that have been fully executed can be rescinded by agreement. a. True b. False 35. The most common way to terminate contractual duties is by repudiation. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. New Builders Inc. enters into a contract with O’Reilly to refurbish a garage on his property as an auto repair shop. O’Reilly’s neighbor Pete challenges the project as a violation of the local zoning laws. A court orders a halt to the project. O’Reilly’s contract with New Builders is a. breached. b. discharged. c. not affected. d. suspended. 37. Drain Equipment Inc. contracts to sell its assets to Earth Aquatic Corporation. Before either party has performed, rescission of this contract requires a. a mutual agreement to rescind. b. an accord and satisfaction. c. a novation. d. specific performance. 38. State University provides housing on campus and in some adjacent off-campus neighborhoods. To lease a university house or apartment, a person must be a student at State. This requirement is a. a condition. b. a novation. c. a breach of contract. d. an operation of law.

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Chap 18_15e 39. Build-It Construction LLC agrees to build a warehouse for Corporate Storage Inc. According to the terms of the deal, Corporate does not have to pay Build-It if the warehouse is not built. Their respective promises are a. conditioned on the occurrence of an event. b. conditioned on the nonoccurrence of an event. c. conditioned on Build-It’s performance. d. not conditioned. 40. Dairy Farm enters into a contract with EZ Ice Cream Inc. to supply milk. Later, Dairy decides that it is no longer advantageous to fulfill the contract and subsequently fails to perform as promised. EZ files a suit against Dairy. A breach occurred when Dairy a. entered into the contract. b. decided that it was not advantageous to fulfill the contract. c. failed to perform as promised. d. was sued by EZ. 41. Vera enters into a contract to work as a lifeguard at Water Park for the summer in exchange for a weekly paycheck. The duties under this contract will be discharged when the duties are a. avoided. b. breached. c. conditioned. d. performed. 42. Inez hires Josh to paint her portrait to her satisfaction for $4,000. When Josh finishes the portrait, Inez announces that she is not satisfied with it. Inez a. must pay Josh the contract price. b. must pay Josh half of the contract price as a compromise. c. must pay Josh only the cost of his materials. d. does not have to pay Josh. 43. Security Company enters into a contract with Tower Apartments to deliver and install an alarm system for a certain price. Both parties perform the acts as promised. The contract is a. conditioned. b. terminated. c. excused. d. suspended. 44. Lana agrees to work as Michelle’s personal assistant for one year but dies in the ninth month of the contract. Lana’s death a. discharges the contract. b. breaches the contract. c. requires Lana’s estate to pay damages. d. suspends performance of the contract.

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Chap 18_15e 45. Emil enters into a contract to buy Foley’s cultivated bottomland if County AgriCredit will lend Emil the funds to pay for the land. Emil’s duty to perform is a. absolute. b. conditional. c. substantial. d. commercially impracticable. 46. Leah and Mason are parties to a contract for the sale of Mason’s day care facility to Leah. Before the deal closes, they agree to substitute Nell for Leah as a party to the deal. This does not require a. the existence of a previous, valid obligation. b. agreement by all the parties to a new contract. c. performance of the original contract by all of the parties. d. a new, valid contract. 47. Hilton enters into a contract to erect a fence around Irene’s cattle pasture. When the fence is built, Hilton’s performance will be a. conditional. b. complete. c. material. d. substantial. 48. Business Center signs an agreement with Credit Lending Inc. to borrow $40,000 at 20 percent interest. Later, the state legislature passes a law lowering the maximum permissible rate of interest to 15 percent. The borrower’s best argument for avoiding payment to the lender is that a. performance of the contract is commercially impracticable. b. payment of the loan would force the debtor into bankruptcy. c. the law has rendered performance of the contract illegal. d. the specific subject matter of the contract has been destroyed. 49. East Bay Café orders seafood from Fresh Catch Company. Fresh places the goods at East’s disposal. Fresh’s performance under the contract is a. conditional. b. complete. c. material. d. substantial. 50. Debt Collection Service enters into a contract to employ Emma as a billing manager for two years. During the first year, Emma is often absent without explanation and when present fails to adequately do her job. This a. discharges the employer from the contract. b. has no effect on the employer’s performance. c. changes the employer’s duties under the contract. d. suspends the employer’s duty to perform.

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Chap 18_15e 51. Trucking LLC enters into a contract to deliver a certain quantity of potatoes to United Foods’s refrigerated warehouse in exchange for a specified payment. Trucking delivers substantially all of the spuds to the location. United’s duty to pay is a. discharged. b. breached. c. absolute. d. performed. 52. A novation requires a. the existence of a previous, valid obligation. b. consideration greater than $5,000. c. performance of the original contract by all of the parties. d. an accord and satisfaction. 53. Architect LLC enters into a contract with Barn & Silo Inc. to provide designs for a certain number of farm buildings. Architect provides fewer than half of the designs by the time specified in the contract because the firm is busy with other projects. Architect’s performance is most likely a. a material breach. b. a minor breach. c. a reasonable breach. d. no breach. 54. Ghee agrees to buy Hole’s Donut Shop on the express condition that the shop’s suppliers extend the same credit terms to Ghee that the suppliers currently extend to Hole. This approval is a. a concurrent condition. b. a condition precedent. c. a condition subsequent. d. an implied condition. 55. Sage enters into a contract to sell her condo to Tel for a certain price on a specific day. On that day, Sage unconditionally offers to perform. Sage’s offer a. conditions Tel’s promise to pay for the property. b. constitutes tender of performance. c. excuses the parties’ performance under the contract. d. suspends the parties’ contractual obligations. 56. Jamal and Keri enter into a contract for Jamal to renovate Keri’s house by a certain date. Jamal never performs. After the applicable limitations period has passed, Keri decides to bring a suit against Jamal for breach. This suit a. must be filed within ten to twenty years, depending on state law. b. can no longer be brought. c. can be filed within four years of notice to Jamal that Keri decided to sue. d. must be filed between four and five years after Keri decides to sue.

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Chap 18_15e 57. Restoration Inc. enters into a contract to refurbish an old bus depot for Quality Diners LLC. If Restoration completes most of the work promised in the contract, its performance will be a. conditional. b. complete. c. material. d. substantial. 58. Iggy and Jen sign a contract by which Iggy agrees to deliver and install a gas fireplace on October 15 in exchange for Jen’s promise to pay the $500 price within ten days of the install date. The delivery and installation of the fireplace and the payment of the price are examples of a. conditions precedent. b. concurrent conditions. c. conditions subsequent. d. implied conditions. 59. Megan contracts to sell Nonny her horse for $4,000. This contract will be fully discharged when Megan and Nonny a. execute a bill of sale. b. exchange the horse for the money. c. sign a receipt. d. agree that the deal is fair. 60. City Delivery, Inc., enters into a contract to deliver furniture to Damien’s house with payment due on July 4. On July 4, Damien’s bank is closed, and for this reason, he claims that he cannot pay on time. In this situation a. the bank is liable for breach. b. Damien is in breach. c. the contract is discharged. d. the contract is suspended. 61. Adrian operates a recycled metals business and contracts to provide ten tons of scrap steel at $500 per ton to be delivered to Build-It-Rite Materials Inc. in seven months. An unforeseen shortage of scrap steel suddenly develops, making it impossible for Adrian to fulfill the contract for less than $5,000 per ton. Adrian’s best defense against performing the contract would be that a. performance of the contract is commercially impracticable. b. procuring the steel would force the seller into bankruptcy. c. the law has rendered performance of the contract illegal. d. the specific subject matter of the contract has been destroyed.

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Chap 18_15e 62. Rene contracts with Scot to pay him $5,000 for repairs to Rene’s lake cabin. After Scot performs, Rene tells him that she cannot pay him in full immediately. They sign an agreement in which Rene promises to pay $2,500 now instead of $5,000 later. This is a. a mutual agreement to rescind. b. an accord and satisfaction. c. a novation. d. specific performance. 63. Juan and Isidro enter into a contract to buy, restore, and reopen the Coastal Park Carousel. Before either party begins to perform, they make a new agreement to rescind their deal. This a. discharges the original contract. b. has no effect on Juan’s performance. c. changes Isidro’s duties under the contract. d. suspends both parties duties to perform. 64. Discharging a contract by executing a new agreement with performance different from what was originally promised is a. a material breach. b. an accord and satisfaction. c. a novation. d. substantial performance. 65. Gliders LLC and Hang Time Inc. are parties to a contract. They subsequently agree that In the Wind Inc. should take Gliders’ place and assume all of its rights and duties under the contract. This is a. a mutual agreement to rescind. b. an accord and satisfaction. c. a novation. d. specific performance. 66. The most common way to terminate contractual duties is by a. agreement. b. repudiation. c. failure of a condition. d. performance. 67. Fig, who owns and operates Garden Farm, agrees to sell Harvest Grocery a minimum quantity of fresh fruits and vegetables every week for three months. If bad weather destroys Fig’s crops, the obligation to deliver produce to Harvest is a. breached. b. discharged. c. not affected. d. suspended.

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Chap 18_15e 68. Range Free Farms enters into a contract to deliver to Sara’s Market a truckload of eggs for a certain payment. Range Free fails to deliver. Sara’s Market a. must pay in anticipation of the delivery to avoid a breach of contract. b. does not have to pay because Range Free did not perform. c. must pay under the contract, but can sue Range Free for breach. d. does not have to pay, but then cannot sue Range Free. 69. Bottling Company enters into a contract with Chug’s Brewery to provide certain bottling and delivery services. Before Bottling starts to work, the market price rises for the fuel for glass ovens. Bottling tells Chug’s that due to the added cost it will not perform their deal. Bottling’s contractual obligation to Chug’s is a. breached. b. discharged. c. rescinded. d. suspended. 70. Dom enters into a contract to buy Ezra’s office building for a certain price subject to an appraiser’s evaluation of the structure’s condition. If the appraiser deems the condition to be substandard, the parties’ obligations will be a. discharged. b. breached. c. altered. d. performed. 71. Q Media Inc. contracts with Rural Broadband LLC to design and build an all-weather communications system for Q’s operations. Rural builds the system, but it repeatedly, predictably fails in bad weather conditions. Is this a breach of the contract? If so, what remedies does Q have?

72. Floors n’ More Inc. hires Gordo to renovate Floors n’ Mores showroom. Gordo submits plans that Floors n’ More approves. Gordo completes the major reconstruction, paints the interior, and buys the fixtures and furnishings. Floors n’ More rejects some of these items because they do not match the plans, and subsequently refuses to allow Gordo to finish the work or to collect payment. Could Gordo sue successfully for payment for the entire contract?

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Chap 18_15e Answer Key 1. False 2. False 3. False 4. False 5. True 6. True 7. False 8. False 9. True 10. False 11. True 12. False 13. True 14. False 15. True 16. False 17. False 18. False 19. True 20. False 21. True 22. True 23. False 24. False 25. True 26. False

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Chap 18_15e 27. True 28. True 29. False 30. True 31. True 32. True 33. True 34. False 35. False 36. b 37. a 38. a 39. d 40. c 41. d 42. d 43. b 44. a 45. b 46. c 47. b 48. c 49. b 50. a 51. c 52. a 53. a 54. b Copyright Cengage Learning. Powered by Cognero.

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Chap 18_15e 55. b 56. b 57. d 58. b 59. b 60. b 61. a 62. b 63. a 64. b 65. c 66. d 67. b 68. b 69. a 70. a 71. Performance far below reasonable expectations is not substantial. When performance is not substantial, a breach is material. The non-breaching party is excused from performing and can sue for damages caused by the breach. Any breach entitles the non-breaching party to sue for damages, but only a material breach discharges the non-breaching party from the contract. In this question, the contract asked for an all-weather communications system, but the system functioned effectively only in good weather. Thus, Q is excused from paying for the system and can sue for damages caused by the breach. 72. No, Gordo could not sue successfully for payment for the entire contract, but he could sue successfully to collect for the value of the work actually performed. When the performance on a construction contract is substantial, the deviations are minor, and the failure to perform completely is not willful (that is, the performance is in good faith), the party who substantially performed is entitled to collect payment for that performance. The amount of the payment is the contract price less the costs to make the performance complete. When the cost to complete the performance is high in relation to the contract price, the party is entitled to the contract price less the amount by which the object of the contract is diminished in value by the failure to completely perform. In this problem, the “breach” may have been so minor that it was no breach at all, because Floors n’ More was not denied the benefit of its bargain by Gordo’s conduct. In that interpretation, Floors n’ More rejected Gordo’s good faith tender of complete performance, and this rejection would allow Gordo to collect payment for the work.

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Chap 19_15e Indicate whether the statement is true or false. 1. In most states, a person whose employment is wrongfully terminated has no duty to take a similar job if one is available. a. True b. False 2. When both an owner and a contractor breach a construction contract, a court will attempt to strike a fair balance in awarding damages. a. True b. False 3. The terms of a contract must be sufficiently definite for a court to determine the amount of damages to award. a. True b. False 4. If a surgeon breaches a contract by refusing to perform an operation, a court will normally compel performance through an award of specific performance. a. True b. False 5. A restrictive covenant imposed as part of a sale of an ongoing business will be enforced even if the restrictions are unreasonable. a. True b. False 6. Restitution may be available in a situation in which damages cannot be proved or are difficult to prove. a. True b. False 7. Sometimes, when a buyer breaches a contract for a sale of goods and the seller has not yet produced the goods, the seller can recover the lost profits. a. True b. False 8. On an architect’s breach of contract after payment for the work, the owner can immediately hire a new architect and obtain restitution of the payment. a. True b. False 9. Expenses incurred because of a breach of contract to obtain performance from another source are not recoverable in a suit for breach. a. True b. False

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Chap 19_15e 10. The measure of compensatory damages does not vary by type of contract. a. True b. False 11. The standard measure of compensatory damages is the value of the breaching party’s actual performance. a. True b. False 12. In most situations, when a breach of contract occurs, the injured party is held to a duty to mitigate, or reduce, the damages that he or she suffers. a. True b. False 13. The breach of a contract for a sale of goods qualifies for specific performance only when substantially identical goods can be bought or sold in the market. a. True b. False 14. On the breach of a contract for a sale of land when the seller has sold the property to someone else, an award of specific performance is unavailable. a. True b. False 15. Special damages that compensate for a loss caused by circumstances beyond the contract itself are incidental damages. a. True b. False 16. Liquidated damages provisions normally are unenforceable. a. True b. False 17. Normally, a court will not award damages unless the appropriate equitable remedy is inadequate. a. True b. False 18. A contract clause that provides the only remedy for breach is repair, replacement, or refund of the purchase price is invalid and unenforceable. a. True b. False 19. If the Statute of Frauds bars the enforcement of an oral contract, a court will not impose a quasi contract regardless of the other circumstances. a. True b. False

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Chap 19_15e 20. When a buyer breaches a contract for a sale of land, the seller can recover the difference between the contract price and the market price of the land. a. True b. False 21. A liquidated damages provision specifies an amount to be paid in the event of a future default or breach of contract to make the innocent party whole. a. True b. False 22. When a seller breaches a contract for a sale of goods, knowing the buyer plans to resell the goods, the buyer can recover the lost profits from the planned resale. a. True b. False 23. When a contract mistakenly specifies a crane instead of a forklift, a court could reform the contract to reflect the parties’ original intent as to the equipment. a. True b. False 24. The remedy available when a court imposes a quasi contract is the recovery of the reasonable value of a benefit conferred or detriment suffered. a. True b. False 25. A contract clause that excludes liability for willful misconduct is enforceable if the provision is sufficiently prominent in the body of the contract. a. True b. False 26. The function of a quasi contract is to impose a legal obligation on a party who purposely failed to fulfill an express promise. a. True b. False 27. A court will grant specific performance as a remedy only when the legal remedy is adequate. a. True b. False 28. The Uniform Commercial Code provides that remedies may not be limited in a contract for the sale of goods. a. True b. False

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Chap 19_15e 29. When no actual damage or loss results from a breach of contract and only a technical injury is involved, the innocent party can recover no damages. a. True b. False 30. When a breach is material and willful, an innocent party seeking to rescind it must show that the contracting parties cannot be restored to the status quo. a. True b. False 31. Between parties in equal bargaining positions, a contract provision that states no damages can be recovered for certain types of breaches may be enforced. a. True b. False 32. In contract law, damages compensate for harm suffered as a result of another’s wrongful act, not for the loss of a bargain. a. True b. False 33. A seller cannot avoid the risk of liability for consequential damages by limiting the buyer’s remedies in their contract. a. True b. False 34. There is a remedy available for nearly every breach of contract. a. True b. False 35. The failure of one party to perform under a contract entitles the other party to rescind the contract. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. To induce the sale of an auto parts business, Carmel fraudulently represents the worth of the inventory to Drew, who offers an inflated price. They enter into a contract to close the deal. On closer inspection, the buyer learns the true value of the goods. Drew can a. impose a penalty on the seller. b. force the seller to accept a more reasonable price. c. rescind the contract. d. none of the choices.

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Chap 19_15e 37. Renew Turf Inc. enters into a contract with Sports Park to provide surface material for Sports Park’s baseball field by a certain date. The contract specifies an amount to be paid if Renew breaches the deal. This clause is enforceable if the amount is a. meant to pay for additional work in the event of damage. b. a reasonable estimate of the loss on the breach. c. designed to penalize Renew. d. intended to quickly provide cash to Sports Park. 38. Sparkle Jewelers breaches its lease with Town Mall and vacates the premises six months before the end of the term. In some states, the mall would be required to a. avoid reletting the premises for six months to recover damages. b. use reasonable means to find a new tenant. c. relet the premises to recover any damages. d. sell the premises to recover any damages. 39. Max orally agrees to construct two outbuildings on Ned’s ranch for a stated price. Max performs, but Ned does not pay. To recover on a theory of quasi contract, Max must show that if Ned were allowed to retain the benefit of their bargain, Ned would a. be restored to the status quo. b. be unjustly enriched. c. obtain a reasonable exchange of values. d. profit from Max’s performance. 40. Armand orally agrees to pay Borges to seed and harvest a quarter of Armand’s farm acreage for four planting seasons. After Borges prepares the land and plants the first crop, Armand says that the deal is off. Borges can most likely recover on a theory of a. reformation. b. restitution. c. specific performance. d. quasi contract. 41. Erma enters into a contract to buy a tract of lakefront property from Forest Acres to build and sell a residential development. Forest Acres fails to close the sale. Erma’s remedy is most likely a. the amount that Erma invested in the project to the date of the closing. b. nothing—Forest Acres still owns the land. c. the difference between the contract and market prices of the land. d. specific performance.

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Chap 19_15e 42. Berry Farm hires Chun to repair its irrigation system on site by a certain date for $2,500, but Chun fails to perform. Berry Farm hires Diego to do the job for $2,000. In a suit for breach, Berry Farm may recover from Chun a. nothing—there is only a technical injury. b. compensatory damages. c. punitive damages. d. nominal damages. 43. Metro Holdings Inc. contracts to sell a commercial parking garage to New Property LLC. The contract provides that if Metro does not close the deal by a certain date, it must pay the buyer one-half of the value of the property. This provision is not enforceable if it is a. meant to pay for additional work in the event of damage. b. a reasonable estimate of the loss on the breach. c. designed to penalize Metro. d. intended to quickly provide cash to New Property. 44. Restore Inc. contracts to resurface the pools at Swim Park by June 1. Restore knows that if performance is not timely, Swim Park will have to delay its seasonal opening. Restore finishes the job June 15. In a suit for breach, Swim Park can recover a. the cost of new pools. b. the difference between the contract and market prices for the work. c. the loss of profit from the delayed opening. d. nothing—the work is done. 45. Food Court Inc. leases space to Gourmet Café. Gourmet abandons the premises when the amount of the rent due on the lease is $5,000. Food finds a new tenant, Hasty Bowls, which agrees to pay $3,500 for the space over the remainder of Gourmet’s term. Food’s measure of damages is a. $5,000. b. $1,500, minus any expenses reduced by mitigating the damages. c. $1,500, plus any additional expenses to find the new tenant. d. $6,500. 46. Jet enters into a contract to buy a certain commercial building from Kim. At the closing, Kim refuses to transfer title. In a suit for breach, Jet should seek specific performance to a. return the parties to the positions they occupied before the contract. b. obtain the exact bargain promised in the contract. c. reform the contract to reflect the parties’ true intentions. d. make the terms reasonable and enforce the contract as reformed.

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Chap 19_15e 47. Repair Service enters into a contract to fix washing machines in Soapy Suds Company’s coin-operated laundries. Repair breaches the contract. Soapy is awarded compensatory damages. The purpose is to a. establish, as a matter of principle, that Repair acted wrongfully. b. provide Soapy with funds for a loss beyond the contract. c. provide Soapy with funds for its loss of the bargain. d. punish Repair and deter others from similar acts. 48. Copper Wire Inc. and Direct Electric LLC sign an agreement that provides for the payment of “$1,000 by whichever party commits a material breach of the contract that creates damages difficult to estimate but approximately $1,000.” This is a. a liquidated damages clause. b. a mitigation of damages clause. c. a consequential damages clause. d. a penalty clause. 49. Len contracts to work for Media Corporation during May for $4,500. On April 30, Media cancels the contract. Len declines a similar job with New Ads Inc., which would have paid $3,500. Len files a suit against Media. As compensatory damages, Len can recover a. $4,500. b. $3,500. c. $1,000. d. $0. 50. Cow’s Milk LLC needs a certain part for its pasteurizing equipment to continue its operations and orders one for $3,000 from Dairy Supplies Inc. Cow’s Milk tells Dairy Supplies that it must receive the part by Tuesday or it will lose $10,000. Dairy Supplies ships the part late. Cow’s Milk can recover a. $13,000. b. $10,000. c. $3,000. d. $0. 51. Concrete Company agrees to lay a foundation for Diamond Properties, but fails to finish the job. Diamond hires Earth Projects Inc. to complete the work. In a suit for breach, Diamond may recover from Concrete a. nothing. b. the contract price. c. the costs needed to complete construction. d. profits plus the costs incurred up to the time of the breach. 52. Ochre holds one ton of perishable fruit in storage for Produce Corporation. If Produce does not pay for the storage, under the doctrine of mitigation of damages, Ochre is held to a duty to a. continue to store the fruit until Produce pays. b. do whatever is reasonable to minimize the damages. c. dispose of the fruit immediately. d. set an example to deter similar misconduct in the future. Copyright Cengage Learning. Powered by Cognero.

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Chap 19_15e 53. Ziplines Inc. enters into a contract to employ Scot as a manager for two years. If Ziplines breaches the contract, Scot has a duty to a. do nothing. b. reduce the damages that Scot might otherwise suffer. c. rescind the contract with Ziplines. d. act to punish Ziplines as an example to deter others from similar acts. 54. Builders Inc. agrees to construct an office building for Commerce Center Corporation. The project proceeds according to plan, but before it is done, the buyer tells Builders to quit. In a suit for breach, Builders may recover a. nothing. b. the contract price. c. the costs needed to complete construction. d. profits plus the costs incurred up to the time of the breach. 55. A contract for a sale of land from Beachfront Properties Inc. to City Development Corporation contains an erroneous legal description. The appropriate remedy for these parties is most likely a. damages. b. reformation. c. a quasi contract. d. specific performance. 56. Reese contracts to sell a Saucy Pizza restaurant to Titian. As part of the deal, Reese agrees not to open a competing business within a hundred-mile radius for ten years. Reese later sues Titian, alleging that the agreement is illegal. To enforce the covenant not to compete, the court will most likely a. award damages for Reese’s complete compliance with the terms. b. reform the contract to make the distance and time limits reasonable. c. rescind the contract and require restitution. d. order specific performance. 57. Guy orally agrees to buy a unique collection of sports memorabilia for $10,000 from Hec and sends $2,500 as an initial payment. When Guy pays the rest of the price, Hec refuses to ship the collection. In a suit for breach, Guy should seek a. damages. b. restitution. c. a quasi contract. d. specific performance. 58. Lyn orally contracts to sell five acres of timber to Mountain Mill LLC. The buyer harvests the trees but fails to remit the full price. Because of the lack of a written contract, Lyn could most likely recover on a theory of a. none of the choices. b. restitution. c. specific performance. d. quasi contract.

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Chap 19_15e 59. Steel Mill Inc. agrees to deliver a certain quantity of steel to T-Bar Framing Corporation. The agreement states that delivery is to be within “9” days, although the parties intend “90” days. The seller cannot convince the buyer to amend the contract. The most appropriate remedy is most likely a. a quasi contract. b. reformation. c. rescission. d. specific performance. 60. Bagels Bakery enters into a contract with Cineplex for discounted tickets for Bagels’s employees. When Cineplex does not provide the tickets, Bagels enters into a contract with DigiMovies for the same service at a lower price. In a suit for breach, Bagels might be awarded nominal damages to a. establish, as a matter of principle, that Cineplex acted wrongfully. b. provide Bagels with funds for a foreseeable loss beyond the contract. c. provide Bagels with funds for its loss of the bargain. d. punish Cineplex and set an example to deter others from similar acts. 61. Hera contracts to work exclusively for Island Tours LLC during July for $5,000. On June 30, Island cancels the contract. Hera finds a similar job for the month of July but earns only $3,000. Hera files a suit against Island. As compensatory damages, Hera can recover a. $5,000. b. $3,000. c. $2,000. d. $0. 62. City Nurses College loses its accreditation. As a consequence, City students can still obtain a state nurse’s license, but their earning capacity is impaired. In a suit against the school for breach, the students are most likely to recover a. nothing. b. the difference between their earning capacity before and after the loss. c. the difference between the tuition costs at City and an accredited school. d. the cost of a City education, including tuition, and room and board. 63. Home Furnishing Store’s contract for a sale of its appliances provides that the only remedy for breach is replacement, repair, or refund of the purchase price. With respect to this provision, on a customer’s suit for breach, a court is most likely to a. enforce it. b. reform it. c. refuse to enforce it. d. reallocate the risk expressed in it.

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Chap 19_15e 64. Dory enters into a contract with Eton for the construction of a Fast Food franchise, according to a certain schedule. The parties perform some preparatory steps, but Eton materially and willfully fails to begin work on the specified date. To rescind the contract, Dory must show that the parties can a. be restored to the status quo. b. realize at least some of the benefit of their bargain. c. obtain a reasonable exchange of values for the preparatory steps. d. profit from the partial performance. 65. A contract between Speculative Investment Company and Trusts & Bonds Inc. excludes liability as a result of fraud. This exclusion is enforceable a. because the parties are protected from liability. b. because the parties consented to it. c. if the parties have equal bargaining power. d. under none of the choices. 66. Faiz enters into a contract to buy 350 acres from Grain Farm to cultivate hops and open a brewery. Faiz fails to make the purchase. Grain Farm’s remedy is most likely a. the amount that Faiz expected to invest in the brewery. b. a percentage of Faiz’s unrealized profit. c. the difference between the contract and market prices of the land. d. nothing—Grain Farm still owns the land. 67. Bee is an employee of Credit Agency Inc. On the termination of Bee’s position, Credit pays Bee $10,000 to agree not to disclose the employer’s confidential information. Later, Bee sells the information to Debt Records LLC for $100,000. In a suit for breach, Credit is most likely to recover a. $10,000 from Bee. b. $110,000 from Bee. c. $100,000 from Debt. d. all future profits from Debt. 68. Shi’s lease of retail premises from Thuy requires Shi to pay certain fees, subject to the landlord’s proof of the correct amount. Thuy overcharges Shi for the fees, without explanation. Most likely, the tenant can rescind the lease a. after paying the overcharge. b. by finding a new tenant for the premises. c. with prompt notice. d. under no circumstances.

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Chap 19_15e 69. Dino hires Eve to perform at Dino’s Club, but Eve later breaches the agreement to accept a higher-paying job at Five Star Arena. Dino files a suit against Eve, asking the court to order her to perform at his club. The court will most likely a. award damages to Dino. b. cancel Dino and Eve’s contract. c. order Eve to perform both contracts. d. rescind Dino and Eve’s contract. 70. Dwelling Inc. enters into a contract with Estate Management to manage and maintain Dwelling’s apartment complex. Their contract contains a clause that limits Estate’s liability except in cases of gross negligence or willful misconduct. With respect to this clause, a court would most likely a. enforce it. b. reform it. c. refuse to enforce it. d. reallocate the risk expressed in it. 71. Lunch Truck Inc. contracts to deliver and serve Meal Catering Service’s products to its clients for $5,000 per event, payable in advance. Meal pays the money, but Lunch fails to perform. Can Meal rescind the contract? Can Meal also obtain restitution? What does it mean to “rescind” a contract? How is a contract rescinded? What is restitution? How is restitution accomplished? Explain.

72. Permian Oil Corporation ships its only pump to Quality Repair Inc. for repair. Permian hires Route Shipping Inc. to take the pump to Quality and to return it as soon as the repair is complete. Permian is forced to suspend operations without the pump, but Route does not know this. Permian expects to be without the pump for five days and to lose profits of $50,000. When Route does not return the pump by the end of the fifth day, Permian rents a substitute at a cost of $1,000 per day. Route delays five more days before returning the pump. Permian files a suit against the shipping company, asking for compensatory, consequential, and punitive damages. Will Permian recover?

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Chap 19_15e Answer Key 1. False 2. True 3. True 4. False 5. False 6. True 7. True 8. True 9. False 10. False 11. False 12. False 13. False 14. True 15. False 16. False 17. False 18. False 19. False 20. True 21. True 22. True 23. True 24. True 25. False 26. False

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Chap 19_15e 27. False 28. False 29. False 30. False 31. True 32. False 33. False 34. True 35. True 36. c 37. b 38. b 39. b 40. d 41. d 42. d 43. c 44. c 45. c 46. b 47. c 48. a 49. c 50. b 51. c 52. b 53. b 54. d Copyright Cengage Learning. Powered by Cognero.

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Chap 19_15e 55. b 56. b 57. d 58. d 59. b 60. a 61. c 62. a 63. a 64. a 65. d 66. c 67. a 68. c 69. a 70. a 71. Yes, Meal can rescind the contract and obtain restitution. A breach of contract by a failure to perform entitles the nonbreaching party to rescind, or cancel, the contract, and the parties must make restitution, which is the returning of whatever benefit they conferred on each other. These remedies are particularly available when the breaching party would otherwise be unjustly enriched, as in this question. Rescission is an action to cancel a contract—to return the parties to the positions they were in before the transaction. It is also available in cases involving fraud, mistake, duress, or failure of consideration. To rescind, a nonbreaching party must give prompt notice to the breaching party. Both parties must then make restitution to each other by returning whatever was conveyed in execution of their contract. If the goods or property conveyed can be returned, they must be. If the actual items cannot be returned, an equivalent amount in money must be paid.

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Chap 19_15e 72. Yes and no. Permian will succeed in recovering damages, but not all of the damages that it seeks. The shipping company’s failure to perform promptly is a breach of contract for which Permian can recover damages. Because of the late delivery of the pump, Permian is entitled to recover the cost of renting the pump for the five days that Route delayed. Expenses that are caused directly by a breach of—such as the cost to rent the replacement pump after Route breached the contract—are recoverable as compensatory damages. These expenses were foreseeable. Consequential damages—damages caused by special beyond the contract—are recoverable only if the breaching party knew or should have known at the time of contracting of their possibility. In this problem, Permian’s shutdown of its operations is a special circumstance, but Route did not know of these circumstances so the consequent loss of profits is not recoverable. Also, Permian cannot recover punitive damages, which are not usually recoverable in breach of contract suits. Punitive damages are intended to punish wrongdoing. The purpose of damages in a breach of contract suit is to place the nonbreaching party in the position he or she would have occupied if the contract had been performed, not to punish the breaching party.

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Chap 20_15e Indicate whether the statement is true or false. 1. Because contracting parties presumably know best what they meant by their words, the course of performance under their agreement is the best indication of what they meant. a. True b. False 2. In response to an order for a hundred baseballs, the shipment of a hundred basketballs is both an acceptance of the offer and a breach of the contract. a. True b. False 3. An agreement for the temporary use of goods for a personal, family, or household purpose in exchange for payment does not fall under the UCC. a. True b. False 4. An auto lease between a consumer and a car dealer is not governed by the UCC because the statute applies only to transactions between merchants. a. True b. False 5. If the acceptance to a sales contract between non-merchants includes terms different from those in the offer, no contract is formed under the UCC. a. True b. False 6. Under the UCC, the meaning of any agreement must be interpreted in light of commercial practices, so a court will not assume that the usage of trade was taken into account when the agreement was phrased. a. True b. False 7. An excessive price for goods and unequal bargaining power can indicate to a court that a sales contract is unconscionable. a. True b. False 8. The United Nations Convention on Contracts for the International Sale of Goods is the law that governs contracts for the international sale of goods. a. True b. False 9. To the extent that it has not been modified by the UCC, the common law of contracts applies to sales contracts. a. True b. False

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Chap 20_15e 10. Under the law that governs the international sale of goods, when an acceptance to a contract includes terms additional to those in the offer, the terms automatically become part of the deal. a. True b. False 11. Corporate stocks and bonds meet the requirements to be among the items of property characterized as goods under the UCC. a. True b. False 12. Under the law that governs the international sale of goods, when the parties to a contract do not specify a price term, or at least provide for its specification, normally no contract will exist. a. True b. False 13. To qualify as a sale under the UCC, the price in the transaction must be payable in cash. a. True b. False 14. Under the UCC, contract modifications extorted by one contracting party from the other party are in bad faith but enforceable. a. True b. False 15. The UCC states that an agreement sufficient to constitute a contract cannot exist if the moment of its making is undetermined. a. True b. False 16. The UCC promotes commerce by simplifying and streamlining commercial transactions. a. True b. False 17. Acceptance of an offer to lease goods can be made by any means reasonable under the circumstances, including a prompt shipment of the goods. a. True b. False 18. Generally, when an acceptance to a sales contract between merchants includes terms additional to those in the offer, the terms automatically become part of the deal. a. True b. False 19. Parties to sales and lease contracts are not free to agree to terms different from those stated in the UCC. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 20_15e 20. If a writing indicating a sales contract contains only some of the terms that the parties agreed to, a court may allow evidence of consistent additional terms. a. True b. False 21. Under the UCC, merchant’s choice is the test to determine whether a contract is primarily for the sale of goods or services. a. True b. False 22. If a sales contract prohibits any changes unless they are in a signed writing, then only those changes agreed to in a signed writing are enforceable. a. True b. False 23. A contract for a sale of natural gas is a contract for a sale for goods. a. True b. False 24. Under the UCC, an oral contract for a sale of goods is enforceable once goods have been received and accepted. a. True b. False 25. Under the UCC, if a dispute occurs over the existence of a contract, a purchase order can be sufficient to indicate that there is a contract. a. True b. False 26. An auto dealer is a merchant when selling or leasing a new car but not when selling or leasing a pre-owned vehicle. a. True b. False 27. Except for an option contract, a firm offer by a merchant is irrevocable once it has been made. a. True b. False 28. If a contract for a sale of goods leaves the quantity term open, there is a basis for determining a remedy. a. True b. False 29. If a court determines that a contract involving both goods and services is primarily a goods contract, any dispute over the deal will be decided under the UCC. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 20_15e 30. To satisfy the UCC’s Statute of Frauds, a writing indicating an intent to form a sales contract must signed by both parties. a. True b. False 31. The UCC imposes certain special business standards on merchants because of their commercial expertise. a. True b. False 32. When a sales contract contemplates shipment of the goods but does not specify the arrangements, either party can make those arrangements. a. True b. False 33. The UCC provides that a sale or lease contract will fail for indefiniteness if more than one of its terms is left open. a. True b. False 34. An agreement to transfer the right to possess and use goods for a commercial purpose for a period of time in exchange for payment is a lease. a. True b. False 35. When the parties to a contract for a sale of goods do not specify a payment term, and the parties are unaware of the UCC’s rules, those rules do not apply. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. Refined Metals Company and Superior Fabrication Inc. enter into a contract under which Refined agrees to deliver a certain quantity of sheet metal to Superior each month. The contract does not include a price term. In a suit between the parties over the price, a court will a. determine a reasonable price. b. impose the lowest market price. c. impose the highest market price. d. return the parties to the positions they held before the contract. 37. Aaron offers to sell Babe a collection of movie memorabilia. For the transaction to be a sale under the UCC, title to the collection must be passed from the seller to the buyer for a. cash. b. services. c. a price. d. goods. Copyright Cengage Learning. Powered by Cognero.

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Chap 20_15e 38. Bean Processor Inc. agrees to ship a certain quantity of coffee beans to Coffee Café LLC. Bean sends to Coffee an e-mail indicating that the parties intended to form a contract. Against Bean, as a contract, the e-mail will be sufficient a. if it is signed by Bean. b. if it is signed by Coffee. c. if Coffee responds with an acknowledgment of the deal. d. under no circumstances. 39. Talk Inc. offers to buy from Ultra Corporation 1,000 phones with certain features. Without notifying Talk, Ultra timely ships phones with fewer features. With respect to the offer, this shipment is an acceptance and a. a breach. b. an accommodation. c. complete performance. d. a counteroffer. 40. Seacoast Transport Company pays Trucks & Trailers Inc. a stated price for the use of seven tractor-trailer rigs for a year. Under the UCC, this is a. a contract for services. b. a sublease. c. a lease. d. a sale. 41. Embers Corporation orders twelve fire extinguishers from Firefighting Inc., which delivers the equipment. This is most likely a. a gift. b. a lease of goods. c. a sale of goods. d. a contract for services. 42. Brooke is an art collector and hires a broker to buy and sell artworks on her behalf. Under the UCC, in those transactions, Brooke has the status of a. a consumer. b. an agent or other intermediary. c. a merchant. d. an employer and manager. 43. Bon, an agent for City Motors Inc., e-mails Dale on May 1 that the dealer will sell to her a 2018 Ford pick-up truck for $25,000 between May 1 and July 1. Bon’s offer to Dale is a. irrevocable for the stated period. b. irrevocable until Dale responds. c. revocable at any time. d. revocable on the payment of consideration to Dale.

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Chap 20_15e 44. Excluded from Article 2 of the UCC are a. all of the choices. b. corporate stocks and bonds. c. patents and copyrights. d. ordinary contract rights. 45. Elle sells a motorcycle to Fran for $5,000, a bike to Gwen for $600, a pool table to Holly for $200, and three shares of stock to Inez for $100. Article 2 of the UCC does not apply to the sale of a. the motorcycle. b. the bike. c. the pool table. d. the stock. 46. Minh owns a beach house that she rents to vacationers. Minh gives her son Ngo a trip to Omaha on his graduation from community college. Minh sells her car to her neighbor Phan for $4,500. UCC Article 2 covers a. the beach house rentals. b. the gift to Ngo. c. the sale to Phan. d. none of the choices. 47. Mining Corporation purchases the business assets of Open Pit Inc., including its equipment and supplies, for an agreed-to price, payable in installments. Under the UCC, this transaction is a. a contract for services. b. a sublease. c. a lease. d. a sale. 48. Auto Body Company orders custom paint from Best Hues Inc., but Best does not deliver. Auto Body will probably be unable to enforce the agreement if the parties omitted a. a price term. b. a delivery date. c. a quantity term. d. shipping arrangements. 49. Ferris is refinishing his kitchen floor and needs a floor sander to complete the job. Ferris’s neighbor Gina suggests that he call Home Repair Rentals, Inc. Home Repair leases Ferris a floor sander. In this transaction, the lessor is a. Ferris. b. Gina. c. Home Repair. d. none of the choices.

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Chap 20_15e 50. Speedy Trucking Inc. and Trailer Rents LLC are parties to an oral agreement for a one-year lease of six doublewides with payments totaling more than $40,000. They may satisfy the Statute of Frauds by a. mutually agreeing not to commit fraud. b. repeating the terms in a phone call. c. setting out the terms in a memo. d. shaking hands on the deal. 51. Power Company offers to buy from Quality Transformers LLC a specific quantity of a certain type of transformer for a stated price. Quality can accept the offer by a. a counteroffer within a reasonable time. b. a promise to ship the goods. c. a rejection of the offer with an invitation to negotiate a different price. d. any of the choices. 52. Under a contract with Fresh Farm LLC for a delivery of vegetables, Growers Mart refuses to pay for some of the produce. The buyer contends that the practice in the trade with respect to payment for spoiled produce justifies its refusal to pay. Growers Mart is arguing that the court should take into account a. course of dealing. b. course of performance. c. usage of trade. d. none of the choices. 53. Jo owns a condominium that she leases to Kia. Jo gives her daughter Liu $450 on her sixteenth birthday. Jo sells her car to her neighbor Maia for $1,500. Article 2 of the UCC covers a. the lease with Kia. b. the gift to Liu. c. the sale to Maia. d. all of the choices. 54. Rice Farm offers to sell Sushi Restaurants Inc. five hundred bushels of rice. Sushi responds, “We agree to buy five hundred bushels only if the rice is Grade-A quality.” Without more, their contract is formed according to a. the new terms of the acceptance. b. whatever is reasonable. c. the terms of the original offer. d. none of the terms. 55. With respect to a contract for a sale of goods, when its express terms cannot be construed as reasonably consistent with the parties’ course of performance and course of dealing, and the usage of trade, the UCC gives priority to a. express terms. b. course of performance. c. course of dealing. d. usage of trade.

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Chap 20_15e 56. Joel sells a violin to Key for $5,000, a cello to Leia for $400, and five music stands to Mica for $50. A writing is required to enforce the sale of a. the violin only. b. the violin and the cello only. c. the violin, the cello, and the music stands. d. none of the choices. 57. Marine Expeditions Inc. pays Noah’s Boats $4,000 to use an oceangoing vessel for a month. For the purposes of the UCC, this is a. a merchant’s firm offer. b. a contract for services. c. a lease. d. a sale. 58. Mara and Nim enter into a contract for a sale of orchids that requires payment within thirty days of delivery. Under the UCC, the payment term in the contract a. removes the entire transaction from the UCC. b. is superseded by the UCC rule that payment is due on delivery. c. is fully enforceable. d. is not enforceable because it does not specify a definite date. 59. Grass Farm LLC offers to sell fifty bales of hay at a certain price to Horse Stable Inc. The owner of the stable responds, “We agree if you agree to make it sixty bales for the price.” Their contract is formed according to a. the new terms of the acceptance. b. whatever is reasonable. c. the terms of the original offer. d. none of the terms. 60. Under the second of two contracts with Citrus Orchard for deliveries of fruit, Distribution Center refuses to pay for fruit that arrives damaged. Citrus responds that the buyer did not waive payment for damaged goods in the parties’ first contract. Citrus is arguing that the court should take into account a. course of dealing. b. course of performance. c. usage of trade. d. none of the choices. 61. Meds-Free Inc. enters into a contract to sell its product line to Naturopath Clinic, which later sells some of the items to Oneida, a patient and consumer. Article 2 of the UCC applies to a. both transactions. b. the sale from Med-Free to the clinic only. c. the sale from the clinic to its patient only. d. none of the transactions.

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Chap 20_15e 62. Grinders Mill agrees to sell to Harvest Company a certain quantity of refined grains. Some of the other terms in the deal are left open. In the case of a dispute, a court will presume a. whatever favors the non-breaching party. b. whatever favors the plaintiff. c. whatever is reasonable. d. nothing. 63. Skyscape LLC regularly engages in the business of leasing construction equipment, primarily to commercial contractors. Tilde, a consumer, leases a backhoe from Skyscape to landscape the property at her home. The price is less than the amount set by state statute. Under the UCC, the deal with Tilde is a. a commercial lease. b. a consumer lease. c. a construction lease. d. none of the choices. 64. Jade offers to sell Khan a collection of baseball cards. To qualify as a sale under the UCC, Khan’s payment must be a. split into more than one installment. b. in cash, or its equivalent, or in other goods or services. c. specified on an invoice and evidenced by a receipt. d. the fair market value of the goods. 65. Containers Inc. sends its standard order form to Distribution Corporation to evidence a sale of packing materials. Distribution responds with its own standard purchase order form. Additional terms in Distribution’s form automatically become part of the contract unless a. the terms materially alter the original contract. b. the original offer expressly required acceptance of its terms. c. Containers objects to the new terms within a reasonable time. d. any of the choices. 66. Dona offers to sell her used sofa, chair, coffee table, end table, and lamp to Etta for $700. Etta responds that she will pay that price if Dona’s TV set is included. Neither party is a merchant. Their contract is formed according to a. the new terms of the acceptance. b. whatever is reasonable. c. the terms of the original offer. d. none of the terms.

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Chap 20_15e 67. Under a contract with Assemble Inc. for the delivery of a shipment of TV sets, Buyers Store refuses to pay for sets with cracked cases. Assemble files a suit against Buyers, claiming that the defendant assumed the risk of damaged goods. The court may allow evidence of this term if it finds that the parties’ contract is a. fully integrated. b. not fully integrated. c. none of the choices. d. a complete and final statement of their agreement. 68. Bagels Inc. and other bakeries refer to a “baker’s dozen” as consisting of a collection of thirteen baked goods. According to the UCC, this is a. a course of dealing. b. a course of performance. c. none of the choices. d. a usage of trade. 69. Curt enters into a contract with Drivers Lease Company for a three-year lease of a car. This contract is subject to a. Article 2 of UCC. b. Article 2A of the UCC. c. none of the choices. d. the common law only. 70. Ric enters into written agreements with Sophie involving a sale of Timberline Motel, including the land, the building, and the furnishings. The UCC Statute of Frauds governs the sale of a. all of the choices. b. the building. c. the furnishings priced at $500 or more. d. the land. 71. Time Inc. offers to sell to Unlimited Sales Company one hundred digital watches at $50 a piece, subject to certain specific delivery dates. Unlimited replies with a signed purchase order that reads, “Accept your offer for 100 watches at $50 each. Must be delivered to our warehouse.” Time does not respond or deliver the goods. Unlimited files a suit for breach of contract, to which Time answers that there is no contract because Unlimited’s purchase order contained additional terms and is not signed by Time. Can Unlimited recover? Explain.

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Chap 20_15e 72. Clean Machines Company makes washing machines. Over the phone, Clean offers to sell Dealer Appliance Outlet one hundred model EZ2000 washers at a price of $150 per unit. Clean says that it will keep the offer open for ninety days. Dealer responds that within two or three weeks it will decide whether to accept. One week later, Clean faxes, and Dealer receives, notice that the offer is withdrawn. Dealer immediately phones Clean to accept the $150-per-unit offer. When Clean refuses to deliver at that price, Dealer files a suit. Clean asserts, first, that there is no contract and, second, that if there is a contract, it is unenforceable. Discuss Clean’s assertions.

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Chap 20_15e Answer Key 1. True 2. True 3. True 4. False 5. False 6. False 7. True 8. True 9. True 10. False 11. False 12. True 13. False 14. False 15. False 16. True 17. True 18. True 19. False 20. True 21. False 22. True 23. True 24. True 25. True 26. False

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Chap 20_15e 27. False 28. False 29. True 30. False 31. True 32. False 33. False 34. True 35. False 36. a 37. c 38. a 39. a 40. c 41. c 42. c 43. a 44. a 45. d 46. c 47. d 48. c 49. c 50. c 51. b 52. c 53. c 54. a Copyright Cengage Learning. Powered by Cognero.

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Chap 20_15e 55. a 56. a 57. c 58. c 59. d 60. a 61. a 62. c 63. b 64. b 65. d 66. c 67. b 68. d 69. b 70. c 71. Yes. Additional or different terms in an unconditional acceptance, which is otherwise definite and timely, are interpreted as proposals for additional terms to a contract, unless the contract is between merchants. In that situation, the terms become part of the contract unless (1) the offer expressly limits acceptance to its terms, (2) the additional terms materially alter the contract, or (3) the offeree objects to the additional terms within a reasonable time. Here, the offer did not expressly limit the acceptance, the extra terms did not materially change the contract, and Time did not object within a reasonable time. If either or both of the parties are not merchants, a contract is formed according to the terms of the original offer. Thus, here, the additional term (delivery to Unlimited’s warehouse) would have become part of the contract even if one or both parties had not been merchants. Time’s Statute of Frauds claim (that the purchase order was not signed by Time) also fails. For a contract for a sale of goods between merchants, when one party sends a written confirmation within a reasonable time after terms have been reached orally, the confirmation is binding unless the recipient objects within ten days of receipt. The merchant receiving the communication must have reason to know its contents, but it needs to be signed only by the party who sends it. Here, Time received the signed writing, but did not object within the ten days.

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Chap 20_15e 72. Clean’s contention that there is no contract between it and Dealer is correct. An offeror can revoke an offer at any time before acceptance without liability unless the offer is irrevocable. For this offer to be considered irrevocable, Dealer would have to prove that it had an option, which requires consideration, or that the offer was irrevocable under UCC provision that applies to merchants’ firm offers. Neither of these applies. Dealer gave no consideration for the offer to be kept open, and thus no option was created. And, for the offer to be irrevocable without consideration, Clean—a merchant—would have had to give assurance that the offer would remain open for ninety days in a signed writing. Because the assurance was made orally, the offer was revocable. Thus, Dealer’s receipt of Clean’s revocation (withdrawal) of the offer before Dealer’s acceptance terminated the offer, and no contract was formed. Clean’s contention that even if a contract was created, the contract is unenforceable is also correct. Under the UCC’s Statute of Frauds, any contract for the sale of goods priced at $500 or more must be in writing, be supported by written evidence such as a memorandum, or be the object of an applicable exception (such as written confirmation between merchants, specially ordered or manufactured goods, admission under oath, or partial performance completed) to be enforceable. The contract in this question is for a sale of goods (washing machines) priced at $500 or more ($15,000). It was not in writing; nor is there a writing signed by Clean that an oral contract was formed. Also, none of the exceptions apply. Thus, even if Dealer could prove that an oral contract had been made, the contract could not be enforced against Clean’s defense of the Statute of Frauds.

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Chap 21_15e Indicate whether the statement is true or false. 1. If the seller is a merchant who is holding the goods for the buyer to pick up, the risk of loss passes when the buyer takes physical possession of the goods. a. True b. False 2. If the seller’s title is voidable, a good faith purchaser acquires no title, and the real owner can reclaim the goods. a. True b. False 3. When a bailee is holding goods that are to be delivered under a contract without being moved, risk of loss passes when the bailee acknowledges the buyer’s right to the goods. a. True b. False 4. After title passes to a buyer, a seller no longer has an insurable interest in the goods. a. True b. False 5. If a seller supplies ten dishwashers in response to an order for ten washing machines—“F.O.B. the seller’s warehouse”—and the goods are damaged in transit to the buyer’s store, the loss falls on the seller. a. True b. False 6. If the seller’s title is void, the seller has the power to transfer good title to a good faith purchaser. a. True b. False 7. In a shipment contract, the seller is required to deliver the goods to a particular destination. a. True b. False 8. Generally, the party in breach of a sales contract bears the risk of loss. a. True b. False 9. Identification is not significant for the buyer or lessee. a. True b. False 10. On a contract—“F.O.B. New York”—for a sale of almonds by a broker in California, the risk of loss passes to the buyer when conforming goods are placed in the possession of the carrier. a. True b. False

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Chap 21_15e 11. Title can pass to the buyer from the seller before the goods are identified to the contract. a. True b. False 12. In a shipment contract, risk of loss remains with the seller until the goods are delivered to the buyer at the buyer’s place of business. a. True b. False 13. If a person buys cattle at a livestock auction, unless the parties agree otherwise, title will pass to the buyer when the cattle are physically delivered. a. True b. False 14. The parties can agree in their contract when identification will take place. a. True b. False 15. A receipt issued by a warehouser for goods stored in a warehouse is a warehouse receipt. a. True b. False 16. A trucking company that normally issues documents of title for goods its receives is a bailee. a. True b. False 17. If the contract calls for the sale or lease of specific goods that are already in existence, identification takes place when the goods are shipped. a. True b. False 18. An owner in common of fungible goods can pass title and risk of loss to the buyer only by actually separating the goods. a. True b. False 19. Parties to sales or lease contracts often obtain insurance coverage to protect against damage, loss, or destruction of the goods. a. True b. False 20. Identification is the express designation of the goods provided for in a contract. a. True b. False

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Chap 21_15e 21. Buyers and lessees have an insurable interest in identified goods. a. True b. False 22. If a lessor is a merchant who is holding the goods for the buyer to pick up, the risk of loss passes to a lessee when the lessee takes physical possession of the goods. a. True b. False 23. Risk of loss cannot pass from seller to buyer unless the goods are identified to the contract. a. True b. False 24. In a destination contract, risk of loss passes to the buyer or lessee when the goods are delivered to the carrier. a. True b. False 25. Identification is one of the concepts involved in determining the rights and liabilities of parties to a sales contract. a. True b. False 26. When a buyer breaches a sales contract, the risk of loss remains with the seller to the extent of any deficiency in the buyer’s insurance coverage. a. True b. False 27. The UCC’s provisions relating to passage of title do not apply to leases of goods. a. True b. False 28. Generally, all contracts are assumed to be destination contracts if nothing to the contrary is stated in the contract. a. True b. False 29. When no documents of title are required, title does not pass. a. True b. False 30. Goods that are not both existing and identified to the contract are called future goods. a. True b. False

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Chap 21_15e 31. If the seller is not a merchant, and the goods are being held by the seller for the buyer to pick up, the risk of loss passes to a buyer on identification. a. True b. False 32. Generally, the buyer acquires whatever title the seller has to the goods sold. a. True b. False 33. When a buyer breaches a contract, risk of loss remains with or reverts to the seller. a. True b. False 34. In most situations involving sales or leases, rights and liabilities are generally not determined by who has title to the goods. a. True b. False 35. In a sales contract, the passage of risk of loss from a seller to a buyer gives the buyer the right to insure the goods. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. Commercial Rents Corporation agrees to lease a pressure washer to Delivery Trucks Inc., which agrees to pick it up at E Street Warehouse. Before Delivery Trucks retrieves the washer, it is stolen. The loss is suffered by a. Commercial Rents. b. Delivery Trucks. c. E Street Warehouse. d. the thief. 37. Regional Freight LLC delivers a receipt issued by Storage Warehouse for goods stored in its facility to Transnational Inc., a buyer of the goods. This is a. a bill of lading. b. a destination contract. c. a shipment contract. d. a warehouse receipt. 38. Quaff Café buys twenty-five crates of apples from Reynaldo Produce, Inc. The parties agree to ship the apples “F.O.B. Quaff” via Swift Trucking Company. The apples rot in transit. The loss is suffered by a. Quaff. b. Swift. c. F.O.B. d. Reynaldo. Copyright Cengage Learning. Powered by Cognero.

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Chap 21_15e 39. Roofing Contractor LLC buys roof tiles from Shingles Inc. The parties agree that the tiles will be shipped “F.O.B. Shingles” to Roofing via Tristate Shipping Corporation. The goods are lost in transit. The loss is suffered by a. Tristate. b. Shingles. c. Roofing. d. consumers by an increase in the prices of tiles and shipping. 40. Barley that fills Cultivator Co-op’s silo is fungible if the grain is a. alike naturally, by agreement, or by trade usage. b. fundamentally different. c. good, edible, and marketable. d. rotting due to a fungus caused by a leaky roof and a delay in shipping. 41. In a sale of oranges from Citrus Grove Farms to Donuts & Juice Inc. to be delivered after the harvest, a fire destroys the fruit before it is picked. Under the UCC, the rights and liabilities of Citrus and Donuts in this circumstance are generally determined by a. the right of ownership. b. who has title. c. the concepts of identification and risk of loss. d. all of the choices. 42. Runners Feet, a shoe store, orders one hundred pair of athletic shoes from Speedster Inc. Absent a contrary agreement between the parties, title will pass to Runners Feet when a. the parties sign the contract. b. the goods exist and are identified. c. the seller physically delivers the goods. d. the buyer pays for the goods. 43. Organic Café orders five gallons of PureMaid-brand olive oil from Quico Oil Inc. Quico mistakenly ships Pure soy oil, which Organic keeps, despite the nonconformity. The oil is destroyed in a fire. The loss is suffered by a. all of the parties as owners in common in equal measure. b. Pure. c. Organic. d. Quico. 44. Appliance Corporation sells Best-brand vacuum cleaners to Cash Discount Stores and other retailers. Appliance will have an insurable interest in the vacuums as long as a. Appliance remains in business. b. Appliance retains title to the goods. c. the goods are in existence. d. there is no risk of loss.

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Chap 21_15e 45. Growers Mart buys one hundred cases of berries from Hilltop Farm. The parties agree that the berries will be transported “F.O.B. Hilltop Farm” via Intrastate Trucking Company. Intrastate’s truck and the berries are lost in a fire following an accident. The loss of the berries is suffered by a. Growers. b. Hilltop. c. Intrastate. d. all of the parties as owners in common in equal measure. 46. Outdoor Outfitters Store contracts to buy fifty tents from Pitched Camp, Inc. Unless the contract states otherwise, this document is assumed to be a. a bill of lading. b. a destination contract. c. a shipment contract. d. a warehouse receipt. 47. Ota buys a Prius from Quincy’s Toyota, paying with a check that is later dishonored. Ota offers to sell the car to Rafe for cash. With respect to this offer, Ota’s title to the car is a. valid. b. voidable. c. void. d. good. 48. Elena buys from Fiesta Autos a used pick-up truck. The truck was manufactured by Gem Vehicles, Inc., and previously owned by Hanna. Regarding title to the truck, Elena acquires a. whatever title Fiesta had. b. whatever title Gem had. c. whatever title Hanna had. d. no title. 49. Roasters Corporation and Outdoor Barbecues Inc. enter into a contract for a sale of a commercial grill. The contract requires Roasters to deliver the goods to Speedy Delivery Company for transport to Outdoor. Risk of loss passes to Outdoor when a. Roasters delivers the goods to Speedy. b. Roasters and Outdoor enter into their contract. c. Speedy transports the goods to Outdoor. d. Outdoor begins to use the grill. 50. Garden Stores order a specific assortment of rose bulbs from Hybrid Company. Hybrid mistakenly ships a selection of annuals, which Garden rejects and returns via Indie Transport Inc. During the return, the annuals are lost. The loss is suffered by a. Garden. b. Hybrid. c. Indie. d. consumers by increases in the prices of other goods and shipping. Copyright Cengage Learning. Powered by Cognero.

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Chap 21_15e 51. United Wear Inc. and Winter Gear stores enter into a contract for a sale of coats. Their contract can indicate that the price includes transportation costs to a specific destination by including the term a. C.I.F. b. delivery ex-ship. c. F.A.S. d. F.O.B. 52. Pipe Company orders six irrigation pumps from Quality Pumps Inc. The pumps are stored in Re-storage Warehouse. Under the terms of the order, Quality must give Pipe a warehouse receipt for the goods, which the buyer will then pick up. Title to the goods passes to Pipe when a. Quality stores the pumps. b. Pipe orders the pumps. c. Pipe picks up the pumps. d. Quality gives Pipe the warehouse receipt. 53. Beef Ranch raises calves to sell. In January, Cold Cuts Inc. contracts with Beef to buy fifty calves. Beef breeds its cows in April, and the cows calve in February of the following year. Identification of the calves to the Cold Cuts contract takes place in a. January, when the contract is signed. b. April, when the calves are conceived. c. February, when the calves are born. d. when the buyer takes possession of the calves. 54. Sure Good Appliance Corporation contracts with Trucking Company to take a selection of appliances to United Railroad Inc. for United to transport the goods to a VeriSafe Company warehouse. Trucking, United, and VeriSafe each acknowledge possession of the goods by a document of title. These parties are a. bailees. b. buyers. c. lessees. d. sellers. 55. A contract between Fresh Fruit Corporation and Green Grocer Inc. requires Fresh Fruit to deliver goods to Green Grocer’s place of business. This is a. a bill of lading. b. a destination contract. c. a shipment contract. d. a warehouse receipt.

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Chap 21_15e 56. Mountain Coffee Company and Nature’s Cuisine Inc. enter into a contract for a sale of coffee beans. The contract includes the term “F.O.B. Ocean City,” which is the location of Nature’s Cuisine. This means that the contract is a. a bill of lading. b. a destination contract. c. a shipment contract. d. a warehouse receipt. 57. Brad leaves an iPod at Computer Sales & Repair (CSR) to have the battery replaced. CSR sells the iPod to Doris, who does not know that it belongs to Brad. Brad can recover from a. no one. b. CSR. c. Doris. d. the maker of the iPod. 58. A seller’s title to goods being sold is voidable if the goods a. were bought on credit. b. were obtained by fraud. c. were delivered to a buyer but have not yet been paid for. d. must be sold to a good faith purchaser for value. 59. Jared buys a kayak from a Lake Craft store, which agrees to keep it for him until he picks it up. Before Jared gets the kayak, an unforeseen tornado destroys the store and the goods. The loss is suffered by a. Jared. b. the maker of the kayak. c. Lake Craft. d. the government agency that failed to foresee the tornado. 60. Security Insurance Agency contracts with Town Motors to buy six cars. The contract lists the cars by their VINs (vehicle identification numbers). Under the UCC, identification a. requires the filing of a copy of the contract in the appropriate state office. b. has taken place. c. cannot take place unless the cars are in the seller’s possession. d. cannot take place until the cars are in the buyer’s possession. 61. Red Bev LLC contracts to buy two tons of strawberries from Sweet Fruits, Inc. The contract states that Sweet Fruits is required to ship the strawberries to Red Bev by Truck Transport Inc. The contract is a. a bill of lading. b. a destination contract. c. a shipment contract. d. a warehouse receipt.

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Chap 21_15e 62. Confection Corporation orders Double Chocolate Bars from Edible Distribution Company. Edible identifies the goods. Before they are shipped via Fast Shipping LLC, an insurable interest in the goods exists in a. Confection only. b. Edible only. c. both Confection and Edible. d. Confection, Edible, and Fast. 63. An insurable interest is a. an interest in goods permitting a party to insure against their damage. b. an interest in ensuring that goods are of a certain quality. c. interest that can accrue from investing in insurance of certain goods. d. none of the choices. 64. Spuds Corporation buys from Tater Farm Inc. a potato crop that Tater plans to plant and harvest during the next growing season. Spuds plans to sell the potatoes to Tasty Food Restaurant. After the potatoes are planted, but before they are harvested, an insurable interest in the crop exists in a. Spuds and Tater, but not Tasty. b. Spuds, Tater, and Tasty. c. Tater only. d. none of the choices. 65. EverSafe Corporation in New York sells a truckload of protective suits, masks, and other safety gear to Foundry Inc. in Connecticut, “F.O.B. New York.” EverSafe arranges with Geo Truckline to transport the goods. The cost of the transport will be paid by a. EverSafe. b. Foundry. c. Geo. d. all businesses through an increase in the prices of safety gear. 66. Equip Corporation agrees to lease a woodchipper to Forest Management LLC. Before any interest in the woodchipper can pass from Equip to Forest, it must be a. in existence and identified as the goods in the contract. b. in Equip’s physical possession. c. in Forest’s physical possession. d. listed in a document of title filed in the appropriate state office. 67. When the risk of loss passes is generally determined by a. the passage of title to identified goods. b. the acquisition of an insurable interest in specific goods. c. the expression of a buyer or lessee’s interest in obtaining certain goods. d. the terms of a contract for a sale or lease of goods.

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Chap 21_15e 68. Consumers Choice Store accepts a shipment of phones from Digital Devices Inc. Consumers Choice later discovers a defect in the phones, revokes acceptance, and returns the goods via GoBack, Inc. During the return, the goods are lost. The loss is suffered by a. Consumers Choice. b. Digital Devices. c. GoBack. d. consumers by increases in the prices of other goods and shipping. 69. Quest Outdoor Store orders a specified size of RiverRun-brand rafts from Sports Merchandise, Inc. Sports Merchandise mistakenly ships rafts of the wrong size, which Quest rejects and returns via Trans-State Shipping. During the return, the rafts are lost. The loss is suffered by a. Quest. b. Trans-State. c. RiverRun. d. Sports Merchandise. 70. Identification gives a. the state the right to impose taxes on a sale or lease of goods. b. the buyer or lessee the right to insure certain goods. c. the seller the right to collect payment for goods before their delivery. d. none of the choices. 71. Quality Computer Company agrees to sell one hundred servers to Social Media Networks Inc. The servers, which Social Media Networks expressly requires to have certain amounts of memory, are to be shipped “F.O.B. Social Media Networks distribution center in Memphis, TN.” When the servers arrive, Social Media Networks rejects them and informs Quality Computer, claiming that the servers do not conform to Social Media Networks’ memory requirement. A few hours later, the servers are destroyed in a fire at Social Media Networks’ distribution center. Will Quality Computer succeed in a suit against Social Media Networks for the cost of the goods?

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Chap 21_15e 72. In the following situations, two parties claim the same goods. Who is most likely to prevail in each circumstance? Explain. (a) Czeslaw steals Denise’s Ultra HD TV set and sells it to Ezra, an innocent purchaser, for value. Denise learns that Ezra has the set and demands its return. (b) Gwendolyn takes her all-terrain vehicle (ATV) for repair to Hank’s Sales & Repair, a merchant who fixes and sometimes sells used ATVs. One of Hank’s employees sells Gwendolyn’s ATV to John, an innocent purchaser-customer, who takes possession. Gwendolyn wants her ATV back from John.

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Chap 21_15e Answer Key 1. True 2. False 3. True 4. False 5. True 6. False 7. False 8. True 9. False 10. False 11. False 12. False 13. True 14. True 15. True 16. True 17. False 18. False 19. True 20. True 21. True 22. True 23. True 24. False 25. True 26. False

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Chap 21_15e 27. True 28. False 29. False 30. True 31. False 32. True 33. False 34. True 35. True 36. a 37. d 38. d 39. c 40. a 41. c 42. c 43. c 44. b 45. a 46. c 47. b 48. a 49. a 50. b 51. d 52. d 53. b 54. a Copyright Cengage Learning. Powered by Cognero.

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Chap 21_15e 55. b 56. b 57. b 58. b 59. c 60. b 61. c 62. c 63. a 64. a 65. a 66. a 67. d 68. b 69. d 70. b 71. No, because the goods were nonconforming, and so the cost of their loss will be borne by Quality Computer, the seller. When goods are shipped and destroyed while in the possession of the buyer, if a contract does not state who bears the risk of loss, the determining factor is whether there has been a breach of the contract. There is a breach if the goods are so nonconforming as to give the buyer a right of rejection. In that situation, the risk of loss belongs to the seller until the defects are cured or until the buyer accepts the goods in spite of their defects. It makes no difference, in these circumstances, whether the agreement is a shipment contract or a destination contract. Here, the goods were destroyed without their defects being cured and without the buyer’s accepting them anyway. 72. (a) A buyer acquires whatever title the seller has to the goods sold. If the seller is a thief, the seller’s title is void (seller has no title). Thus, the buyer can acquire no title, and the real owner has superior rights. Under those principles, Denise can recover the set from Ezra. (b) When a person “entrusts” goods to a merchant (a person who deals in goods of that kind), the merchant has the power to transfer a good title to any purchaser who acquires the goods in the ordinary course of business. Gwendolyn entrusted her ATV to Hank’s. Hank’s deals in goods of that kind. Therefore, Hank’s could pass good title to the ATV to a customer (John) because John purchased the goods in the ordinary course of business. Consequently, Gwendolyn cannot get the ATV back from John. (But Hank’s is liable to the true owner, Gwendolyn, for the equivalent value of the ATV).

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Chap 22_15e Indicate whether the statement is true or false. 1. Under the UCC, because a contract for the sale of six display counters does not designate where the goods will be delivered, the place of delivery is the buyer’s place of business. a. True b. False 2. An action for breach of contract under the UCC must be commenced within a certain period of time before the cause of action accrues. a. True b. False 3. A buyer will be deemed to have accepted delivered goods if, after a reasonable opportunity to inspect the goods, the buyer does not reject them. a. True b. False 4. Under the UCC, good faith can never be disclaimed. a. True b. False 5. When the time for performance under a contract expires, the right to cure also expires. a. True b. False 6. A buyer can revoke his or her acceptance if, despite assurances by the seller that the goods would conform, the buyer was aware of their nonconformity before acceptance. a. True b. False 7. If a buyer wrongfully refuses to pay for goods, the seller can reclaim them and resell them, without crediting the sale proceeds to the buyer. a. True b. False 8. Under the United Nations Convention on Contracts for the International Sale of Goods, a buyer can avoid obligations under a contract only if the seller fails to deliver the goods. a. True b. False 9. Under shipment contract for the sale of a certain quantity of solar panels, the seller is required to deliver conforming goods at a particular destination. a. True b. False

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Chap 22_15e 10. To bring an action based on breach of warranty, a buyer or lessee has a certain limited period of time from the date of delivery to file suit. a. True b. False 11. In a sales contract, an agreed-on remedy is in addition to those provided in the UCC even if the parties expressly otherwise. a. True b. False 12. If a seller fails to deliver the goods, the buyer can purchase other goods to substitute for those due under the contract, but cannot then sue for consequential damages. a. True b. False 13. If a seller fails to deliver conforming goods, the measure of recovery in the buyer’s suit for damages is the difference between the contract price and the market price at the place of delivery at the time the buyer learns of the breach. a. True b. False 14. Tender can occur at any hour—for example, 2 A.M.—and in any manner—such as by a phone call to the buyer, allowing “fifteen minutes to pick up the goods.” a. True b. False 15. A letter of credit is independent of the underlying contract between a buyer and seller, requiring the issuer to ascertain whether the contractual conditions have been met. a. True b. False 16. If a buyer rightfully rejects nonconforming goods, he or she can resell them and retain the proceeds, without crediting the amount to the seller. a. True b. False 17. Under the United Nations Convention on Contracts for the International Sale of Goods, a seller can avoid obligations under a contract only if the buyer fails to accept delivery of the goods. a. True b. False 18. If a buyer wrongfully refuses to accept the goods, the seller can bring an action for damages equal to the difference between the contract and market prices at the time and place of tender. a. True b. False

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Chap 22_15e 19. Under the perfect tender rule, a buyer or lessee has the right to insist on goods that conform to their contract in every detail. a. True b. False 20. If, before the time for contract performance, one party communicates an intent not to perform, the other party can only wait to see if the repudiating party will decide to perform. a. True b. False 21. A seller who tenders nonconforming goods with a price allowance has reasonable grounds to believe that the buyer will accept the tender. a. True b. False 22. Under the United Nations Convention on Contracts for the International Sale of Goods, the measure of damages on a contract’s breach normally includes foreseeable consequential damages. a. True b. False 23. A buyer is required to cover—a failure to do so will bar the buyer from using any other remedies available under the UCC. a. True b. False 24. If Basic Pipe LLC and City Construction Inc. state in their contract that repair or replacement is the exclusive remedy, then it is—even if Basic is unable to repair a defect or replace a defective part. a. True b. False 25. If contracting parties agree that defective goods will not be rejected if the seller or lessor can repair or replace them within a reasonable period of time, the perfect tender rule does not apply. a. True b. False 26. When the goods delivered are not as promised, the measure of recovery in the buyer’s suit for damages is the difference between the values of the goods as accepted and if they had been delivered as warranted. a. True b. False 27. Commercial impracticability arises only when the parties—at the time the contract was made—had reason to foresee a certain event that could make performance “impracticable.” a. True b. False

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Chap 22_15e 28. When a buyer or lessee is a consumer, any limitation of damages is per se unconscionable. a. True b. False 29. Any use of delivered goods by the buyer—even for the limited purpose of testing them—constitutes acceptance. a. True b. False 30. The parties to a sales contract can vary their rights and obligations by agreement, but they cannot change the measure of damages. a. True b. False 31. If a breach occurs when the seller still possesses identified goods, the seller must nevertheless deliver the goods to pursue a remedy. a. True b. False 32. If a party to a contract has reasonable grounds to believe that the other party will not perform, he or she can demand in writing assurance of performance. a. True b. False 33. A buyer can revoke his or her acceptance if it was predicated on a reasonable assumption that the goods’ nonconformity would be cured, and the nonconformity was not cured. a. True b. False 34. The parties to a sales contract can limit or exclude consequential damages for any commercial loss—such as a business’s lost profits or property damage. a. True b. False 35. The obligation of commercial reasonableness underlies every sales and lease contract. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. Under the United Nations Convention for the International Sale of Goods, the measure of damages for a breach of an international sales contract normally is the difference between a. the contract price and the market price of the goods. b. compensatory damages and foreseeable consequential damages. c. the value of the currencies of the contracting parties’ respective markets. d. the costs of assurance and cooperation.

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Chap 22_15e 37. Bull & Cow Corporation, a U.S. firm, and Carne Ltd., an Italian company, contract for a sale of beef. Under a letter of credit issued by Fiscal Bank to facilitate the deal, Carne promises to a. reimburse the bank for the amount paid to the seller. b. ascertain whether the seller delivers as contracted. c. transmit information and expedite payment. d. pay the seller when the bank has complied with the terms of the letter. 38. Construction Inc. contracts to buy some heavy equipment from Dig Machines Inc. Before either party performs, Dig sells its assets to Excavation Corporation. On learning of the sale, Construction is concerned about its contract with Dig. Construction should a. demand an assurance of performance from the seller. b. consider the contract repudiated and sue the seller for breach. c. buy the equipment from a different firm and bill the seller for the price. d. buy the equipment from a different firm and bill Excavation for the price. 39. Motor Parts Inc. and National Auto stores enter into a contract for a sale of auto parts that meet certain specifications. Motor ships goods that do not comply. National a. cannot reject the entire shipment. b. can reject the entire shipment. c. must accept the entire shipment. d. must reject the entire shipment. 40. ABC Hardware Store orders one hundred power hand-drills from Drilling Tools Inc. When the hand-drills are delivered, they are all missing pieces. ABC rejects the shipment. To exercise a right to cure, Drilling must a. promptly notify ABC of the intent to cure. b. pay a cure fee. c. pick up the nonconforming tools before the end of the business day. d. enter into a new contract with ABC. 41. Steel Buildings Inc. agrees to sell four portable garages to Truck Service Center. Five days later, Truck refuses delivery and cancels the contract. Steel is entitled to a. force Truck to accept the garages. b. recover any damages from Truck but not resell the garages. c. resell the garages and recover any damages from Truck. d. resell the garages but not recover any damages from Truck. 42. Nature’s Eggs Inc. agrees to supply Omelet Express with five hundred eggs. Nature’s Eggs can reasonably ask Omelet Express to pick up the eggs at a. no specific time—only a buyer can set the time. b. any reasonable hour. c. no time—as a seller, Nature’s Eggs must deliver the goods. d. any hour.

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Chap 22_15e 43. Fuel Connectors Inc. agrees to sell Go-Flo, Inc., a certain quantity of hose couplings and fittings, but the contract does not specify a place of delivery. Go-Flo is expected to pick up the goods. The place of delivery is a. Fuel Connector’s place of business. b. Go-Flo’s place of business. c. the current location of the hose couplings and fittings. d. a warehouse midway between the parties’ places of business. 44. Refined Mills orders “Grade A” oats from Sweet Farms to grind and sell to Town Grocery. Sweet ships “Grade B” grain, which Refined accepts. To recover damages for the nonconformity, Refined must give notice of the breach within a reasonable time to a. Sweet. b. Town. c. no one. d. the appropriate state government agency. 45. Bayou Boats Inc. contracts for the sale of seven swamp boats to Eventide Fishing Tours. Bayou repudiates the contract. Eventide’s recovery is measured at the time a. Bayou advertised the goods. b. Eventide ordered the goods. c. Eventide learned of the breach. d. Bayou knew that it would repudiate the contract. 46. Loading Ramps Inc. contracts to sell sixteen loading ramps to Moving Service Inc. Loading ships the ramps, which Moving accepts but does not pay for. Loading can a. sue to recover the purchase price plus incidental damages. b. sue to recover the purchase price minus incidental damages. c. resell the ramps to any buyer willing to repossess them from Moving. d. require Moving to revoke its acceptance of the ramps. 47. Durable Goods Inc., a U.S. firm, and Économique S.A., a French company, contract for an international sale of goods with the use of a letter of credit issued by Finance Corporation. In this transaction, the letter protects a. primarily the issuer. b. both the buyer and the seller. c. only any third parties, such as advising and paying banks. d. chiefly the account party. 48. Business Rents LLC and Cartage Trucking Inc. enter into a contract for a lease of ten hydraulic lifts. Under the perfect tender rule, Business Rents must ship or tender lifts to Cartage that, with regard to the contract specifications, conform a. to the best of Business Rents’ ability under the circumstances. b. reasonably. c. in every way. d. substantially.

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Chap 22_15e 49. Chair Company contracts to deliver a dozen suites of dining room tables and chairs to Furniture Store on May 1. On April 15, Chair tells Furniture that delivery will be delayed until June 1. Furniture may a. await performance, sue Chair, or suspend its own performance. b. only await Chair’s performance for a commercially reasonable time. c. only sue Chair for breach of contract. d. only suspend its own performance. 50. River Gear Company and Scenic Trips Inc. enter into a contract on August 1 for the sale of fifty inflatable river rafts. Scenic cancels the contract ten days later. River is unable to sell the rafts to another buyer. River can a. force the buyer to accept the rafts and pay for them. b. recover the contract price but must hold the rafts for the buyer. c. recover the contract price and keep the rafts. d. recover the contract price but must destroy the rafts. 51. Watercraft Inc., a U.S. firm, files a suit in a U.S. court against Xia Ltd., a Chinese company, seeking specific performance. Under the United Nations Convention for the International Sale of Goods, the court is most likely to grant this remedy if a. no remedy at law is available and the goods at issue are unique. b. specific performance is a commonly granted remedy in China. c. the measure of damages would be undercut by currency differences. d. the parties’ deal was a simple letter-of-credit transaction. 52. Speedy Auto Parts orders two gross of tires from Tough Tread Inc. Ten of the tires are delivered in a damaged condition. Speedy a. cannot reject the entire shipment. b. must pay for all of the tires at the contract price. c. may accept the shipment with a reduction in price. d. must reject the entire shipment. 53. Burgers Inc. contracts to buy five hundred head of cattle from Cattle Ranch. Before the seller delivers, an outbreak of disease causes a quarantine of the ranch. In this circumstance, the perfect tender rule a. applies to both parties. b. no longer applies. c. applies only to the buyer. d. applies only to the seller. 54. Lumber Company agrees to sell a certain quantity of plywood to Metro Builders Inc. under a destination contract. Lumber must a. allow the buyer to reject the plywood for any reason. b. deliver the plywood to a particular destination. c. inspect the plywood before tendering its delivery. d. place the plywood into the hands of a carrier.

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Chap 22_15e 55. Snee, a consumer, agrees to buy an exercise machine from Treadmills Inc. Their contract excludes consequential damages for personal injuries resulting from the use of the device. This exclusion is a. presumably unconscionable. b. not unconscionable because any loss would be commercial in nature. c. reasonably foreseeable and therefore meets its essential purpose. d. permissible because the buyer can pursue other remedies. 56. Minerals Ltd. contracts to provide several manufacturers with tin. When a cartel of tin-producing countries suddenly embargoes future shipments of tin to Minerals so that it cannot fulfill its contracts, the distributor a. can substitute some other material for the tin. b. is excused from the performance of its contracts. c. is liable for breach of contract. d. must obtain tin in any way to meet the needs of its customers. 57. Granos de Café S.A., a Columbian company, and Hot Drinks Inc., a U.S. firm, contract for a sale of coffee beans. Granos does not deliver. Under the United Nations Convention for the International Sale of Goods, Hot can recover as damages the difference between a. any loss avoided and any profit gained. b. the actual price and the hoped-for price. c. the contract price and the market price. d. the market prices in the contracting parties’ places of business. 58. Elegant Carpet Inc. agrees to sell a certain quantity of carpeting to Fabulous Floor stores under a shipment contract. Elegant must a. allow Fabulous to reject the goods for any reason. b. deliver the carpeting to a particular destination. c. inspect the carpeting before shipping it. d. place the carpeting into the hands of a carrier. 59. RV Company agrees to buy a certain quantity of vintage campers from Sales Inc. Their contract limits consequential damages for lost profits resulting from the use of the goods. This limit is not necessarily unconscionable because a. the loss would be commercial in nature. b. consequential damages cover only reasonable foreseeable losses. c. lost profits are indirect losses. d. the transaction is a sale, not a lease. 60. Real Stones Inc. and Sparkling Jewelry stores enter into a contract for a sale of gemstones. The seller fails to deliver. Sparkling can recover as damages the difference between a. any loss avoided and any profit gained. b. the actual price and the hoped-for price. c. the contract price and the market price. d. the current prices in the contracting parties’ places of business.

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Chap 22_15e 61. Merchant Mart accepts a shipment of nonconforming goods from Nabob Inc. Under the applicable statute of limitations, with respect to pursuing a remedy against the seller for the shipment, the buyer a. must warrant that the goods will be returned. b. is limited to a certain amount of damages. c. is barred from seeking damages. d. has a reasonable time to notify the seller of the breach. 62. H2O Company contracts to sell pumps, tanks, and water storage systems to In-Flo Irrigation, Inc. Before the goods are delivered, In-Flo indicates that it will not be able to pay. H2O can a. force In-Flo to accept and pay for the goods. b. require In-Flo to find a buyer for the goods. c. resell the goods and recover any damages from In-Flo. d. do nothing. 63. On July 10, Best Pet Supply Store orders fifty small dog collars from Collars Inc. to be delivered by July 15. On July 13, Collars delivers fifty large dog collars. Best rejects the shipment. Collars has a. no right to cure. b. until July 15 to cure. c. until the end of the business day on July 13 to cure. d. unlimited time to cure. 64. The use of a letter of credit in a transaction for the international sale of goods greatly reduces costs in the deal because the issuer a. must determine whether the contract conditions have been satisfied. b. does not inquire into whether the contract conditions have been met. c. pays only against the facts reflected in documents presented by the beneficiary. d. has the obligation to police the underlying contract. 65. Alpha Packaging Company agrees to buy goods from Boxes Inc. Their contract limits Alpha’s remedies to repair or replacement of defective parts. Alpha can pursue other remedies a. for any breach. b. for indirect losses that were not reasonably foreseeable. c. if a defective part cannot be repaired or replaced. d. under no circumstances. 66. Fresh Grow Farm enters into a contract with Gourmand’s Restaurant for a sale of a certain quantity of specified vegetables. After Fresh ships the produce but before Gourmand’s receives it, the buyer declares bankruptcy. Fresh can stop delivery of the goods in transit a. only if the quantity is at least 50 percent of the contract amount. b. only if the quantity is in a single “unit.” c. only if the quantity is at least a truckload. d. regardless of the quantity.

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Chap 22_15e 67. Rancho Stables orders ten saddles from Saddles Inc. The sales contract states that if the tack is defective, Rancho will allow Saddles to repair or replace it instead of rejecting the shipment. When the gear arrives, it is defective. In this case, the perfect tender rule a. does not apply. b. applies to both parties. c. applies only to Saddles. d. applies only to Rancho. 68. Fiesta LLC contracts to buy 1,000 balloons from Gas Bags Inc. for $1 per item. When the market price decreases to 50 cents per balloon, Fiesta refuses to go through with the deal. Gas Bags can recover a. $1,500. b. $1,000. c. $500. d. $0. 69. Builder Inc. and Concrete Supply Company enter into a contract for a sale of cement. Concrete delivers, but Builder does not pay. Concrete can recover as damages a. any profit lost minus any loss avoided. b. whatever amount Concrete wishes to claim. c. the purchase price plus incidental damages. d. the market price at the place at which Concrete delivered the goods. 70. In a letter-of-credit transaction, Unum Inc., a U.S. firm, delivers a bill of lading to Verity Bank to prove that a contracted-for shipment was made to Wallaby Ltd., an Australian company. Verity must pay Unum a. before policing the underlying contract. b. after verifying the facts that the bill of lading purports to reflect. c. against the bill of lading, without more. d. coincident with the buyer’s assurance of its receipt of the goods. 71. Colby contracts in writing to sell his Dodge-brand pick-up truck to Efrem for $10,500. Colby agrees to deliver the truck on Friday, and Efrem promises to pay the $10,500 on the following Monday. On Thursday, Efrem tells Colby that he changed his mind and will not buy the truck. Over the weekend, Efrem changes his mind again and tenders $10,500 to Colby on Monday. Colby has not sold the truck to another party but refuses the tender and refuses to deliver. Efrem claims that Colby has breached their contract. Colby contends that Efrem’s repudiation released him from his duty to perform under the contract. Who is correct, and why?

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Chap 22_15e 72. Signal Sets Company contracts to deliver one hundred television sets to a new retail customer, Tuner Electronics Warehouse, on May 1, with payment to be made on delivery. Signal tenders delivery in its own truck. Tuner’s manager notices that some of the cartons have scrape marks. Tuner’s owner phones Signal’s office and asks whether the sets might have been damaged as they were being loaded. Signal assures Tuner that the sets are in perfect condition. Tuner tenders Signal a check, which Signal refuses, claiming that the first delivery to new customers is always for cash. Tuner promises to pay the cash within two days. Signal leaves the sets with Tuner, which stores them in its facility pending its "Grand Opening Sale" on May 15. Two days later, Tuner’s stocker opens some of the cartons and discovers that a number of the sets are damaged beyond ordinary repair. Signal claims Tuner has accepted the sets and is in breach by not paying on delivery. Will Signal succeed on these claims? Explain.

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Chap 22_15e Answer Key 1. False 2. False 3. True 4. False 5. False 6. False 7. False 8. False 9. False 10. True 11. False 12. False 13. True 14. False 15. False 16. False 17. False 18. True 19. True 20. False 21. True 22. True 23. False 24. False 25. True 26. True

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Chap 22_15e 27. False 28. False 29. False 30. False 31. False 32. True 33. True 34. True 35. True 36. a 37. a 38. a 39. b 40. a 41. c 42. b 43. a 44. a 45. c 46. a 47. b 48. c 49. a 50. b 51. a 52. c 53. b 54. b Copyright Cengage Learning. Powered by Cognero.

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Chap 22_15e 55. a 56. b 57. c 58. d 59. a 60. c 61. d 62. c 63. b 64. b 65. c 66. d 67. a 68. c 69. c 70. c 71. Efrem is correct. Colby’s refusal to deliver the truck to Efrem on Monday, when Efrem tenders the $10,500 to Colby, constitutes a breach of their contract. Colby could have canceled the contract on Efrem’s anticipatory repudiation but did not do so and did not change his position in any way as a result of Efrem’s anticipatory breach. Efrem could retract his repudiation of the contract at any time before the time performance was due. Because Efrem did retract his repudiation and decided to buy the truck at the time performance was due (and not later), Colby was obligated to abide by the terms of the contract.

72. Signal will lose on both claims. Acceptance of the goods by a buyer takes place when the buyer either signifies that the goods are conforming after inspection or fails to reject after a reasonable time for inspection or acts inconsistently with the seller’s ownership. Once the goods are accepted, the buyer loses the right to revoke acceptance of nonconforming goods unless acceptance was based on a reasonable assurance that the goods were conforming. In this case, although Tuner accepted the goods, it did so on Signal’s assurance that the sets were in perfect condition. Thus, on discovery of the damaged sets, Tuner can revoke acceptance on the basis of substantial impairment of value. In addition, although the contract called for payment on delivery, no method of payment was specified. Therefore, tender of payment is sufficient if it is by any means currently used in the ordinary course of business—a check is such a means. Signal does have a right to demand cash but must give Tuner a reasonable extension of time in which to procure the cash. Thus, Signal’s claim of Tuner’s breach for nonpayment on delivery is not valid.

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Chap 23_15e Indicate whether the statement is true or false. 1. To protect a buyer from surprise, a warranty can be limited only by general, ambiguous language. a. True b. False 2. A merchant who is in the business of selling certain goods makes an implied warranty of merchantability every time she sells any type of merchandise. a. True b. False 3. A salesperson’s statement of fact about goods, such as a product’s capability, made during the bargaining process, is not an express warranty. a. True b. False 4. Goods that are reasonably fit for the ordinary purposes for which such goods are used are automatically sold free of any implied warranties. a. True b. False 5. An express warranty arises when a seller or lessor indicates that the goods are the “best” of the kind of goods sold. a. True b. False 6. Because the UCC sections dealing with warranty disclaimers do not refer to unconscionability, the UCC’s unconscionability standards do not apply to warranty disclaimers. a. True b. False 7. Warranties of title arise automatically in most sales contracts—a thief breaches the warranty by selling stolen goods. a. True b. False 8. In an action based on breach of implied warranty, a buyer must show that the warranty existed and its breach proximately caused the damage sustained. a. True b. False 9. If a creditor repossesses goods from a buyer who bought the goods knowing they were subject to a prior claim, the buyer can recover from the seller for breach of warranty. a. True b. False

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Chap 23_15e 10. On a breach of warranty, unless the parties have agreed to modify the remedies available, a buyer or lessee cannot rescind the agreement. a. True b. False 11. If a buyer is sued by a third party holding trademark rights in certain goods, the buyer must notify the seller or forfeit the right to recover the expenses of the suit from the seller. a. True b. False 12. A seller’s statement of opinion or recommendation about goods, such as a medical device’s appropriateness for an unapproved use, is not an express warranty. a. True b. False 13. If it is unreasonable for two warranties to be considered consistent, the intention of the parties determines which is dominant. a. True b. False 14. An express warranty can be created only by an express warranty provision in a sales or lease contract. a. True b. False 15. A seller’s statement about the value or worth of goods, such the price that might be charged by a competitor, is not an express warranty. a. True b. False 16. Because each type of warranty is created in a different way, the manner in which a warranty can be disclaimed varies with the type of warranty. a. True b. False 17. It is not possible for the implied warranty of merchantability to be breached if a merchant does not know or could not have discovered that its product was defective. a. True b. False 18. A description of goods, such as a product-identification label on the outside of a box that contains the product, is not an express warranty. a. True b. False

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Chap 23_15e 19. A merchant seller’s unsuccessful attempt to repair or replace defective parts is not a breach of warranty if the attempt was undertaken in good faith and with the skill of similarly situated merchant sellers. a. True b. False 20. Express warranties cannot be found in marketing brochures or other promotional materials, which are, by definition, only puffery. a. True b. False 21. Merchantable food is food that is fit to eat based on consumers’ reasonable expectations. a. True b. False 22. Express and implied warranties do not displace each other—more than one warranty can cover the same goods in the same transaction. a. True b. False 23. An implied warranty can arise as a result of a well-recognized trade custom that a court could infer the parties intended to apply to their contract. a. True b. False 24. Because a warranty imposes a duty on the seller, a breach of warranty is a breach of the seller’s promise. a. True b. False 25. If it is unreasonable for two warranties to be considered consistent, the intention of the parties determines which is dominant. a. True b. False 26. Sellers can effectively disclaim or modify title warranties by asserting that they are transferring only such rights, title, and interest as they have in the goods. a. True b. False 27. Every seller is required to give a written warranty for consumer goods in a single document in “readily understandable language.” a. True b. False

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Chap 23_15e 28. A neighbor selling her snow blower at a garage sale does not make an implied warranty of merchantability because she is not in the business of selling goods of the kind. a. True b. False 29. To give rise to an implied warranty of fitness for a particular purpose, a seller must have actual knowledge of a buyer’s particular purpose. a. True b. False 30. To create an express warranty, a reasonable buyer must regard a seller’s representation of fact—found, for example, in an ad—as part of the basis of the bargain. a. True b. False 31. A bar of soap is not merchantable if stepping on it would cause its user to slip and fall. a. True b. False 32. Goods that are of only average, fair, or medium-grade quality are not merchantable. a. True b. False 33. Inconsistent warranties are construed to effectively render each other invalid. a. True b. False 34. Determining whether a statement constitutes an express warranty can depend on the context in which the statement was made. a. True b. False 35. A buyer who refuses to inspect goods when requested by the seller assumes the risk that the goods are defective. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. Rena is a book dealer and an expert in the publications of Shakespeare’s plays. She tells Toby, an investor in rare books, that in her opinion a certain bound volume is an early edition of several Shakespearean dramas. Rena has warranted a. nothing. b. the basis for a bargain between Toby and the owner of the volume. c. the appropriateness of the volume as an investment. d. the accuracy of her opinion. Copyright Cengage Learning. Powered by Cognero.

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Chap 23_15e 37. An action for breach of warranty accrues when a. the seller or lessor tenders delivery of the goods. b. the buyer or lessee is made aware of the breach. c. the non-breaching party notifies the breaching party of the cause. d. the action is commenced. 38. A sales contract for a new car states that the vehicle is “warranted to be free from defects for 48,000 miles or forty-eight months, whichever occurs first.” This statement creates a. an express warranty but not an implied warranty. b. an implied warranty but not an express warranty. c. an express warranty and an implied warranty. d. no warranty. 39. Gabe, a salesperson for Headphones Inc., tells Ike, a potential customer, that Headphones’ products “last a lifetime.” This is a. an express warranty. b. an implied warranty. c. a statement of value. d. puffery. 40. In determining the reasonableness of a buyer’s reliance on a seller’s statement purported to be an express warranty, it can be considered that a reasonable person is more likely to rely on a. an expression of puffery. b. a feature asserted to be “always” or “never.” c. an oral statement by a salesperson. d. a written statement in an ad. 41. In a sale of camping equipment from Outdoor Outfitters to Pedro, a consumer, if the parties have not agreed to limit or modify the remedies available, on a breach of warranty a. the buyer has no recourse against the seller. b. rescission of the parties’ agreement is the only remedy. c. the buyer can sue to recover damages. d. repair or replacement is the only option. 42. The Magnuson-Moss Warranty Act requires that a seller who elects to give a full warranty for consumer goods must a. discover the buyer’s purpose for the purchase before closing the sale. b. disclose certain information in “readily understandable language.” c. deal in goods only of the kind offered for sale. d. determine that the products are fit for any foreseeable purpose.

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Chap 23_15e 43. A warranty that the law derives by inference from the nature of a transaction or the relative situations or circumstances of the parties is a. an express warranty. b. an implied warranty. c. a warranty of title. d. not a warranty. 44. Glass Company and competitive merchants who deal in goods of the same kind assert that their products are reasonably fit for the ordinary purposes for which such goods are used. This is a. an express warranty. b. an implied warranty. c. a warranty of title. d. puffery. 45. 3D Printers LLC includes with each sale of its product a technical manual that includes a general description and exact specifications. Specialty Metalwork buys a 3D product but soon realizes that it is not sufficient for Specialty’s purpose. On the buyer’s claim that the manual’s statements are inconsistent, a court is most likely to hold that a. the general description takes precedence. b. the claim of inconsistency is irrelevant to a breach of warranty. c. the exact specifications displace the general description. d. each statement voids the other. 46. Pipe Company includes in its contracts a provision that reads, in large red letters, “There are no warranties that extend beyond the description on the face hereof.” This disclaimer negates a. the implied warranty of fitness for a particular purpose. b. the implied warranty of merchantability. c. the implied warranty of title. d. none of the choices. 47. To create an express warranty, a seller or lessor a. does not have to use formal words. b. must use the word “warrant.” c. must use the word “guarantee.” d. must use the word “express.” 48. A court is most likely to infer that both parties to a sale or lease of goods intended for a well-recognized trade custom to apply to their contract a. despite evidence to the contrary. b. when both parties had knowledge of the custom. c. in the absence of negligence on the part of the seller or lessor. d. if no implied warranty arises from the parties’ course of dealing.

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Chap 23_15e 49. Fatima asks Gianni, a salesperson for Hues & Colors, for a gallon of paint of a certain color and suitable for interior walls. Gianni sells her a gallon of interior paint of a different color. Gianni has breached a. an implied warranty of fitness for a particular purpose. b. the implied warranty of merchantability. c. an implied warranty for the ordinary purpose of the goods. d. no warranty. 50. Brass Inc. sells seventy-six trombones to Community Band. To avoid liability for most implied warranties, Brass should state in writing that the trombones are sold a. as is. b. by a merchant. c. in perfect condition. d. with no known defects. 51. A label reads, “Box contains one bass clarinet.” This creates a. an express warranty that the goods conform to the description. b. an implied warranty that the goods are merchantable. c. a statement of opinion that the goods are in the package. d. a statement of value or worth about the goods. 52. Jin buys a used car from Klee. Jin knows that Loan Company has a security interest in the car but is not aware that Klee has missed several payments on the loan. Loan repossesses the car. Jin can recover for breach of warranty from a. Klee but not Loan. b. neither Klee nor Loan. c. Loan but not Klee. d. Klee or Loan. 53. Home Remodel Inc. and Ivan enter into a contract for a sale of countertops. Home, a merchant who deals in goods of the kind sold, notes that its goods come with an implied warranty of merchantability. Under the UCC, this means that the goods are reasonably a. fit for the buyer’s particular purpose. b. fit for the ordinary purpose for which such goods are used. c. suitable for resale at an acceptable price. d. the best that money can buy. 54. Packaged Foods Inc. and competitive merchants who deal in goods of the same kind imply that their products are properly packaged and labeled. This is a. an express warranty. b. an implied warranty. c. a warranty of title. d. puffery.

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Chap 23_15e 55. Precision Parts Corporation and competitive merchants who deal in goods of the same kind assert that their products are of the proper quality. This is a. an express warranty. b. an implied warranty. c. a warranty of title. d. puffery. 56. Lake Craft Inc. sells boats to consumers. To avoid liability for oral express warranties, each sales agreement should note that a boat is sold a. as is. b. in perfect condition. c. subject to warranties included in the written contract only. d. with no known defects. 57. Bike Shop sells a trail bike to Cian. When Cian rides the bike, the frame breaks apart. The cause is something that Bike Shop did not know about and could not have discovered. This is a breach of a. a warranty of title. b. the implied warranty of merchantability. c. an express warranty. d. puffery. 58. Singh, a consumer, leases sheet music from Tunes Inc. for a public performance. United Music Corporation, which holds a copyright on the music, sues Singh to stop the performance without a royalty payment. Singh fails to notify Tunes of the suit within a reasonable time. The lessee a. can sue the lessor to recover the expenses of the suit. b. loses any remedy against the lessor for liability established in the suit. c. can raise the failure to notify as a defense in copyright holder’s suit. d. can assert this failure to delay the litigation, but it is not a defense. 59. Cato, a salesperson for Durable Sportswear Corporation, tells Elan, a buyer for Footwear Inc., that Durable’s athletic shoes are made of certain materials. This is a. an express warranty. b. an implied warranty. c. a statement of opinion. d. puffery. 60. Lima buys a new car from Motor City Inc. In the first month after the purchase, the car repeatedly fails to meet standards of quality and performance. To prevail against Motor in a lemon-law dispute, Lima must a. give the dealer or manufacturer an opportunity to remedy the problem. b. take the car to an expert third party for an independent inspection. c. file a court action without prior notice of the defect to the dealer. d. have reason to know of the cause of the failure.

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Chap 23_15e 61. Holiday Corporation sells Idyll-brand campers and trailers. Under most circumstances, Holiday will be presumed to have warranted that its title to the goods is a. the same as every other merchant who deals in goods of the kind. b. none of the choices—a warranty of title is not presumed. c. good and valid. d. only such as the seller has acquired in the goods. 62. Rent-From-Us Inc. leases Speedy-brand moving vans. Under most circumstances, the lessor will be presumed to have warranted that its title to the goods is a. the same as every other merchant who deals in goods of the kind. b. none of the choices—there is no warranty of title in lease contracts. c. good and valid. d. only such as the lessor has acquired in the goods. 63. Under the UCC, when express and implied warranties are consistent a. the express warranty is presumably dominant. b. the implied warranty displaces the express warranty. c. they are construed as cumulative. d. each warranty voids the other. 64. Coal Corporation buys a Durable-brand bulldozer from Equipment Inc. Coal is unaware that Finance Company holds a lien against the bulldozer. Finance repossesses the goods. Coal can recover for breach of warranty from a. Equipment. b. any of the parties. c. Durable. d. Finance. 65. Creekside Mill enters into a contract for a sale of lumber to Development Company. The mill knows the purpose for which the buyer will use the goods. Under the UCC, an implied warranty of fitness of a particular purpose arises if a. the buyer relies on the seller to select suitable goods. b. the goods are merchantable. c. a particular purpose coincides with the ordinary purpose of the goods. d. the seller believes that a product is fit for a particular purpose. 66. In many states, in a lemon-law dispute submitted for arbitration according to the program in a vehicle manufacturer’s warranty, the decision of the arbitration panel is binding on a. the manufacturer but not the purchaser. b. the purchaser but not the manufacturer. c. the manufacturer and the purchaser. d. neither the manufacturer nor the purchaser.

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Chap 23_15e 67. Jem, a salesperson for Kitchens Inc., shows Lana, a buyer for Metro Diner, display items in Kitchens’ showroom, stating that any purchased equipment will match the display. This is a. an express warranty. b. an implied warranty. c. a statement of opinion. d. puffery. 68. A representation concerning the quality, condition, description, or performance potential of goods is a. an express warranty. b. an implied warranty. c. a warranty of title. d. not a warranty. 69. Bren buys a new motorcycle from Cycles Inc. The most important factor in determining whether an express warranty is created is whether a. Bren expresses to Cycles what she wants warranted. b. Bren’s desire for the cycle becomes part of her motivation to deal. c. Cycles’ expression to Bren of what it expects from its customers. d. Cycles’ promise becomes part of the basis of the bargain. 70. Trucks Inc. and United Express Service enter into a contract for a lease of trucks. The lessor is a merchant that deals in goods of the kind leased. Under the UCC, an implied warranty of merchantability arises a. automatically. b. only if the lessee asks for it. c. only if the lessor expresses such a warranty. d. only in conjunction with sales, not lease, contracts. 71. Langston steals from MindGames, Inc., ten game players, which Langston sells to Nu2U Games store. Unaware that the players are stolen, Nu2U reconditions them and sells them to Online Distributors, Inc. With the reconditioned drives, Nu2U gives Online Distributors a written statement that disclaims “any and all warranties.” MindGames learns that Online Distributors has the players and demands their return. Online Distributors gives the equipment to MindGames and files a suit against Nu2U. Will Online Distributors succeed in its suit? Why or why not?

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Chap 23_15e 72. Clark purchases a new car from Dicey’s Deals. The retail installment contract states immediately above the buyer’s signature in large, bold type: "There are no warranties that extend beyond the description on the face hereof" and "There are no express warranties that accompany this sale unless expressly written in this contract." Before purchasing the car, Clark specifically informed Dicey’s salesperson that he wanted a car that could be driven in a dusty area without needing mechanical repairs. Dicey’s salesperson said to Clark, "Nothing will go wrong with this car, but if it does, return it to us, and we will repair it without cost to you." Neither this statement nor any similar statement appears in the retail sales contract. Clark drives the car into a dust storm. The air filter gets plugged up, and the car engine overheats, causing motor damage. Dicey’s refuses to repair the engine under any warranty. Clark claims that Dicey’s is liable for breach of the implied warranty of fitness for a particular purpose, that the Magnuson-Moss Warranty Act prohibits disclaiming this implied warranty, and that the salesperson’s express warranty has also been breached. What are the problems with Clark’s claims?

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Chap 23_15e Answer Key 1. False 2. False 3. False 4. False 5. False 6. False 7. True 8. True 9. False 10. False 11. True 12. True 13. True 14. False 15. True 16. True 17. False 18. False 19. False 20. False 21. True 22. True 23. True 24. True 25. True 26. True

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Chap 23_15e 27. False 28. True 29. False 30. True 31. False 32. False 33. False 34. True 35. True 36. d 37. a 38. c 39. d 40. d 41. c 42. b 43. b 44. b 45. c 46. a 47. a 48. b 49. a 50. a 51. a 52. b 53. b 54. b Copyright Cengage Learning. Powered by Cognero.

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Chap 23_15e 55. b 56. c 57. b 58. a 59. a 60. a 61. c 62. b 63. c 64. a 65. a 66. a 67. a 68. a 69. d 70. a 71. Yes, Online Distributors will succeed in its suit against Nu2U. Every contract for a sale of goods warrants that the title is good and its transfer is proper. This warranty of title arises automatically. The warranty can be excluded or modified only by a specific written statement in the contract. A general disclaimer is not effective—the disclaimer must be specific. In some cases, the circumstances may give the buyer reason to know that the transferor does not have title to the goods. The transfer of the players from Nu2U to Online Distributors was a sale of goods. The warranty of title arose automatically. Nu2U’s disclaimer was in writing, but it was not specific—it did not specifically disclaim that the title was good and its transfer proper. Also, under the circumstances described in this problem, Online Distributors had no reason to know that Nu2U did not have good title to the drives. In this situation, Nu2U warranted the title, breached that warranty in the sale to Online Distributors, and will lose the suit.

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Chap 23_15e 72. Clark has a number of problems with these claims. First, the Magnuson-Moss Warranty Act applies only to written express warranties made by a seller of consumer goods. Because no written express warranties were made, the act does not apply. (Had a written express warranty been made, Clark’s claim that Dicey’s cannot disclaim implied warranties would be correct.) Second, a seller can specifically disclaim the implied warranty of fitness if the disclaimer is in writing and is conspicuous. The word fitness does not have to appear in the disclaimer, and the statement “There are no warranties that extend beyond the description on the face hereof” is specifically designated by the UCC as effectively disclaiming the warranty of fitness. The bold print would seem to serve as notice of disclaimer. Therefore, Clark cannot claim breach of the warranty of fitness. Third, the UCC also allows for negation of express warranties if the negation is in clear, specific, and unambiguous language. Although a valid argument can be made that the buyer deserves protection from unauthorized oral warranties, if the buyer signed the contract with knowledge of the conspicuous disclaimer, the buyer’s claim will not be supported.

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Chap 24_15e Indicate whether the statement is true or false. 1. Regional trade agreements and associations help to minimize trade barriers among nations. a. True b. False 2. To prevent the sale of imported goods at less than fair value, an extra tariff—known as an antidumping duty— may be assessed on the imports. a. True b. False 3. Under United Nations guidelines, objects no longer in operation should be removed from orbit if this can be accomplished in a controlled manner. a. True b. False 4. When a foreign government acts as a “private party” in the market, its actions qualify as commercial activity for purposes of the Foreign Sovereign Immunities Act. a. True b. False 5. A U.S. court can assert jurisdiction over a foreign government in a case involving the control of natural resources within that government’s territory. a. True b. False 6. The Outer Space Treaty declares that internationally recognized political boundaries extend from Earth into the farthest reaches of space. a. True b. False 7. An allegation that certain imported goods infringe on a U.S. firm’s patents will be investigated by the ExportImport Bank of the United States. a. True b. False 8. A U.S. court will likely uphold a contract created in the United Kingdom because the U.K.’s laws are generally compatible with those of the United States. a. True b. False 9. In the United States, each government agency that operates or authorizes spacecraft is responsible for complying with U.S. law and international treaties. a. True b. False

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Chap 24_15e 10. Under the act of state doctrine, a U.S. court can rule on the validity of a foreign government’s acts within its own territory. a. True b. False 11. A foreign state is immune from the jurisdiction of a U.S. court when the state has engaged in commercial activity only outside the United States. a. True b. False 12. Sovereign nations agree to be governed by International law to facilitate trade, commerce, and civilized discourse. a. True b. False 13. In a case alleging that a foreign government wrongfully confiscated a domestic firm’s property, the foreign government must prove the taking was an expropriation. a. True b. False 14. A nation that launches objects into space is absolutely liable for personal injury and property damage caused by its objects on Earth or in flight. a. True b. False 15. The federal Alien Tort Claims Act allows foreign citizens, but not U.S. citizens, to file civil actions in U.S. courts for torts that were committed abroad. a. True b. False 16. The parties to an international contract can indicate what court, jurisdiction, or tribunal will decide any disputes arising under the contract. a. True b. False 17. In an action by a domestic business to attach a foreign nation’s property, the plaintiff must prove that the defendant is not entitled to sovereign immunity. a. True b. False 18. The U.S. government does not generally regulate private spaceports and the launch and reentry of private spacecraft. a. True b. False

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Chap 24_15e 19. A foreign state is not immune from the jurisdiction of a U.S. court when it has engaged in commercial activity within the United States. a. True b. False 20. Countries restrict exports to protect national security, further foreign policy objectives, and conserve resources. a. True b. False 21. When a foreign country represents a substantial market for a U.S. manufacturer, the firm may enter into an agreement for the distribution of its products in that market by a foreign distributor. a. True b. False 22. U.S. antitrust laws can protect foreign consumers and competitors from violations committed by U.S. citizens and companies. a. True b. False 23. A company can export indirectly and thereby limit its involvement in an international market by making use of agency relationships. a. True b. False 24. Normal trade relations status granted to a member of the World Trade Organization means that the member will receive other members’ most favorable treatment with regard to imports and exports. a. True b. False 25. When a wholly owned subsidiary is established in a foreign country, the parent company, which remains in the United States, gives up ownership, authority, and control of over all phases of the operation in the foreign country. a. True b. False 26. International law is formed as result of international customs, treaties, agreements, and organizations. a. True b. False 27. By means of an arbitration clause, the parties to an international business contract agree in advance to resolve any dispute without involving a third party. a. True b. False

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Chap 24_15e 28. Under the principle of comity, a domestic court will not examine the validity of any act committed by a foreign government within the court’s jurisdiction. a. True b. False 29. An export tax imposed by Congress would be unconstitutional. a. True b. False 30. A U.S. employer operating in a foreign country must abide by U.S. discrimination laws even if doing so violates the laws of that foreign country. a. True b. False 31. National laws—involving taxes, for example—do not become international law until they are applied beyond a nation’s borders. a. True b. False 32. Because exchanges of goods on a global level are routine, students of business law do not need to be familiar with laws pertaining to international business transactions. a. True b. False 33. U.S. law allows U.S. citizens, including private companies to engage in the commercial exploration and exploitation of space resources. a. True b. False 34. Nations impose laws to restrict or facilitate international business because business activities can affect national interests. a. True b. False 35. In direct exporting, a U.S. company sets up a specialized marketing organization in a foreign market by appointing a foreign agent. a. True b. False

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Chap 24_15e Indicate the answer choice that best completes the statement or answers the question. 36. Retail Operations, Inc., a U.S. firm, obtains a judgment in a U.S. court against Shinobu, Ltd., a Japanese business. Whether the court’s judgment will be enforced by a court in Japan depends on the Japanese court’s application of a. the act of state doctrine. b. the doctrine of sovereign immunity. c. the principle of comity. d. the Foreign Sovereign Immunities Act. 37. The government of Japan sets a limit on the amount of beef that can be imported from the United States. This is a. a dumping duty. b. an antidumping duty. c. a quota. d. a tariff. 38. Comida de Chile S.A., an export company in Chile, and Deli Source Inc., an import form in the United States, enter into a contract. When Deli breaches the contract, Comida obtains an award of damages in a Chilean court. Comida then asks a U.S. court to enforce the award. The U.S. court defers to and enforces the Chilean court’s decree. This is an application of a. none of the choices. b. the act of state doctrine. c. the doctrine of sovereign immunity. d. the principle of comity. 39. Mining Company, a U.S. firm, owns property in Bolivia. The government of Bolivia seizes the property for an illegal purpose without paying just compensation. This is a. confiscation. b. the act of state doctrine. c. the doctrine of sovereign immunity. d. expropriation. 40. Agri Products Inc., a U.S. firm, signs a contract with Bao Ltd., a Chinese firm, to distribute Agri’s products in China. The most likely reason for this deal is a. China represents a substantial market for Agri. b. China is a new market for Agri. c. Agri will thereby avoid jurisdictional and contract-law issues. d. Agri prefers to limit its involvement in Chinese markets. 41. In international business, franchising involves a. a license. b. a distribution agreement. c. a subsidiary. d. direct exporting. Copyright Cengage Learning. Powered by Cognero.

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Chap 24_15e 42. Opti-Med Inc., a U.S. firm, signs a contract with Pharma Ltd., a Canadian firm, to give Pharma the right to sell Opti-Med’s products in Canada. This is a. a distribution agreement. b. indirect exporting. c. direct exporting. d. licensing. 43. Market Maven Inc., a U.S. firm, can license a foreign manufacturing company to use its a. patented intellectual property. b. trade secrets. c. trademarked brand. d. any of the choices. 44. A body of law—formed as a result of international customs, treaties, and organizations—that governs relations among or between nations is a. space law. b. universal law. c. international law. d. national law. 45. Nakeya and other foreign citizens allege environmental destruction committed overseas by the government of Cameroon on behalf of Global Mining Company, a U.S. firm. To seek redress for their injuries in a U.S. court, these citizens can a. subject the private company to the provisions of the Sherman Act. b. bring civil suits under the Alien Tort Claims Act. c. file criminal complaints under Title VII of the Civil Rights Act. d. do nothing. 46. Mont Blanc S.A., a French firm, imports its goods into the United States and offers those goods for sale at “less than fair value.” Fair value is the price of Mont Blanc’s goods in a. the European market. b. France. c. the United States. d. the world market. 47. Wei Ltd., a Chinese firm, imports its goods into the United States and offers those goods for sale at “less than fair value.” This is a. confiscation. b. a trade barrier. c. dumping. d. normal trade relations.

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Chap 24_15e 48. Star Flights Inc. launches commercial space flights from its base in the United States. In the event of a collision with other space objects, under the Outer Space Treaty, liability for injury or damage a. is to be assumed by all involved parties equitably b. is strict liability—that is, liability without fault. c. is subject to a determination of fault. d. does not exist. 49. Trade barriers are a. restrictions on imports. b. restrictions on exports. c. the lack of incentives and subsidies to stimulate imports. d. the lack of incentives and subsidies to stimulate exports. 50. Airbud Corporation, a U.S. firm, signs a contract with Bueno Computadores Ltd., an Argentinean firm, for a shipment and payment for Airbud’s goods. This is a. a distribution agreement. b. indirect exporting. c. direct exporting. d. licensing. 51. Lunchies Corporation, a U.S. firm, signs a contract with Manger au Brasserie, S.A., a French firm, to give Manger the right to use the Lunchies trademark in restaurants in France. This is a. a distribution agreement. b. indirect exporting. c. direct exporting. d. licensing. 52. Burger Bistros, a U.S. firm, makes a deal with a Canadian firm, Donny’s Diners, that allows Donny’s to use Burger’s trade name in Canada in return for a fee. This is a. a license. b. a distribution agreement. c. a subsidiary. d. direct exporting. 53. Suisse Internationale, a Swiss maker of athletic equipment, enters into a price-fixing agreement with Total World Sports, a U.S. wholesaler of Suisse’s products. U.S. courts will apply U.S. antitrust laws if a. the agreement was made in Switzerland. b. the agreement was made in the United States. c. the price fixing has a substantial effect on U.S. commerce. d. the Swiss government agrees to be sued in the United States.

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Chap 24_15e 54. Equity International Inc., a U.S. firm, and Finance Invest Ltd., a firm in Great Britain, are parties to a contract with a forum-selection clause. The forum specified in the clause must be within the geographic boundaries of a. the United States. b. Great Britain. c. none of the choices. d. a “select” forum, such as a United Nations protectorate. 55. Global Project, a U.S. firm, owns property in Hong Kong. The government of China seizes the property. The firm claims that this is confiscation. The government claims that it is expropriation. The difference concerns a. the location of the seizure and the nature of its government. b. the purpose of the seizure and the payment of compensation. c. the business of the firm and the citizenship of its owners. d. none of the choices. 56. As part of a deal for power-generating equipment, Solar Wind Company and Thermal Gen Ltd. enter into a written contract that includes a clause providing for the arbitration of any dispute in the United States. Under the New York Convention, if a dispute arises, a court will compel arbitration if both parties are a. not U.S. citizens. b. U.S. citizens. c. citizens of non-signatory countries. d. citizens of countries that are members of the World Trade Organization. 57. Under the Outer Space Treaty, with respect to a space object and the personnel aboard it, the launching state a. forfeits supervisory authority to the United Nations. b. shares dominion and responsibility with the United Nations. c. retains complete jurisdiction and control. d. grants political autonomy to those aboard the object. 58. The United States taxes most goods imported from China at a flat rate. This is a. an antidumping duty. b. a dumping duty. c. a quota. d. a tariff. 59. Habitat Corporation, a U.S. firm, owns property in India. The government of India seizes the property for a proper public purpose and pays the firm just compensation. This is a. confiscation. b. the act of state doctrine. c. the doctrine of sovereign immunity. d. expropriation.

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Chap 24_15e 60. Consolidated Corporation, a U.S. firm, wishes to participate, but limit its involvement, in Middle Eastern markets. Consolidated empowers Doha Ltd., an Egyptian firm, to enter into contracts in certain countries on behalf of Consolidated. This is a. a distribution agreement. b. an agency relationship. c. indirect exporting. d. direct exporting. 61. Under the Outer Space Treaty, a moon, a planet, an asteroid, or any other celestial body is subject to the appropriation of a. the first nation to explore it. b. the first nation to exploit it. c. the first nation to claim title to it. d. no single nation. 62. Sufficient business develops in France for Graphic Comics Inc., a U.S. firm, to appoint Comics Graphique Ltd., a French firm, to act as the U.S. firm’s marketing representative in France. This is a. direct exporting. b. franchising. c. indirect exporting. d. licensing. 63. Mexico is likely to defer and give effect to the laws and judicial decrees of the United States as long as a. the laws and decrees are consistent with Mexican law and public policy. b. smaller countries fear and are intimidated by more powerful nations. c. poorer countries admire and envy richer nations. d. all of the choices. 64. Fiscal Corporation, a U.S. firm, files a suit against Ghana in a U.S. court. Under the Foreign Sovereign Immunities Act, Ghana is immune from the jurisdiction of the court if Ghana has a. engaged in commercial activity within the United States. b. engaged in commercial activity outside the United States that has a direct effect in the United States. c. committed a tort in the United States. d. none of the choices. 65. Sugar Company, a U.S. firm, owns property in Trinidad and Tobago. When the foreign government seizes the property, the company asks a U.S. court to order the property’s return. The court rules that the Trinidad and Tobago is exempt from the court’s jurisdiction. This is an application of a. a coercive action. b. the act of state doctrine. c. the doctrine of sovereign immunity. d. the principle of comity.

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Chap 24_15e 66. The Outer Space Treaty provides that a nation retains jurisdiction over objects on its space registry that are launched into space. The treaty also prohibits interference with space activities. In effect, these provisions a. ban the national appropriation of territory in space. b. protect property rights with respect to private space activities. c. assert sovereignty over celestial bodies. d. declare exclusive international jurisdiction over space locations. 67. Resort Hotel Corporation, a U.S. firm, establishes a wholly owned subsidiary in Singapore. As a parent corporation, with respect to the subsidiary, Resort retains complete ownership of a. all of the facilities in Singapore. b. more than half, but less than all, of the facilities in Singapore. c. none of the facilities in Singapore. d. no more than half of the facilities in Singapore 68. Venezuela seizes the assets of World Oil Inc., a U.S. firm. World Oil’s recovery from Venezuela in a U.S. court may be prevented by a. the act of state doctrine. b. the doctrine of sovereign immunity. c. a court in Venezuela. d. the principle of comity. 69. Under the Export Trading Company Act, U.S. banks are a. encouraged to invest in export trading companies. b. discouraged from granting credit to export trading companies. c. required to report financial transactions with export trading companies. d. prohibited from lending funds to export trading companies. 70. Space Corporation launches exploratory space flights to the moon and Mars. The purpose is to discover and retrieve minerals and other resources. Under U.S. law, the corporate explorer a. cannot profit from resources retrieved in space. b. cannot legally retrieve resources in space. c. must share with all interested parties what it retrieves in space. d. owns what it retrieves in space. 71. Global Industries Corporation owns assets in Kazakhstan, a country in Asia. The government of Kazakhstan wants to nationalize all assets owned by foreign firms and investors. What can Global Industries do? Can it at least obtain payment for the assets?

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Chap 24_15e 72. The management of Sport Shoes Corporation, a U.S. firm, wants to expand into foreign investment and employment markets. They are considering either opening their own production facility in a foreign country or entering into a licensing agreement with a foreign firm. What are the advantages and disadvantages of each of these courses of action?

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Chap 24_15e Answer Key 1. True 2. True 3. True 4. True 5. False 6. False 7. False 8. True 9. True 10. False 11. False 12. True 13. True 14. True 15. False 16. True 17. True 18. False 19. True 20. True 21. True 22. True 23. True 24. True 25. False 26. True

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Chap 24_15e 27. False 28. False 29. False 30. False 31. False 32. False 33. True 34. True 35. False 36. c 37. c 38. d 39. a 40. a 41. a 42. a 43. d 44. c 45. b 46. b 47. c 48. c 49. a 50. c 51. d 52. a 53. c 54. c Copyright Cengage Learning. Powered by Cognero.

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Chap 24_15e 55. b 56. a 57. c 58. d 59. d 60. b 61. d 62. c 63. a 64. d 65. c 66. b 67. a 68. a 69. a 70. d 71. If a government decides to seize property within its borders, and not to pay for it, there are few remedies available. This is of course a confiscation, which results when a government takes private property for an illegal purpose without paying just compensation. (An expropriation, by contrast, occurs when a government seizes private assets or a private business for a legal purpose and pays for the seizure.) Under most circumstances, it is unlikely that a confiscating nation’s courts would order its government to pay just compensation, even if the court had the authority to do so. In a case alleging that a foreign government has wrongfully taken a business firm’s property, the defendant government has the burden to prove that the taking was an expropriation, not a confiscation. But the act of state doctrine can prevent a firm’s recovery in a court in the firm’s home country. Under that doctrine, a court in one country will not review the validity of a public act of a recognized foreign government within it own territory. (Some nations guarantee compensation to foreign investors in their constitutions, statutes, or treaties. Others (such as the United States) provide some insurance for their citizens’ investments abroad. Claims are often resolved by lump-sum settlements after negotiations, as between the United States and the confiscating nation.)

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Chap 24_15e 72. One of the advantages of opening a wholly owned production facility, in the United States or in a foreign nation, is that all of the profits accrue to the owner. The disadvantages include the risk involved in opening a production facility in a foreign country. There is a possibility of the foreign government’s expropriation of the facility. Expropriation is the taking of private property for a public purpose and the paying of just compensation. Foreign governments have also sometimes confiscated the property of foreign companies. Confiscation is the taking of private property for a public purpose without just compensation. Under the act of state doctrine, U.S. courts would be reluctant to intervene, either by ordering the property returned or ordering the payment of a fair price. Thus, there could be a considerable sum of money at risk in a foreign production facility. A licensing agreement, by contrast, involves relatively little capital investment and represents less risk of loss from a confiscation or an expropriation. By entering into a licensing agreement with a foreign firm for the rights to manufacture Sport products, or to sell products under the Sport trademark, Sport eliminates the chance that its assets would be lost if they were confiscated. Of course, there will also be fewer profits and those will likely be in the form of royalties.

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Chap 25_15e Indicate whether the statement is true or false. 1. To be negotiable, an instrument must condition its terms on the occurrence or nonoccurrence of some other event or agreement. a. True b. False 2. An instrument that orders the drawee to pay a certain sum of money, usually to a third-party payee, is a draft. a. True b. False 3. Mortgage notes tied to a variable rate of interest—fluctuating in response to market conditions—are not negotiable. a. True b. False 4. To determine the value of an instrument, it is necessary to know when the obligations of secondary parties, such as indorsers, will arise. a. True b. False 5. A trade acceptance is created when, as part of a deal to buy wheat from Xi, Yang signs a draft ordering the buyer to pay for the wheat within ninety days. a. True b. False 6. A promissory note signed to obtain a student loan is a negotiable instrument that functions as an extension of credit. a. True b. False 7. A note made in exchange for funds that contains an acceleration clause is not negotiable because the exact value of the note cannot be ascertained. a. True b. False 8. A promissory note is both a debt and evidence of the debt. a. True b. False 9. Businesses use the commercial money market for short-term borrowing. a. True b. False

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Chap 25_15e 10. Stating with certainty a fixed amount of money to be paid at the time an instrument is payable ensures that the value of the item can be determined with clarity. a. True b. False 11. The first delivery of an instrument by the maker or drawer for the purpose of giving rights in the instrument to any person is referred to as its demand. a. True b. False 12. An instrument is not negotiable unless it is “payable to order or to bearer” at the time it is issued or first comes into the possession of a holder. a. True b. False 13. Because negotiable instruments were originally paper documents, they are sometimes referred to as a commercial paper. a. True b. False 14. The nature of an instrument, such as a check, may indicate that it is payable on demand. a. True b. False 15. On an instrument, a mere reference to another writing—“As per contract”— does not render the instrument nonnegotiable. a. True b. False 16. Commonly used in international trade, a draft that orders a buyer’s bank to pay is a cashier’s check. a. True b. False 17. An instrument is negotiable even if the payment is to be made from a fund that does not yet exist. a. True b. False 18. If an instrument is payable within a definite period of time after being presented for payment, the maker or drawee is under no obligation to pay until that time. a. True b. False 19. A person can sign an instrument as an authorized agent of the drawer, but the instrument is not negotiable unless the drawer also signs it. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 25_15e 20. With an order instrument, the payee must be identified with certainty because the transfer of the instrument requires his or her signature. a. True b. False 21. An instrument must name a specific payee and be made payable at a definite time to qualify as a promissory note. a. True b. False 22. To be negotiable, if an instrument is not payable on demand, it must be payable at a definite time. a. True b. False 23. The payee of a certificate of deposit is not allowed to withdraw the funds before the date of maturity, because the instrument is a time deposit. a. True b. False 24. A promise that states an express condition to payment is negotiable if the condition is stated in writing on the instrument. a. True b. False 25. The assignment of a promissory note from one payee to another changes the maker’s obligation to pay the note as promised. a. True b. False 26. If the numerical and written amounts on a check differ, the check is payable in the written amount. a. True b. False 27. When a note is lost, impaired, or destroyed, the owner loses the right to be paid its value, even if its existence can be proved with a copy. a. True b. False 28. An unusual signature clearly increases the marketability of an instrument because it creates distinction and uniqueness. a. True b. False

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Chap 25_15e 29. If an instrument does not specify a time for payment and the instrument must be paid on presentment, it is not negotiable. a. True b. False 30. To determine the value of an instrument, it is necessary to know when the maker, drawer, or acceptor is required to pay. a. True b. False 31. When a bank is both the drawer and drawee, a check functions the same as cash because the bank has committed itself to paying the item on demand. a. True b. False 32. For a drawee to be obligated to honor an order to pay, the drawee must be obligated to the drawer. a. True b. False 33. No drafts other than checks may be used in commercial transactions. a. True b. False 34. A check is not a demand instrument, because by definition a check is not payable for a period of time after its issue. a. True b. False 35. For a negotiable instrument to operate practically as a substitute for cash, it must be easily transferable and uncollectible. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. Rico agrees to buy a bicycle from Salvatore for $250. Salvatore agrees to deliver the bike on September 1. Rico writes a draft for $250 payable to Salvatore on September 1. This is a. none of the choices. b. a time draft. c. a sight draft. d. a promissory note.

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Chap 25_15e 37. Luc signs a promissory note for $2,500 in favor of Metro College. The note is undated but specifies that it is “payable one month after date.” This note is a. negotiable. b. nonnegotiable, because one month is not a reasonable time. c. nonnegotiable, because there is no option to pay early. d. nonnegotiable, because the maturity date cannot be determined from the face of the instrument. 38. In response to an order for flour from Good Eating LLC, Harvest Mill creates a draft ordering Good to pay Harvest for the flour within sixty days and sends it with the delivery to Good. On receipt, the buyer signs the draft. On this instrument, Harvest is a. neither the drawer nor the payee. b. only the payee. c. only the drawer. d. both the drawer and the payee. 39. Veggie Bowl Café signs an instrument in favor of Whole Wheat Company that states it is “subject to a certain agreement between buyer and seller.” This instrument is a. negotiable. b. nonnegotiable, because it is made subject to a separate agreement. c. nonnegotiable, because it refers to a separate agreement. d. nonnegotiable, because the buyer and seller are not the same parties. 40. Fresh Fruit Company accepts a check from Grocers Mart in payment on a shipment of apples, but Harvest Meat LLC will not accept a check for a beef order. Fewer checks are written today because a. most transactions are electronic. b. promissory notes have replaced checks as costs have risen. c. the use of credit has become more widespread. d. merchants are increasingly refusing to accept cash and checks. 41. Direct Connect Company orders a quantity of wire from Electric Supply Inc. To finance the purchase, Direct signs a note that includes a reference to the parties’ contract, a payment schedule, and a security agreement. This note is a. negotiable. b. nonnegotiable, because it refers to the parties’ contract. c. nonnegotiable, because it refers to a payment schedule. d. nonnegotiable, because it refers to a security agreement. 42. Motor Sales Inc. signs an instrument that promises to pay National Parts Company a certain price, with interest, for a shipment of auto parts. It is necessary to know when the instrument is due in order to a. determine the value of the instrument. b. calculate when a statute of limitations may apply. c. know when the interest will accrue. d. all of the choices.

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Chap 25_15e 43. Brie signs an instrument in which she promises to pay Carmen a certain price for her Dodge Dart. The instrument will be negotiable if it meets all of the requirements for negotiability, including that it is payable in a. goods equal in value to the market price of the car. b. money. c. any of the choices. d. services equal in value to the market price of the car. 44. Donut Shop signs a promissory note for $50,000 in favor of Enterprise Lending Inc. The note includes an acceleration clause. This note is a. negotiable. b. nonnegotiable, because the maker can move up the payment date. c. nonnegotiable, because payment can be demanded early if a specified event occurs. d. nonnegotiable, because the maturity may be extended into the future. 45. Fertile Farm Corporation and Grain Commodities Inc. enter a contract for a sale of soybeans. Fertile draws a draft unconditionally ordering Grain to pay $75,000 to Fertile’s order in ninety days. Grain signs and dates the draft. Before payment is due, Fertile needs cash. The drawer can a. submit the draft to the drawee for immediate payment. b. market the contracted-for soybeans to obtain a higher price. c. accelerate the date for payment on the draft. d. sell the draft in the commercial money market. 46. Sport Souvenir LLC orders a gross of printed shirts from T-Shirt Company. To finance the purchase, the buyer signs a note to pay the seller from the funds paid to the buyer on the sale of the shirts at a certain event. This note is nonnegotiable because a. the note is not a three-party instrument, such as a draft. b. payment is to be made from a fund that does not yet exist. c. the instrument does not contain an express promise to pay. d. the note appears not to state a rate of interest. 47. Juice Company signs an instrument that states it is being executed “as per a contract for the sale of a case of oranges dated May 1.” This instrument is a. negotiable. b. nonnegotiable, because banks cannot easily process commodities. c. nonnegotiable, because it includes the specific date of a contract. d. nonnegotiable, because it refers to an express contract. 48. Brownies Inc. signs an instrument that promises to pay Chocolate Company a certain price, with interest, for a shipment of refined cocoa. By the terms of the instrument, it must be paid on its presentment, but no time for payment is specified. This instrument is a. negotiable. b. nonnegotiable, because it is only payable on presentment. c. nonnegotiable, because no time for payment is specified. d. nonnegotiable, because it is only payable on demand. Copyright Cengage Learning. Powered by Cognero.

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Chap 25_15e 49. Tree Nursery signs an instrument that states with certainty a fixed amount to be paid at the time the instrument is payable. Fixed amount means that the amount must be a. stated as a fixed, not a variable, rate. b. ascertainable from the face of the instrument. c. determinable before the time it is payable. d. all of the choices. 50. A certificate of deposit (CD) is issued when Lo-Risk Invest LLC deposits funds with Money Bank on the bank’s promise to repay the funds, with interest, on a certain date. Lo-Risk cannot withdraw the funds before the date of maturity because a. the bank is both the issuer of the instrument and the drawee. b. a CD is a time deposit. c. a CD cannot be sold or negotiated to a third party before maturity. d. a CD is not a three-party instrument. 51. Wen writes an instrument that states it is “payable to X.” The instrument is a. negotiable. b. nonnegotiable, because it does not state that it is payable to order. c. nonnegotiable, because it is payable to a nonexistent person. d. nonnegotiable, because it cannot be transferred by indorsement. 52. Special requirements for the form and content of negotiable instruments are imposed by a. the Lex Mercatoria as codified in England. b. the Uniform Commercial Code. c. none of the choices. d. rules developed by merchants in the medieval world. 53. Oren signs an instrument payable to the order of Pay-Out Loans Inc. “on or before” June 15. This instrument is a. negotiable. b. nonnegotiable, because the maker can move up the payment date. c. nonnegotiable, because moving up the payment date is optional. d. nonnegotiable, because the exact payment date cannot be determined from the face of the instrument. 54. On behalf of Bubble Tea Company, Corey signs an instrument in which she promises to deliver 100 cases of tea as payment to Deli Inc. on April 1. This instrument is a. negotiable. b. nonnegotiable, because tea is not a medium of exchange authorized or adopted by a government as currency. c. nonnegotiable, because it does not indicate a specific brand of tea. d. nonnegotiable, because it does not recite any consideration.

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Chap 25_15e 55. Bon signs a promissory note for $12,500 in favor of Car Loans Inc. The note specifies payment by a certain date and includes an option to pay early. This note is a. negotiable. b. nonnegotiable, because the date for payment is uncertain. c. nonnegotiable, because the option violates negotiability requirements. d. nonnegotiable, because the note need not be paid until the specified date. 56. For a drawee to be obligated to honor a time draft, the drawee must be obligated to the drawer by a. a stated time in the future. b. an international trade agreement. c. a commercial money market contract. d. an account agreement or a debtor-creditor relationship. 57. LNG LLC and Mainline Corporation enter a contract for a sale of liquefied natural gas. LNG draws a draft unconditionally ordering Mainline to pay $50,000 to LNG’s order in sixty days. Mainline signs and dates the draft. LNG can sell the draft to a. Mainline only. b. LNG’s bank only. c. any party after the draft has been paid. d. any party before payment is due. 58. In a domestic sale of goods, Boxes LLC, the seller, and Containers Inc., the buyer, use a trade acceptance. Essentially, this instrument a. promises that the maker will pay a specified amount to another party. b. orders the buyer to pay a specified amount to the seller. c. orders the buyer’s bank to pay a specified amount to the seller. d. acknowledges a deposit of funds payable to the holder. 59. Fern has six nieces, ages five to sixteen. She writes an instrument for $50 that states, “Pay to the order of my niece.” The instrument is a. negotiable. b. nonnegotiable, because the amount of money is less than $500. c. nonnegotiable, because it is illegal to write an order instrument payable to a relative. d. nonnegotiable, because there is no specific person identified. 60. In an international sale of goods, Cielo SA, the buyer, and Drones Inc., the seller, use a banker’s acceptance. Essentially, this instrument a. promises that the maker will pay a specified amount to another party. b. orders the buyer to pay a specified amount to the seller. c. orders the buyer’s bank to pay a specified amount to the seller. d. acknowledges a deposit of funds payable to the holder.

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Chap 25_15e 61. Marin writes on a piece of paper, “I owe you $600,” signs it, and gives it to Nye. This instrument is a. negotiable. b. nonnegotiable, because it does not include an express promise to pay. c. nonnegotiable, because it does not recite any consideration. d. nonnegotiable, because it does not state any conditions to payment. 62. Bogart presents a sight draft to Commerce Bank for payment. A bank employee writes accepted across the face of the instrument, and adds the date and the bank’s signature. The draft is a. acknowledged as received, but not payable without further verification. b. accepted and will be payable by the close of the next business day. c. payable ninety days after sight. d. payable immediately or within a stated time after sight. 63. Steel Mill Inc. signs an instrument that states with certainty a fixed amount to be paid at the time the instrument is payable. This ensures that a. the value of the instrument can be determined with clarity. b. interest may be payable at a fixed or variable rate. c. the amount may be determined by information not in the instrument. d. the amount payable can fluctuate as a result of market conditions. 64. To operate practically as a substitute for cash or a credit device, a negotiable instrument must be a. conditional without the risk of being collectable. b. transferable without the danger of being uncollectable. c. qualified with a promise to set aside the qualification. d. payable without recourse. 65. Yun writes an instrument that states it is “payable to Zho Ltd.” In fact, “Zho Ltd.” does not exist. The instrument is a. negotiable. b. nonnegotiable, because it does not state that it is payable to order. c. nonnegotiable, because it is payable to a nonexistent organization. d. nonnegotiable, because it cannot be transferred by indorsement. 66. Jaime signs an instrument using a “J” with a swirl around it. With this mark for a signature, the instrument is a. negotiable. b. nonnegotiable, because an initial does not state the signer’s name. c. nonnegotiable, because an initial is not a signature. d. nonnegotiable, because a simple initial implies a lack of binding intent.

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Chap 25_15e 67. App Corporation obtains a loan from Backer Bank and signs a note for the amount. For a certain price, the bank transfers the note to Credit Company. Promissory notes are commonly assigned, negotiated, or transferred from one party to another. This is possible because a. as an issuer of a note, a bank commits to paying the stated amount. b. assignment does not affect the maker’s obligation to pay the note. c. a buyer of the note becomes both the drawer and the payee. d. a bank is both the maker of the note and the drawee. 68. Edie deposits funds with First National Bank, which issues an instrument that promises to repay the funds, with interest, on a certain date. Before the maturity date, Edie wants to access the funds. Edie can a. submit the instrument to the maker for immediate payment. b. withdraw the funds before the date of maturity. c. advance the date for repayment. d. sell the instrument to a third party. 69. In payment for a shipment of fittings, Retool LLC offers Supply Company a cashier’s check. A cashier’s check functions the same as cash because a. the bank has committed itself to paying the stated amount on demand. b. the party to whom the check is payable is the bank. c. the bank on which the check is drawn is not the drawer. d. a check is not a debt—it is only the evidence of a debt. 70. Oda signs a promissory note payable to the order of Payday Loan Company. The note states that it is payable “with interest at the legal rate.” This note is a. negotiable. b. nonnegotiable, because it does not state a specific rate of interest. c. nonnegotiable, because it is a promissory note. d. nonnegotiable, because it is payable only with interest. 71. On the back of an envelope, Phoebe writes, “I promise to pay Quint or bearer $600 on demand. [Signed] Phoebe.” What type of instrument is this? Is it negotiable? If not, why not?

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Chap 25_15e 72. On a sheet of paper, Elle writes, without her signature, “I acknowledge that I owe Frank $600, payable out of the proceeds of the sale of my car, a 1995 Honda Civic, which I promise to advertise ‘For Sale’ next week. Payment is to be made on or before six months from today.” What type of instrument is this? Is it negotiable? If not, why not?

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Chap 25_15e Answer Key 1. False 2. True 3. False 4. True 5. True 6. True 7. False 8. False 9. True 10. True 11. False 12. True 13. True 14. True 15. True 16. False 17. False 18. True 19. False 20. True 21. False 22. True 23. True 24. False 25. False 26. True

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Chap 25_15e 27. False 28. False 29. False 30. True 31. True 32. True 33. False 34. False 35. False 36. b 37. d 38. d 39. b 40. a 41. a 42. d 43. b 44. a 45. d 46. b 47. a 48. a 49. b 50. b 51. a 52. b 53. a 54. b Copyright Cengage Learning. Powered by Cognero.

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Chap 25_15e 55. d 56. d 57. d 58. b 59. d 60. c 61. b 62. d 63. a 64. b 65. c 66. a 67. b 68. d 69. a 70. a 71. This instrument is a promissory note and a bearer note, and it is negotiable. A promissory note is an instrument with two parties: a maker and a payee. The maker of this note is Phoebe. The payee is “Quint or bearer.” A note that is payable to a specific payee “or bearer” is a bearer note. To be negotiable, an instrument must be in writing, be signed by the maker or drawer, be an unconditional promise or order to pay, state a fixed amount of money, be payable on demand or at a definite time, and be payable to order or to bearer (unless it is a check). This instrument meets all of these requirements. It is handwritten on the back of an envelope, which has permanence and is transferable. The maker signed it. Its payment is not conditional and includes the maker’s definite promise to pay. Also, “$600” is a fixed amount payable in money, and the instrument is payable on demand and to “bearer.” 72. This instrument is a promissory note, but it is nonnegotiable. A promissory note is an instrument with two parties—a maker and a payee. The maker of this note is Elle. The payee is Frank. To be negotiable, an instrument must be in writing, be signed by the maker or drawer, be an unconditional promise or order to pay, state a fixed amount of money, be payable on demand or at a definite time, and be payable to order or to bearer (unless it is a check). The note is nonnegotiable. Elle did not sign it. Further, it does not include a definite promise to pay, but only acknowledges that a debt is owed. As such, it also is not payable to order or to bearer.

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Chap 26_15e Indicate whether the statement is true or false. 1. If the thief of a stolen bearer instrument delivers it to an innocent, third party, negotiation of the item is complete. a. True b. False 2. Whenever a transfer fails to qualify as a negotiation because it fails to meet one of the requirements for a negotiable instrument, it is considered a breach. a. True b. False 3. The authorized representative of an entity can negotiate an instrument payable to the entity only if the item has been converted into a bearer instrument. a. True b. False 4. The assignee of a negotiable instrument receives only those rights that the assignor had before the assignment. a. True b. False 5. Neither an ordinary holder nor an HDC can enforce an instrument that was originally incomplete and later completed in an unauthorized manner. a. True b. False 6. An insurance agent who receives a check payable to the agent when the item was actually intended as payment to the insurance company is required to make good on the check if it is later dishonored. a. True b. False 7. When a drawer gives one alternative or joint payee a check, the drawer’s obligation on the check to the other payees is suspended. a. True b. False 8. A check payable to stacked payees is ambiguous and thus payable only jointly—with the indorsements of all of the payees. a. True b. False 9. Only the payee’s bank can acquire the rights of a holder and negotiate a check indorsed by the payee “For deposit only.” a. True b. False

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Chap 26_15e 10. A person who takes a demand instrument knowing that demand has been made has notice that the instrument is overdue. a. True b. False 11. An instrument that requires an indorsement for negotiation must contain a handwritten signature. a. True b. False 12. If Dora delivers a check payable to her order to Equity Bank without signing it and receives cash, the transfer is an assignment, not a negotiation. a. True b. False 13. Negotiating bearer instruments requires both indorsement and delivery because the use of bearer instruments involves more risk through loss or theft. a. True b. False 14. A check “payable to the order of Laura” is indorsed in blank if Laura simply delivers it without signing it. a. True b. False 15. The method of negotiating an instrument so that the receiver becomes a holder depends on whether an indorsement on the instrument is blank or special. a. True b. False 16. If a check is made “payable to the order of Marcus or Nathan,” both parties’ indorsements are necessary for negotiation. a. True b. False 17. A loss from a well-crafted forgery usually falls on the party to whom the forger transferred the instrument. a. True b. False 18. In the event that there is a conflicting, superior claim to an instrument, a holder in due course will not be able to collect payment. a. True b. False 19. In most instances, a payee on a note will qualify as an HDC by virtue of the fact that he or she has dealt directly with the maker. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 26_15e 20. The shelter principle permits a holder with notice of a claim or defense to attain HDC status by reacquiring the instrument from a later HDC. a. True b. False 21. Usually, an indorsement is unqualified, which means that the indorser is guaranteeing payment on an instrument, in addition to transferring title to it. a. True b. False 22. A holder will be deemed to have notice of a defect in an instrument if he or she has reason to know that it exists, given all the facts and circumstances known at the time. a. True b. False 23. Generally, an indorser, merely by indorsing, impliedly promises to the pay the holder, or any subsequent endorser the amount of the instrument if the drawer or maker defaults. a. True b. False 24. A holder who takes a negotiable instrument from a thief cannot become an HDC even if the item was acquired in good faith and there was no reason to be suspicious of the transaction. a. True b. False 25. To obtain HDC status, a holder must take an instrument in good faith from a transferor who likewise acts in good faith. a. True b. False 26. A check “payable to Orit” followed by the signature of Petr, the indorser, sufficiently identifies the indorsee. a. True b. False 27. If an instrument is acquired as part of a corporate purchase of assets, the holder will have only the rights of an ordinary holder. a. True b. False 28. A difference between the handwriting in the body of a check and in the signature affects the validity of the item and will bar a holder from HDC status. a. True b. False

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Chap 26_15e 29. To avoid the risk of loss from theft, a holder can convert a blank indorsement to a special indorsement by writing, above the signature of the indorser, the name of the indorsee. a. True b. False 30. A person can become an HDC only if he or she knows or has reason to know that an instrument is defective and is willing to assume the risk of its dishonor. a. True b. False 31. When an instrument is transferred, an ordinary holder obtains only those rights that the transferor had in the instrument but is free of most of the defenses and claims that could be asserted against the transferor. a. True b. False 32. A promise to perform or give value in the future is sufficient value to make the promisor an HDC. a. True b. False 33. In terms of the requirements for HDC status, first a party must be a holder of a negotiable instrument. a. True b. False 34. The holder of a note who needs the funds owed on it can transfer it for cash to a third party, whom the maker must pay when the note comes due. a. True b. False 35. With a few exceptions, anyone who can ultimately trace his or her title to an instrument back to an HDC can acquire the rights and privileges of an HDC. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. Machine Shop Inc. issues a payroll check drawn on Nation Bank “payable to the order of O’Dell.” O’Dell takes the check to the bank and delivers it to the teller without signing it. This is a. an assignment. b. a negotiation. c. a bank transfer. d. a trade acceptance.

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Chap 26_15e 37. Resources Inc. receives a check from Steel Products Company and indorses it with a stamped imprint of its name on the back. This converts the check to a. a bearer instrument. b. a non-transferable instrument. c. an order instrument. d. a special indorsement. 38. Farmers Field LLC negotiates a bearer instrument to Grain Co-op by delivery a. with an assignment of its rights under a contract. b. with any necessary indorsement. c. without more. d. with formal presentment in response to a demand by the payee. 39. Raul wants to transfer a check to Schmidt. The check is defective if it a. is clearly stamped “insufficient funds.” b. contains handwritten terms. c. is undated. d. is payable to alternative or join payees. 40. Because a party’s authenticating intent with respect to a note is shown by the name of the party written on the line that calls for the name of that party, a. the name must be handwritten to negotiate the note. b. a signature of the name must be witnessed to effect an assignment. c. a stamped imprint of the name can be sufficient to transfer the note. d. proof that an indorsement is legitimate is required to validate the note. 41. At 1 A.M., in front of EZ Credit Corporation, which is closed, Frey buys a $500 promissory note for $50 from Greco. When presented with Frey’s demand for payment, Diaz, the maker of the note, could successfully claim that Frey a. acquired the note with notice that it was overdue. b. did not acquire the instrument in good faith. c. did not give value for the instrument. d. none of the choices. 42. To make Credit Bank a collecting agent on a check “payable to the order of Duane,” Duane should a. indorse the check “for deposit only.” b. refrain from signing the check before delivering it to Credit Bank. c. write, above his signature, “Pay to Credit Bank.” d. indorse the check “without recourse.”

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Chap 26_15e 43. Emil writes and signs a check payable to “Film Arts Cinema.” George, Film Arts’ manager, indorses the check “For deposit only.” This is a. a blank indorsement. b. a qualified indorsement. c. a restrictive indorsement. d. a special indorsement. 44. The shelter principle promotes the marketability and free transferability of negotiable instruments by a. limiting the rights and privileges of an HDC. b. extending the benefits of HDC status. c. permitting any holder to attain HDC status by reacquiring an instrument. d. sheltering the principal amount of an instrument without recourse. 45. Rehab LLC owes $20,000 to Stonemason Inc. Rehab executes a note to Stonemason as security for the debt. This security a. does not constitute sufficient consideration for HDC status. b. does not satisfy the value requirement for HDC status. c. satisfies the consideration requirement for HDC status. d. satisfies the value requirement for HDC status. 46. Coki receives a payroll check from Data Solutions Inc. and indorses it by signing her name on the back of the check. This is a. a blank indorsement. b. a qualified indorsement. c. a restrictive indorsement. d. a special indorsement. 47. Durable Goods Inc. negotiates an order instrument to Equity Finance by delivery a. with an assignment of its rights under a contract. b. with any necessary indorsement. c. without more. d. with formal presentment in response to a demand by the payee. 48. On the back of a check “payable to Demos,” Demos signs her name and negotiates the item to Ethos. To most effectively avoid a risk of loss from a theft of the check, Ethos should a. immediately indorse the check in blank. b. make a copy of the check and place it in a secure location. c. write, above Demos’ signature, “Pay to Ethos.” d. indorse the check “without recourse.”

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Chap 26_15e 49. Rafe signs a check payable to Shop Mart, which transfers the note by negotiation to Trans-State Bank. With respect to any defenses to payment on the note that Rafe could have raised against Shop Mart, most likely Rafe can a. raise those defenses against the bank. b. no longer present any defense to payment. c. not assert those defenses against the bank. d. claim more defenses against the bank than Shop Mart. 50. A conditional indorsement on the back of an instrument a. does not affect the right of an indorsee to enforce the instrument. b. suspends further negotiation of the instrument until the condition occurs. c. has the same effect as a conditional promise on the instrument’s face. d. prevents further negotiation of the instrument. 51. An instrument payable to two or more persons in the alternative, such as a check “payable to the order of Elena or Ferrar,” a. requires the indorsement of only of the parties to be negotiated. b. requires the indorsement of both of the parties to be negotiated. c. must be converted to a bearer instrument to be negotiated. d. is nonnegotiable. 52. In good faith and for value, Joya gets from Kyle a negotiable bearer instrument. Joya does not know that Kyle stole the instrument. Joya is a. an HDC. b. not an HDC, because Kyle did not acquire the instrument for value. c. not an HDC, because Kyle did not acquire the instrument in good faith. d. not an HDC, because Kyle transferred the instrument without notice. 53. Vel indorses in blank a check payable to her order, and then loses it. Wang finds the check and, without indorsing it, sells it to Xhi. This is a. an assignment. b. a negotiation. c. a bank transfer. d. a trade acceptance. 54. An irregularity on the face of an instrument that calls into question its validity or ownership, thereby barring HDC status, occurs when a. handwriting used in the body of a check and used in a signature differ. b. a forged maker’s or drawer’s signature is visibly evident. c. a check is antedated or postdated. d. the amount of the item is stated in digits but not written out in numbers.

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Chap 26_15e 55. An instrument payable to two or more persons without an “and” or an “or” between the parties’ names, such as a check “payable to the order of Gerhard Hans,” a. requires the indorsement of only of the parties to be negotiated. b. requires the indorsement of both of the parties to be negotiated. c. must be converted to a bearer instrument to be negotiated. d. is nonnegotiable. 56. Edna is the payee of a bearer instrument—a promissory note in the amount of $10,000. Flem offers to irrigate Edna’s ranch next week in exchange for the note. She agrees and delivers the note to Flem. Flem is a. an HDC, because he promised to perform services at a future date. b. an HDC, because the transferor was the original payee on the note. c. not an HDC, because he did not acquire the instrument in good faith. d. not an HDC, because he did not yet give value for the instrument. 57. An instrument, such as a check, drawn payable to an organization a. can be negotiated by an authorized representative of the entity. b. must be indorsed with a stamped imprint of the name of the entity. c. must be converted to a bearer instrument to be negotiated further. d. is nonnegotiable. 58. On the back of a check payable to Lo, she writes “Pay to Mei, without recourse” and signs it. This a. does not effect the check’s negotiability or any party’s liability. b. relieves Lo of liability on the check. c. relieves Mei of liability on the check. d. renders the check nonnegotiable. 59. Factory Inc. issues a check payable to Gila, who gives it to Hometown Bank without signing it, and receives cash. The transfer of the check from Gila to Hometown is a. an assignment. b. a negotiation. c. fraudulent and therefore void. d. a sale. 60. Keyes negotiates a bearer instrument to Liu by delivery a. with an assignment of its rights under a contract. b. with any necessary indorsement. c. without more. d. with formal presentment in response to a demand by Liu.

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Chap 26_15e 61. Lamont and Marcel collaborate to defraud Nina, who is induced to give Marcel a note payable to Marcel’s order. Marcel indorses the note for value to Orson, an HDC. Later, Orson sells the note to Lamont. Under the shelter principle, a. Orson’s right to repurchase the note from Lamont is limited. b. Lamont cannot acquire HDC rights in the note. c. Lamont attains HDC status by acquiring the note. d. the principal amount of the note is sheltered without recourse. 62. Kris transfers a note, on which Lin is the maker, to Mari, who takes it for value and in good faith. Mari knows that Kris breached the contract underlying the note, giving Lin a defense against payment. With respect to this note, Mari is a. a knowledgeable holder in due course. b. an ordinary holder. c. an ordinary holder in due course. d. a knowledgeable acceptor. 63. Dani signs a note payable to Equity Credit, which transfers the note by assignment to Finance Collection. With respect to any defenses that Dani could have raised against Equity, most likely Dani can a. raise those defenses against Finance. b. no longer present any defense to payment. c. not assert those defenses against Finance. d. claim more defenses against Finance than Equity. 64. A payee or indorsee whose name is misspelled on an instrument a. can indorse with the misspelled name, the correct name, or both. b. must indorse with the misspelled name. c. must indorse with the correct name. d. is prevented from negotiating the instrument further. 65. Hedy draws a check “payable to the order of Ilsa or Jeto” and gives the check to Ilsa. Hedy’s obligation on the check to Jeto is a. suspended. b. to render half of the amount of the check to each party. c. discharged. d. to hold the full amount of the check for the benefit of both payees. 66. Leno makes a gift of a check to Millie who takes it in good faith and without notice of any claim, defense, or defect. With respect to this check, Millie is a. an acceptor. b. a good faith purchaser. c. an ordinary holder. d. an ordinary holder in due course.

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Chap 26_15e 67. On the back of a check “payable to Huan,” Huan signs her name and negotiates the item to Ito. To avoid liability on the item if it is later dishonored, Ito should a. immediately indorse the check in blank. b. make a copy of the check and place it in a secure location. c. write, above Huan’s signature, “Pay to Ito.” d. indorse the check “without recourse.” 68. Anya issues a check payable to Bo, who indorses the back, gives it to Credit Union, and receives cash. The transfer of the check from Bo to Credit Union is a. an assignment. b. a negotiation. c. a payment. d. a sale. 69. Beth, an accountant for Credits & Debits, acquires a negotiable instrument from Ellen by promising to pay its face value in thirty days. Beth acquires the status of an HDC when she a. acquires possession of the negotiable instrument. b. agrees with Ellen to buy the negotiable instrument. c. pays the face value due on the instrument. d. transfers the instrument to another party. 70. Muni Investment Company signs a check payable to Notes & Loans Inc. to buy a promissory note executed by Omni Corporation. This check a. does not constitute sufficient consideration for HDC status. b. does not satisfy the value requirement for HDC status. c. satisfies the consideration requirement for HDC status. d. satisfies the value requirement for HDC status. 71. Doyle gives a check to eMarket Finance to buy 100 shares of stock in FabNu Corporation for Doyle. The price of the shares is constantly fluctuating. eMarket asks Doyle to leave the amount of the check blank and allow it to fill in the price when making the purchase. Doyle agrees. eMarket buys the stock when the price is $4,000, but fills in the check for $5,000. The check is negotiated as payment for a $5,000 debt to Guido & Hollis Accountants (G&H), which takes the check in good faith and without notice of eMarket’s act. G&H later learns that eMarket was not authorized to fill in the check for $1,000 over the price. Is G&H an HDC? If so, for how much?

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Chap 26_15e 72. Rochelle fraudulently induces Sybil to sign a note. Rochelle sells the note to Terry, who does not know of the fraud and takes the note for value and in good faith, and thus becomes an HDC. Terry sells the note to Ulrich, who sells the note back to Rochelle. Does Rochelle acquire Terry’s HDC rights in the note?

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Chap 26_15e Answer Key 1. True 2. False 3. False 4. True 5. False 6. False 7. True 8. False 9. True 10. True 11. False 12. True 13. False 14. False 15. False 16. False 17. True 18. False 19. False 20. False 21. True 22. True 23. True 24. False 25. False 26. True

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Chap 26_15e 27. True 28. False 29. True 30. False 31. False 32. False 33. True 34. True 35. True 36. a 37. c 38. c 39. a 40. c 41. b 42. a 43. c 44. b 45. d 46. a 47. b 48. c 49. c 50. a 51. a 52. a 53. b 54. b Copyright Cengage Learning. Powered by Cognero.

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Chap 26_15e 55. a 56. d 57. a 58. b 59. a 60. c 61. b 62. b 63. a 64. a 65. a 66. c 67. d 68. b 69. c 70. d 71. G&H is an HDC to the extent of $5,000, the amount of the preexisting debt that eMarket owed G&H, and for which G&H accepted the check as payment. To qualify as an HDC, a holder must give value for a negotiable instrument. Taking an instrument as payment for an antecedent claim is giving value. G&H accepted the $5,000 check from eMarket as payment for the debt. This is value. G&H accepted this check before receiving notice of Doyle’s defense against payment of it, so G&H is an HDC for this amount. Even if G&H had known that the check was incomplete when it was given to eMarket, G&H would have qualified as an HDC. Analyze that an incomplete instrument has been completed is not notice of a defense against payment. Doyle is liable to G&H for the amount of the check as completed. 72. No, Rochelle does not acquire Terry’s HDC rights in the note. A person who does not qualify as an HDC but who acquires an instrument from an HDC or from someone with HDC rights receives the rights and privileges of an HDC. A holder who was a party to fraud affecting the instrument, however, knows of a defense against payment on it and cannot improve his or her status by buying it from a later HDC. Because of the fraud perpetrated on Sybil, the signer of the note, Rochelle does not qualify as an HDC because she knows of a defense against payment on the note. Terry and Ulrich, both of whom apparently are not aware of the fraud, can become HDCs in the negotiation of the note to them. But Rochelle cannot improve her status by buying the note from either of them because she is aware of Sybil’s defense against payment.

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Chap 27_15e Indicate whether the statement is true or false. 1. A third party who buys a note arising from a consumer credit transaction that lacks the notice required by FTC Rule 433 is still subject to the buyer’s defenses against the seller because of the otherwise harsh effect of the HDC doctrine. a. True b. False 2. A person who transfers an instrument for consideration warrants to all subsequent transferees and holders who take the instrument in good faith that all signatures on the item are authentic and authorized. a. True b. False 3. Warranty liability arises in the negotiation of an instrument only when a transferor indorses it. a. True b. False 4. A person who is primarily liable on a negotiable instrument is absolutely required to pay the instrument regardless of whether he or she has an otherwise valid defense to payment. a. True b. False 5. The lack or failure of consideration is a personal defense and can be used to avoid payment to an ordinary holder, an HDC, and a holder through an HDC. a. True b. False 6. Because liability for payment on a negotiable instrument is immediate when the instrument is signed or issued, no action by the holder is required. a. True b. False 7. What renders a note negotiable is the maker’s unconditional promise to pay even if the note is incomplete at the time the maker signs it. a. True b. False 8. The transfer of an instrument, with or without indorsement, extends warranty liability to any subsequent holder who takes the instrument in good faith. a. True b. False 9. Warranty liability does not arise when a party delivers a bearer instrument because a holder cannot hold the party liable on his or her signature on the instrument. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 27_15e 10. Generally, when an indorsement is unauthorized, the burden of loss falls on the first party to take the instrument. a. True b. False 11. The destruction or mutilation of an instrument is considered cancellation, and thus discharges the liability of all parties, only if it is done with the intention of eliminating obligation on the instrument. a. True b. False 12. Presentment warranties protect the party to whom an altered instrument is presented because they have the effect of shifting liability back to the party who was in the best position to prevent the wrongdoing. a. True b. False 13. Like secondary signature liability, warranty liability is subject to the conditions of proper presentment, dishonor, and notice of dishonor. a. True b. False 14. A consumer who signs a note to buy a defective product continues to be liable on the note to an HDC even if the consumer returns the faulty product to the seller. a. True b. False 15. When a person forges an instrument, the person whose name is forged is not liable to an ordinary holder but must pay any HDC the value of the instrument. a. True b. False 16. To protect consumers who buy defective products, the Federal Trade Commission adopted FTC Rule 433 to effectively bolster the HDC doctrine in consumer transactions. a. True b. False 17. Timely notice of the dishonor of an instrument that has been properly presented for payment discharges the liability of parties who are secondarily liable on the instrument. a. True b. False 18. It is not a material alteration to change the figures on a check so that they agree with the written amount, and thus, any holder is entitled to enforce the check. a. True b. False

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Chap 27_15e 19. On a note that forms part of a consumer’s contract to buy goods for personal use, the notice in the contract required by FTC Rule 433 places an HDC of the note in the position of a contract assignee. a. True b. False 20. Although the purpose of bankruptcy is to settle finally all of the insolvent party’s debts, a discharge in bankruptcy is not a valid defense against payment on an instrument to an HDC. a. True b. False 21. A parent who co-signs a note for a student loan with his or her son or daughter is primarily liable if the note states the co-signers “collectively” promise to pay. a. True b. False 22. Because banks rely on transfer warranties in the check-collection process, these warranties cannot be disclaimed with regard to checks. a. True b. False 23. A demand instrument must be presented for acceptance or payment within a reasonable time after its date of issue and before a secondary party becomes liable on it. a. True b. False 24. The lack or failure of consideration is a personal defense and can be used to avoid payment to an ordinary holder, an HDC, and a holder through an HDC. a. True b. False 25. Because a maker who issues an incomplete note will normally be liable for payment even if the note is later completed in an unauthorized manner, the alteration can be claimed as a defense against an HDC. a. True b. False 26. When a person claims to have been deceived into signing a negotiable instrument by being told it is something else, the level of his or her intelligence may determine whether he or she should have understood the nature of the deal before signing. a. True b. False 27. A person cannot be liable for payment on a negotiable instrument on the basis of signature liability unless he or she has signed it personally. a. True b. False

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Chap 27_15e 28. Every party who signs a negotiable instrument is potentially liable for payment of that instrument when it comes due. a. True b. False 29. The proper presentment of a negotiable instrument for payment can be made only by commercially reasonable written or electronic means. a. True b. False 30. Liability for payment on a negotiable instrument extends only to those who sign the instrument. a. True b. False 31. A delay in payment or a refusal to pay an instrument when it is returned because it lacks a proper indorsement is a dishonor of the instrument. a. True b. False 32. A holder can impair the value of collateral given to secure payment of an instrument without affecting the liability of parties who would benefit from the collateral in the event of nonpayment. a. True b. False 33. An investor who signs a note on behalf of a business is primarily liable and therefore has no right to reimbursement from the payee if the investor pays. a. True b. False 34. A drawee places himself or herself into almost the same position as the maker of a note or the drawer of a draft when the drawee accepts the instrument. a. True b. False 35. Discharge from liability on an instrument cannot occur if a holder impairs another party’s right of recourse—right of reimbursement—on the instrument. a. True b. False

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Chap 27_15e Indicate the answer choice that best completes the statement or answers the question. 36. Liam, who is authorized to draw checks on Manufacturing Company’s account, signs a check preprinted with the company’s name with a signature that reads simply, “Liam.” On this check, Liam is a. proportionately liable. b. primarily liable. c. secondarily liable. d. not liable. 37. Lon is Mill Corporation’s agent and is authorized to write checks on the firm’s account in North Bank. Lon writes a check “pay to the order of Ocean Shipping.” Lon signs the check “Mill Corporation by Lon, agent.” The bank dishonors the check. Liability extends to a. Lon. b. Ocean Shipping. c. Mill Corporation. d. North Bank. 38. Quint brings a draft drawn on Regional Credit Union and “payable to Silo LLC” to Regional. The credit union stamps “accepted” on the face of the draft, signs it, and dates it. Regional is a. no longer liable for payment of the draft. b. secondarily liable for payment of the draft. c. obligated to pay the draft when it is presented for payment. d. liable for payment of the draft thirty days after issue. 39. Vita gives Walt a $500 check as payment for a debt. Walt crudely increases the amount of the check to $5,000 and deposits the check in his bank account. Vita is liable for the payment of $5,000 to a. no one. b. Walt and his bank. c. Walt’s Bank only. d. Walt only. 40. Development Corporation obtains a business loan from Equity LLC in exchange for a note signed by the borrower. Equity alters the amount due on the note before selling it to Finance Inc., which takes it in good faith, and in turn sells it to Grande Invest Company. Grande can sue for breach of a warranty on the note a. none of the choices. b. when payment of the note becomes due. c. only if Finance Inc. had reason to suspect the breach. d. as soon as Grande has reason to know of the breach.

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Chap 27_15e 41. Family Farm signs and delivers a check payable to Gold Digger PC, leaving the amount blank but authorizing the payee to fill in the check for $10,000. Gold fills in $15,000 and gives the check to Hill Bank as payment on Gold’s debt to the bank of that amount. As an HDC, the bank can enforce the check for a. $0. b. $5,000. c. $10,000. d. $15,000. 42. Bravo co-signs a $15,000 note payable to College Loan Company enabling Dios to obtain a student loan. The terms of the note stated that Bravo signed “on behalf of” Dios. If Dios stops making payments on the debt, Bravo is a. discharged from any obligation. b. not liable because Bravo signed “on behalf of” Dios. c. primarily liable. d. secondarily liable. 43. Property Company borrows $100,000 at 5 percent interest from Quick Loans LLC and signs a note for the amount. Without Property’s authorization, the lender changes the amount of the note to $120,000 and increases the rate to 6 percent. This alteration is a defense to payment on the note against a. no one. b. ordinary holders only. c. ordinary holders, HDCs, and holders through HDCs. d. HDCs only. 44. Drill Bit Company issues a check drawn on East Bank made payable to Faux Products for a shipment of Genuine-brand machine parts. Drill Bit discovers that the goods are counterfeit and orders East Bank not to pay the check. Meanwhile, Faux negotiates the check to Haul-Away Trucking, which takes it in good faith, for value, and unaware of Faux’s fraud. Entitled to payment on the check is a. no one. b. ordinary holders, including Haul-Away, only. c. ordinary holders, HDCs, and holders through HDCs. d. HDCs, including Haul-Away, only. 45. Employers Company draws a check payable to Felipe. Felipe indorses the back and negotiates the check to Guarantors Bank. Primarily liable on the check is a. Employers Company. b. Felipe. c. Guarantors Bank. d. none of the choices.

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Chap 27_15e 46. Kira forges Lew’s name as the drawer of a stolen check, drawn on Metro Bank, and makes the item payable to Kira. Lew is liable to pay the amount to a. no one. b. ordinary holders only. c. ordinary holders, HDCs, and holders through HDCs. d. HDCs only. 47. The appropriate time for presentment of a negotiable instrument for payment is determined by a. the nature of the instrument. b. all of the choices. c. any usage of banking or trade. d. the facts of the particular situation. 48. It is assumed that a drawer or maker will recognize his or her own signature and that a maker or an acceptor will recognize whether an instrument has been materially altered. Therefore, with respect to any of these parties who in good faith accepts an instrument, in terms of presentment warranties, a. none of them apply. b. only the warranty that the person obtaining acceptance is entitled to enforce the instrument applies. c. only the warranties that the instrument has not been altered and that the person obtaining acceptance has no knowledge of an unauthorized signature apply. d. all of them apply. 49. Rau obtains a loan from Security Funds and signs a note for the amount payable to the lender. Security Funds indorses the note and sells it to Tomas. With the intent to cancel Rau’s obligation on the note, Tomas writes “Paid” across its face. This discharges the liability of a. no one. b. Rau only. c. Rau and Security Funds. d. Security Funds only. 50. To buy a truck under warranty from Detour Motors, Eli, a consumer, signs a note payable to the dealer. The note includes the notice required by FTC Rule 433. The dealer sells the note to Finance Company, which takes it in good faith, for value, and unaware of any defenses against payment. Eli discovers that the truck is defective and returns it to Detour Motors. The consumer can assert the breach of warranty to avoid payment on the note against a. no one. b. Detour Motors only. c. Detour Motors and Finance Company. d. Finance Company only.

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Chap 27_15e 51. Because he or she was in the best position to prevent wrongdoing with respect to an instrument, transfer and presentment warranties attempt to shift liability to a. the drawee or payee on an instrument. b. the holder of an unauthorized item when the wrongdoing is discovered. c. the party on whose account an unauthorized item is made or drawn. d. the person who dealt face to face with the wrongdoer. 52. Faro is an agent authorized to sign negotiable instruments on behalf of Global Supply Inc. To protect against potential liability on a note signed on the corporation’s behalf, Faro should a. not identify Global Supply nor indicate his agency status. b. sign “Faro, Global Supply Inc.,” but not indicate his agency status. c. indicate his agency status, but not identify Global Supply. d. identify Global Supply and indicate his agency status. 53. Leda deceives Merchant Company into signing a note by telling the firm’s staff accountant Nano that it is not a note but a receipt for a delivery of goods. In light of Nano’s experience and other circumstances, a reasonable review of the instrument would have revealed its nature. Merchant is most likely liable on the note to a. no one. b. ordinary holders only. c. ordinary holders, HDCs, and holders through HDCs. d. HDCs only. 54. Colin signs a note “payable to the order of Debit Bank.” The bank indorses the note in blank and negotiates it to Equity Funds, which sells it to Financial Investments. The transfer of the note from Equity to Financial gives rise to a. none of the choices. b. contractual liability. c. signature liability. d. warranty liability. 55. Housewares Inc. warrants its goods to be free of defects. Ivy issues an instrument to Housewares for the purchase of an appliance that proves to be defective. With respect to payment on the instrument, Ivy a. is liable only to a subsequent holder of the instrument. b. has a universal defense. c. has a personal defense. d. cannot avoid it. 56. Eton executes a preprinted promissory note to First Bank without filling in the due date. The bank does not complete the form by adding the date. The note is a. not payable. b. payable on demand. c. payable thirty days after issue. d. payable at the election of the maker.

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Chap 27_15e 57. Ruiz writes a check drawn on his account at Security Bank and payable to the order of Twyla. The bank does not pay the check. Ruiz is a. absolved of liability on the check. b. liable to the payee for the amount of the check. c. liable to the bank for the amount of the check. d. entitled to payment of the amount of the check from the payee. 58. Asa executes a preprinted promissory note to Business Loans without filling in the due date. The bank does not complete the form by adding the date. Asa is a. not liable for payment on the note. b. secondarily liable for payment on the note. c. obligated to pay the note. d. liable for payment on the note only at his option. 59. Klaus forges Lot’s name as the maker of a note “payable to Klaus.” Klaus indorses the note in blank, sells it to Mort, and disappears. Without indorsement, Mort sells the note to Nora, who, also without indorsement, sells the note to Obie. On discovery of the forgery, most likely liable to Obie is a. none of the choices. b. Lot. c. Mort. d. Nora. 60. Bass signs a note “payable to the order of Credit Bank.” Unless Bass has a valid defense against payment, his liability on this note is a. impaired. b. primary. c. secondary. d. qualified. 61. Layla executes a preprinted promissory note to Metro Financial without filling in the due date. Metro completes the form with a due date that Layla authorized. The note is a. not payable. b. payable on the stated due date. c. payable on demand. d. payable at the election of the maker. 62. Textile Inc. sells goods to United Stores in exchange for a note signed by the buyer. Textile sells the note to Valley Finance Company. In this situation, transfer warranties arise because a. Valley has no knowledge of any bankruptcy proceedings against United. b. Textiles did not alter the note. c. the signatures on the note were authentic and authorized. d. the note was transferred for consideration.

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Chap 27_15e 63. Baer writes a check for $500 “payable to Cary” drawn on Baer’s account at Debit Bank. Cary indorses and sells the check to Esau, who deposits the check in his account at Fidelity Bank. Fidelity dishonors the check. Baer or Cary may be liable for payment of the check if a. the drawer of the check does not repudiate the dishonor. b. timely notice of dishonor is given. c. more than thirty days have elapsed since the check was written. d. the check was not properly presented for payment. 64. Noah signs Ola’s name to a check without Ola’s authorization. Noah can be held personally liable for payment on the check by a. any holder. b. only an HDC. c. only an ordinary holder. d. none of the choices. 65. Qato forges Rush’s name as the drawer of a stolen check, drawn on Scrutiny Bank, makes the item payable to Qato, and deposits it in his own Scrutiny account. In response to a call from the bank, Rush ratifies the signature. In this situation, Rush is liable to pay the amount to a. no one. b. ordinary holders only. c. ordinary holders, HDCs, and holders through HDCs. d. HDCs only. 66. Qita has the authority to issue checks on behalf of Retail Center. Qita creates a dozen unauthorized checks that she deposits in her account at State Bank. The payee line on each check is blank. In a suit between Retail Center and State Bank over the loss, the party or parties most likely to be held liable is a. Retail Center. b. State Bank. c. Retail Center and State Bank, in prorated amounts. d. none of the choices. 67. To obtain a loan, Nero signs a note payable to Opie. Opie indorses the note and sells it to Payday Capital, which in turn indorses the note and negotiates it to Quality Investments. Nero tenders a partial payment on the note, which Quality refuses. Discharged to the extent of the tender is a. no one. b. Opie only. c. Opie and Payday Capital. d. Payday Capital only.

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Chap 27_15e 68. Transfer of a note “payable to the order of Credit Company” by delivery to Debit Associates, with the payee’s indorsement, for consideration, extends warranty liability a. none of the choices . b. only to Debit. c. only to Debit and its immediate transferee. d. to any subsequent holder who takes the instrument in good faith. 69. Ana issues a check drawn on Best Bank payable to the order of Best, who indorses the check and cashes it at Discount Mart. Discount deposits the check into the store’s account at El Centro Credit, which presents it for payment to Best Bank. The drawee’s payment of the check in good faith to El Centro discharges the liability of a. none of the parties. b. all of the parties. c. Ana and Best Bank only. d. Best Bank only. 70. Wang obtains a loan from Xi and signs a note for the amount payable to the lender, who indorses the note and negotiates it to Yuri. Zhang acquires the note from Yuri, and subsequently agrees not to sue Wang on the note. This discharges a. none of the parties. b. Xi only. c. Xi and Yuri. d. Yuri only. 71. Flo is an administrative assistant with Global Shipping Corporation, but has no authority to sign Global checks. Flo orders merchandise from Home Furnishings Company delivered to her apartment and pays with a Global check, signing “Global Shipping Corp. by Flo, admin. assist.” Home does not know that Flo has no authority to sign the check. Who is liable on the check, and why?

72. Equity Credit Company has in its possession an instrument dated May 1, 2019. The instrument is payable to the order of First Choice Moving & Storage Company “on June 1, 2020,” for $5,000. In the upper left corner is an address for Greater Metro Development Corporation—10 Corporate Park Avenue, Chicago, Illinois—and in the lower right corner is the signature of “Hilltop Investments, Inc., By Ida, President.” In the lower left corner is stamped “ACCEPTED: Greater Metro Development Corporation by John, President, May 5, 2019.” On the back is the signature of “First Choice Moving & Storage Company by Kathleen, President.” Who, if anyone, is primarily liable on this instrument on May 1? On May 5? Who, if anyone, is secondarily liable on this instrument?

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Chap 27_15e Answer Key 1. False 2. True 3. False 4. False 5. False 6. True 7. True 8. False 9. False 10. True 11. True 12. True 13. False 14. False 15. False 16. False 17. False 18. True 19. True 20. False 21. True 22. True 23. False 24. False 25. False 26. True

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Chap 27_15e 27. False 28. True 29. False 30. False 31. False 32. False 33. False 34. True 35. False 36. b 37. c 38. c 39. a 40. d 41. d 42. c 43. c 44. d 45. d 46. a 47. b 48. b 49. c 50. c 51. d 52. d 53. c 54. d Copyright Cengage Learning. Powered by Cognero.

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Chap 27_15e 55. c 56. b 57. b 58. c 59. d 60. b 61. b 62. d 63. b 64. b 65. c 66. a 67. c 68. d 69. b 70. c 71. Flo is liable on the check, and Global is not liable, although it is most likely that Home will suffer the loss. As in cases involving forged drawers’ signatures, in which the person whose name is forged is not liable, Global can assert the defense of the unauthorized signature against any HDC. In this problem, Home appears to qualify as an HDC because it did not know that Flo had no authority to sign the check. Flo is liable because she exceeded her authority in signing the check, purportedly on behalf of her employer. Assuming that Flo has either used the merchandise or resold it and absconded with the proceeds, however, Home will thus most likely suffer the loss.

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Chap 27_15e 72. No one is primarily liable on this instrument on May 1. On May 5, Greater Metro is primarily liable. First Choice and Hilltop Investments are both secondarily liable. This instrument is a draft and it is negotiable. It meets all of the requirements for negotiability: it is in writing, it is signed by the drawer (Hilltop Investments), it is an unconditional order to pay, it states a fixed amount of money ($5,000), it is payable at a definite time (June 1, 2020), and it is payable to order (of First Choice). A draft is an unconditional written order that involves three parties. The party creating the draft (the drawer) orders another party (the drawee) to pay money to a third party (the payee). Here, Hilltop Investments, as noted, is the drawer, Greater Metro is the drawee, and First Choice is the payee. Primary liability arises on a negotiable instrument when a party is absolutely required to pay the instrument. On a draft, no party is primarily liable until the drawee accepts it. The drawee’s acceptance, or promise to pay the draft when it is presented for payment, places the drawee in the position of primary liability. In this problem, Greater Metro, the drawee, accepted this draft on May 5 and became primarily liable. Drawers and indorsers are secondarily liable, which means that they are required to pay the instrument if the party with primary liability refuses to do so. In the case of a draft, Greater Metro’s refusal to accept the instrument would have had the same effect. Here, First Choice, who indorsed the back of the instrument, and Hilltop Investments have secondary liability.

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Chap 28_15e Indicate whether the statement is true or false. 1. Because issuing banks must honor cashier’s checks when they are presented for payment, businesses sometimes use them as nearly the equivalent of cash. a. True b. False 2. Electronic banking makes it easier to issue a stop-payment order. a. True b. False 3. A bank may contractually shift to its customer the risk of forged checks created electronically or otherwise by the use non-manual signatures. a. True b. False 4. Electronic banking has reduced the number of possibilities for tampering with a person’s private banking information. a. True b. False 5. If a check is dishonored for insufficient funds, the bank on which the check is drawn is liable to the payee or to the holder in a civil suit. a. True b. False 6. A bank must re-credit a customer’s account when the bank pays a check on which the drawer’s signature is forged. a. True b. False 7. Checks received after a certain time can be deferred for posting until the next banking day. a. True b. False 8. When a bank certifies a check, the bank is agreeing in advance to accept the check when it is presented for payment and to make payment with funds reserved for the purpose. a. True b. False 9. Even if a customer’s negligence substantially contributes to a forgery of the drawer’s signature on a check, the bank is obliged to re-credit the customer’s account for the amount of the check. a. True b. False

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Chap 28_15e 10. A check may fall under Uniform Commercial Code Article 3 as a negotiable instrument and be subject to UCC Article 4 in the course of collection. a. True b. False 11. Fewer records are available with electronic banking to prove or disprove that a transaction occurred. a. True b. False 12. Online payment systems are not yet among the most common types of electronic fund transfer systems. a. True b. False 13. If a bank does not dishonor an “on-us” item by the opening of the second banking day following its receipt, the check is considered paid. a. True b. False 14. If any part of a commercial electronic fund transfer is covered by the Electronic Fund Transfer Act, the entire transaction is excluded from UCC Article 4A. a. True b. False 15. The death of a customer automatically revokes a bank’s authority to accept, pay, or collect an item drawn by the customer on an account with the bank. a. True b. False 16. A bank is not obligated to pay an uncertified check presented for payment more than six months from its date. a. True b. False 17. Whoever takes an instrument with a forged indorsement cannot become a holder because a forged indorsement does not transfer title. a. True b. False 18. A customer’s negligence cannot shift the loss when payment is made on a check with an altered amount. a. True b. False 19. A paper check must be presented for payment—it cannot be retained at its place of deposit, with only its image or description presented electronically. a. True b. False

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Chap 28_15e 20. A customer can refuse to accept a substitute check created from the digital image of an original check as proof of payment. a. True b. False 21. With a joint checking account, the bank can hold any joint-account owner liable for payment of an overdraft even if that owner did not sign the check or benefit from its proceeds. a. True b. False 22. Both stored-value cards and smart cards contain microchips with security programming that can authenticate the validity of a financial transaction. a. True b. False 23. Because the speed of check-processing time is increasing, to avoid overdrafts, an account-holder needs to verify that funds are available to cover a check when it is written. a. True b. False 24. When a bank wrongfully dishonors a check, it is liable to the customer for any resulting damages. a. True b. False 25. The bank on which a check is drawn is the depositary bank. a. True b. False 26. The contractual rights and duties of the bank and the customer depend on the nature of the transaction. a. True b. False 27. When a customer makes a deposit into a checking account, the customer becomes a debtor, and the bank a creditor, for the amount deposited. a. True b. False 28. If only a bank’s drive-through facility is open, a check deposited on Saturday will not trigger the bank’s midnight deadline until the following Monday. a. True b. False 29. Payments via phones and other mobile devices represent the most common type of negotiable instrument regulated by the Uniform Commercial Code. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 28_15e 30. If a bank’s payment over a stop-payment order causes subsequent checks written on the drawer’s account to be returned for insufficient funds, the bank will be liable for the drawer’s resulting costs. a. True b. False 31. If any financial institution, such as a brokerage house, handles a check for payment or collection, the check is covered by UCC Article 4. a. True b. False 32. To avoid liability for negligence, a customer must examine monthly bank statements and canceled checks promptly and with reasonable care, and report any forged signatures to the bank. a. True b. False 33. The destruction of an original check after the creation of a substitute check prevents the check from being paid twice. a. True b. False 34. If a bank pays a stale check in good faith but without consulting the customer, the bank has no right to charge the customer’s account for the amount. a. True b. False 35. When a bank draws a check on itself, the check is a negotiable instrument at the moment it is issued. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. Dag signs a check “pay to the order of Eton” drawn on Dag’s account at First Bank and dates the check “May 1.” Eton presents the check to the bank for payment on December 15. This is a. a cashier’s check. b. an overdraft. c. a certified check. d. a stale check. 37. Smith & Jones P.A. is a business customer of Tri-State Bank. Under federal law, Smith & Jones cannot demand a. any proof of payment except the bank’s good faith. b. monthly statements. c. recrediting of its account on payment of a forged item. d. the return of its original checks with its monthly statements.

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Chap 28_15e 38. Chad writes Dina an uncertified check for $500 drawn on Chad’s account at Employees Credit Union. Seven months later, Dina presents the check for payment. The credit union pays the check in good faith without consulting Chad. The credit union a. cannot charge Chad’s account for any amount. b. can charge Chad’s account for $250 only. c. can charge Chad’s account for $500. d. is liable for breach of contract. 39. Quint signs a check “pay to the order of Rona” drawn on Quint’s account at Suburban Bank. Quint has $400 in his account but the amount of the check is $500, which the bank pays. This is a. a dishonored check. b. an overdraft. c. a certified check. d. a stale check. 40. Faye forges Greta’s signature on a check “payable to the order of Faye” drawn on Greta’s account at Home Bank. Most likely, if the bank pays the check a. the Federal Reserve will reimburse all parties for their costs. b. the loss will be apportioned among all of the bank’s customers. c. Greta will be liable for the amount. d. the bank will have to recredit Greta’s account. 41. Gary writes a check drawn on Hill Bank for $400 “payable to Ian” on May 1. Gary dies on May 3. Ian presents the check to the bank on May 5. Unaware of Gary’s death, the bank a. must certify the check. b. may pay the check. c. must consult with Gary’s heirs before paying the check. d. can do nothing until Ian claims an interest in the account. 42. When processing a check, Platinum Bank encodes information, such as the amount of the check, on the item. Platinum thereby warrants to any subsequent bank or payor a. the item has been returned to the drawer. b. nothing. c. the check has been processed manually. d. the encoded information is correct. 43. Dallas presents an uncertified check for payment more than six months after its date. The check was drawn by Emma on her account in First Bank. If the bank follows the usual banking practice in such a case, it will a. cash the check. b. consult Emma. c. refuse to cash the check. d. ask Dallas what he would prefer.

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Chap 28_15e 44. Brady forges Cal’s signature on a check “payable to the order of Brady” drawn on Cal’s account in Downtown Bank. Cal’s forged signature is a. effective if an innocent third party accepts the check. b. effective to the degree that it matches Cal’s genuine signature. c. effective to the extent that the bank debits Cal’s account. d. not effective. 45. Bok buys an espresso machine from Coffee Gadgets, which bills him for $100. He writes out a check drawn on Dios Bank, but later, believing that the machine is defective, issues a stop-payment order. Dios a. is liable to Coffee Gadgets for the amount of the check. b. must stop payment if the bank has a reasonable time to act. c. need not follow Bok’s order because it was issued after the check. d. need not follow Bok’s order unless the check was certified. 46. Quito writes a check to Roy on Quito’s account at Sterling Bank. The bank dishonors the check because Quito has insufficient funds in his account. The bank is liable to a. Quito. b. Roy. c. Quito, Roy, and the payees on Quito’s subsequent checks. d. no one. 47. Misha’s debit card, issued by National United Bank, is stolen and used without her permission. She tells the bank within thirty days. She may be required to pay no more than a. $5. b. $50. c. $500. d. $5,000. 48. Dill issues a check drawn on Eagle Bank to Farm Supply Store to pay for a rototiller. Later, Dill discovers a defect in the device and orders the bank to stop payment on the check. Dill does not renew the order, and the bank clears the check eight months later. The bank a. must recredit Dill’s account. b. must obtain funds from Farm Supply to cover the check. c. must locate and substitute an acceptable rototiller. d. none of the choices. 49. Bern signs a check “pay to the order of College Bookstore” drawn on his account at Debit Bank to buy textbooks. Bern is a. none of the choices. b. the drawee. c. the drawer. d. the payee.

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Chap 28_15e 50. Corky pays Delta Bank $500 plus a service fee to draw a check on itself payable to Electric Company. The party responsible for paying the check is a. Corky only. b. Corky and Delta Bank. c. Delta Bank only. d. Corky, Delta Bank, and Electric Company. 51. Nan writes a check for $1,000 drawn on Omni Bank payable to Posy. Posy presents the check for payment to Omni Bank, which dishonors it. The party most likely liable to Posy is a. Nan in a civil suit. b. Nan in a criminal prosecution. c. Omni Bank in a civil suit. d. none of the choices. 52. Riley signs a check “pay to the order of State University” drawn on his account at Town Bank to pay tuition and fees. Like most checks, this check is a. actual cash. b. virtual cash. c. a special type of draft. d. a type of electronic fund transfer. 53. Erin uses e-money consisting of funds stored on microchips in her laptop, phone, and tablet to pay bills. This effectively replaces physical cash with virtual cash in the form of a. coins and paper currency. b. electronic impulses. c. checks. d. none of the choices. 54. Boris can write checks on his account at City Bank. Demi steals the checks, forges Boris’s signature, and cashes the checks at City Bank. The bank is excused from any liability if, after receipt of the first forged check, Boris fails to report the forgeries within a. one day. b. one year. c. one month. d. six months. 55. Curt issues a check payable to Discount Mart. Ethel, Discount’s cashier, forges the store’s indorsement and deposits the check in her bank account. Curt’s bank, Farmers Bank, pays the check. Curt can recover from a. Ethel, but not the bank. b. the bank, which cannot recover from Ethel. c. the bank, which can recover from Ethel. d. neither Ethel nor the bank.

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Chap 28_15e 56. With respect to processing checks for payment, the Uniform Commercial Code governs the relationships of banks with a. their customers. b. the Federal Reserve. c. only other banks. d. all of the choices. 57. Mara has a checking account at North Bank. Mara signs a check “payable to Ovid” drawn on Mara’s account. North Bank is a. none of the choices. b. the drawee. c. the drawer. d. the payee. 58. Kobe signs a check “pay to the order of Liu” drawn on Kobe’s account at Main Street Bank. He later orders the bank not to pay the check, but the bank pays it over his order. Subsequent checks written on the account “bounce.” Most likely liable for the costs to Kobe is a. any party to whom a subsequent check was written. b. Kobe. c. Liu. d. Main Street Bank. 59. Dana draws a check on Equity Bank, and asks the bank to agree in advance to accept the check by setting aside sufficient funds to cover the amount. If Equity agrees, the check will be considered a. cashed. b. certified. c. deposited. d. provisionally credited. 60. Daisy signs a check “pay to the order of Ewan” drawn on Daisy’s account in Finance Bank. Graham forges Ewan’s indorsement. Finance Bank pays the check. Most likely a. Daisy will be liable for the amount. b. Ewan will have to pay Daisy for the amount. c. Finance Bank will have to recredit Daisy’s account. d. the Federal Reserve will reimburse all parties for their costs. 61. Elmer pays Fidelity Bank $1,000 plus a service fee to draw a check on itself made payable to Go Delivery Service. This is a. a cashier’s check. b. an overdraft. c. a stale check. d. a stop-payment order.

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Chap 28_15e 62. On Friday morning, Geoff deposits into his account at Heartland Bank a $500 check from Imelda, who also has an account at Heartland. On that same day, this check is considered a. cashiered. b. certified. c. paid. d. a provisional credit. 63. Rhea writes a check for $100 drawn on Savers Credit Union and presents it to Timpani Jewelers for payment. If the check is not backed by sufficient funds, Rhea may be prosecuted for a. forgery. b. fraud. c. negligence. d. all of the choices. 64. Ridge Bank creates a paper reproduction of customer Sophie’s check with the statement “This is a legal copy of your check. You can use it in the same way you would use the original check.” This is a. a certified check. b. a cashier’s check. c. a substitute check. d. a traveler’s check. 65. Ruth takes her car to Service Center, which repairs the car and bills her for $500. She writes out a check drawn on Tempo Bank, but later, believing that Service Center did not fix the car properly, issues a stop-payment order. If Tempo pays the check, the bank a. can sue Ruth for a wrongful stop-payment order. b. can sue Service Center for breach of contract. c. is liable to Service Center for the time and trouble to return the payment. d. is liable for Ruth’s loss due to the wrongful payment. 66. Allys writes a check to Beri on Allys’ account at Community Bank. The bank dishonors the check even though Allys has sufficient funds in her account. The bank is liable to a. Allys. b. Beri. c. the payee on Ally’s next check. d. no one. 67. Finance Bank receives a check drawn on the account of Enterprise Inc., one of the bank’s customers, at 3 P.M. Friday. Dora, the presenter of the check, is not one of the bank’s customers. The bank uses deferred posting with a 2 P.M. cutoff hour. If it decides to dishonor the check, it must do so by midnight a. Saturday. b. Sunday. c. Monday. d. Tuesday.

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Chap 28_15e 68. Franco buys a sofa from Grey at a garage sale. Franco writes Grey a check for $50 to pay for the couch. Grey is a. none of the choices. b. the drawee. c. the drawer. d. the payee. 69. Ciera presents an instrument that states “pay to the order of Duff” to East Bank for payment. As the most common type of negotiable instrument regulated by the Uniform Commercial Code, this is a. a substitute check. b. a check. c. an electronic fund transfer. d. a payment via a mobile device. 70. Gillis writes a check to Harley as payment for a game player but soon discovers it is broken. Gillis goes to the drawee bank and orally authorizes Ilene, a bank officer, to stop payment on the check. This order is valid for a. fourteen days. b. any stated period of time. c. six days. d. six months. 71. On an automated teller machine (ATM) belonging to USA Bank, Sven placed a card-skimming device to pull information from the magnetic strips of users’ debit cards. The device then transmitted the stolen data to thieves who used it to gain access to, and empty, the bank accounts of the users, including Megan. Megan learned of the theft the next day and promptly notified USA. Is Megan entitled to a recredit of her account for the most of the loss due to the theft? Explain.

72. Nick steals two checks from Pauline—a blank check and a check payable to the order of Retail Outlets Company, drawn on Pauline’s account with State Bank. Nick forges Pauline’s signature on the blank check and makes it payable to himself. Nick forges Retail Outlets’ indorsement on the back of the check payable to Retail Outlets, and adds, “Pay to the order of Nick.” At United Credit Union, Nick indorses the back of both checks with his own name and gives them to United for cash. United does not know about the theft or the forged signatures and presents the checks to State Bank, which pays them. Pauline, who was not negligent, discovers the forgeries and asks State Bank to recredit her account. Who suffers the loss on each check?

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Chap 28_15e Answer Key 1. True 2. False 3. True 4. False 5. False 6. True 7. True 8. True 9. False 10. True 11. True 12. False 13. True 14. True 15. False 16. True 17. True 18. False 19. False 20. False 21. False 22. False 23. True 24. True 25. False 26. True

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Chap 28_15e 27. False 28. True 29. False 30. True 31. False 32. True 33. True 34. False 35. True 36. d 37. d 38. c 39. b 40. d 41. b 42. d 43. b 44. d 45. b 46. a 47. c 48. d 49. c 50. c 51. a 52. c 53. b 54. b Copyright Cengage Learning. Powered by Cognero.

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Chap 28_15e 55. c 56. a 57. b 58. d 59. b 60. c 61. a 62. d 63. b 64. c 65. d 66. a 67. d 68. d 69. b 70. a 71. Yes, Megan is entitled to a recredit of her account for the most of the loss due to the theft. Under the Electronic Fund Transfer Act, if a customer’s debit card is lost or stolen and used without his or her permission, the customer may be required to pay no more than $50. The customer must notify the bank of the loss or theft within two days of learning about it. Otherwise, the liability increases to $500. The customer may be liable for more than $500 if he or she does not report the unauthorized use within sixty days after it appears on the customer’s statement. In this situation, Megan promptly notified USA, so her liability will be no more than $50.

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Chap 28_15e 72. State Bank will suffer the loss of the amount on the blank check unless it can recover from Nick. United will suffer the loss on the amount on the check with the forged indorsement of Retail Outlets unless the credit union, too, can recover from Nick. When the signature of a drawer is forged, the drawer has not been negligent, and the drawee bank pays the check over the forged signature, the party who bears the loss is the drawee bank. The bank has a right to recover from the party who forged the signature, or from any party who does not take the check in good faith and for value, or who changes his or her position in reliance on payment or acceptance. Here, regarding the blank check, Pauline, the drawer, was not negligent, her signature was forged, and State Bank, the drawee bank, paid the check over the forged signature. (State Bank cannot recover from United on the basis of a breach of a presentment warranty, because United warranted only that it did not know the drawer’s signature was forged.) State Bank has a right to recover from Nick, but in most cases, actual recovery from a thief is a remote possibility. Because United took the check in good faith and for value, State Bank does not have a right to recover the amount of this check from United. A bank that pays a customer’s check bearing a forged indorsement must recredit the customer’s account. A forged indorsement does not transfer title, however, and so whoever takes a check with a forged indorsement cannot become a holder and will likely suffer a loss on the check. (A subsequent transfer of the check breaches the presentment warranty that in effect there are no unauthorized indorsements.) In this problem, State Bank must recredit Pauline’s account, but State Bank can recover the amount from United, who did not acquire title to the check and thus did not become a holder. United has a right to recover from Nick, but again actual recovery is unlikely.

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Chap 29_15e Indicate whether the statement is true or false. 1. Any loan for which repayment is ensured by collateral pledged by the borrower is a secured transaction. a. True b. False 2. The borrower is typically required to pay all property taxes, assessments, and other claims against the property. a. True b. False 3. The purpose of a homestead exemption is to ensure that a debtor will retain some form of shelter. a. True b. False 4. Equitable redemption allows a lender to gain title and regain possession of a property. a. True b. False 5. A lender can require a borrower to maintain the property in such a way that the lender’s investment is protected. a. True b. False 6. The borrower need not obtain the lender’s permission for a short sale. a. True b. False 7. The rate of interest paid by the borrower stays fixed with an adjustable-rate mortgage. a. True b. False 8. Most creditors require a borrower to purchase mortgage insurance if the borrower makes a down payment of at least 20 percent of the purchase price. a. True b. False 9. Any payment of the principal obligation by the debtor will discharge the surety or the guarantor from the obligation. a. True b. False 10. Mortgage insurance compensates a debtor for losses due to a default on a mortgage loan. a. True b. False

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Chap 29_15e 11. Because a mortgage involves a transfer of real property, it need not be in writing. a. True b. False 12. Foreclosure is a process that allows a lender to legally repossess and auction off the property that is securing a loan. a. True b. False 13. Bankruptcy statutes were not designed specifically to assist debtors in need of help. a. True b. False 14. A fixed-rate mortgage is a standard mortgage with an adjustable rate of interest. a. True b. False 15. When a co-surety pays more than his or her proportionate share on a debtor’s default, he or she is entitled to recover from the debtor the excess amount paid. a. True b. False 16. Generally, any defenses available to a principal debtor cannot be used by a surety or guarantor to avoid liability on the obligation to the creditor. a. True b. False 17. A mortgage gives a creditor a lien on a debtor’s real property as security for payment of a debt. a. True b. False 18. Most liens have little practical use, because liens generally do not take priority over other claims to the same property. a. True b. False 19. Federal law provides a minimal framework to protect debtors from losing all their income in order to pay judgment debts. a. True b. False 20. An individual who borrows funds from a financial institution to purchase real property by taking out a mortgage is a mortgagee. a. True b. False

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Chap 29_15e 21. A small-amount mechanic’s lien typically stays on record until the property against which it has been filed is sold when it is paid out of the sale proceeds. a. True b. False 22. Recording a mortgage ensures that the creditor is officially on record as holding an interest in the property. a. True b. False 23. Because a writ of attachment is a prejudgment remedy, a debtor does not need to be given notice and an opportunity to be heard before the property is seized. a. True b. False 24. Homeowners’ insurance does not protect the lender’s interest in the event of a loss due to certain hazards, such as fire or storm damage. a. True b. False 25. Every state allows a defaulting borrower to redeem the property before the foreclosure sale. a. True b. False 26. A prepayment penalty clause helps to protect the borrower should the lender sell the loan within a short time after issuing a mortgage. a. True b. False 27. Mortgage loans are contracts. a. True b. False 28. A short sale is a sale of property for less than the balance due on a mortgage loan. a. True b. False 29. A guarantor is entitled to receive from the debtor all outlays made on behalf of the guaranty arrangement. a. True b. False 30. To initiate a foreclosure, a lender must pay the full amount of the debt, plus any costs that have accrued. a. True b. False

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Chap 29_15e 31. Personal property that is most often exempt from satisfaction of judgment debts does not include a vehicle for transportation. a. True b. False 32. No state allows a defaulting borrower to repurchase the property after a judicial foreclosure sale. a. True b. False 33. The loans made by companies that provide credit cards are not backed by collateral. a. True b. False 34. In a few states, if a judgment debtor does not have a family, a creditor may be entitled to collect the full amount realized from the sale of the debtor’s home. a. True b. False 35. Today, there is no significant difference in the liability of a surety and a guarantor in any state at common law or otherwise. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. To buy a condo, Mary obtains a thirty-year mortgage with an interest rate that is fixed for three years and then adjusts annually. Mary’s mortgage is a. a fixed-rate mortgage. b. an adjustable-rate mortgage. c. a workout agreement. d. a short sale. 37. Ran is a surety for Su’s loan from Tempo Credit. When Su pays the debt owed to the lender, Ran’s right of subrogation entitles the surety to a. any right that the creditor had against the debtor. b. a proportionate share of any overpayment due to the loan’s prepayment. c. all outlays made on behalf of the suretyship arrangement. d. title to and possession of the property serving as collateral for the loan. 38. United Contractors Inc. holds a lien on Vista Estate’s real property. This property can be sold to satisfy the debt if, before the sale, notice is given to a. Vista Estate. b. Vista Estate’s other creditors. c. the general public. d. the state in which the property is located. Copyright Cengage Learning. Powered by Cognero.

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Chap 29_15e 39. On a debtor’s default, to ensure that the debtor will retain some form of shelter, most familiarly exempt from execution or attachment by an unsecured creditor is the value of a. collateral possessed by the creditor. b. a family home to a specified amount. c. non-collateral possessed by the debtor. d. non-exempt property. 40. Qian resides in a state that has a $50,000 homestead exemption. She defaults on a loan extended by Rely Bank, owing $60,000. Her home is sold at auction for $90,000. The creditor is entitled to a. 0. b. $30,000. c. $50,000. d. $60,000. 41. To buy a ranch house, Frieda obtains a mortgage loan from Grove Loans LLC. Later, Frieda informs Grove that she may default on the payments. The lender agrees to delay taking possession of the property and selling it. The parties negotiate a payment plan for the amount due on the loan. This is a. forbearance. b. a short sale. c. a workout agreement. d. a foreclosure. 42. Credit Inc. lends $10,000 to Dace. Egan acts as Dace’s surety. When the loan becomes due, Egan pays it in full. As a consequence, the surety gets a. the creditor’s rights in bankruptcy. b. rights to collateral possessed by the creditor. c. rights to judgments obtained by the creditor. d. all of the choices. 43. To buy a house, Tom obtains a mortgage loan with Universal Credit Union. Later, Tom defaults on the loan. Universal informs him that the property will be sold in a foreclosure proceeding. Before the sale, to gain title and regain possession, Tom can a. obtain mortgage insurance. b. demand a workout agreement. c. force a short sale. d. redeem the property. 44. Brie, Cam, and Dei are co-sureties of Edie’s debt to Finance LLC. Brie pays the entire debt. Her right of contribution entitles her to recover any amount paid above the surety’s obligation from a. Cam and Dei. b. Edie. c. Finance LLC. d. none of the parties.

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Chap 29_15e 45. To buy a home, Lois pays part of the purchase price up front in cash and borrows the rest of the funds from Members Credit Union. The part of the purchase price paid up front is a. a down payment. b. a short sale. c. a prepayment penalty. d. a mortgage. 46. Carly defaults on a debt to Debit Loans. As a creditor, Debit can satisfy a judgment debt on the default from all of Carly’s property except a. collateral possessed by the creditor. b. exempt property. c. collateral possessed by the debtor. d. non-exempt property. 47. To purchase a house, Elma obtains a mortgage loan from Fidelity Bank. Later, Elma is unable to make payments on the loan. Meanwhile, the market value of the house has declined. Fidelity agrees to a sale of the property for less than the amount due on the loan. This is a. forbearance. b. a short sale. c. a workout agreement. d. a foreclosure. 48. Rose applies for a credit card at Sell-Mart. The terms do not include a pledge of certain property to ensure the repayment of charges to the card, but it does provide that Sell-Mart can assess interest on the unpaid amount of a monthly statement. In this situation, the unsecured party is a. Rose. b. Sell-Mart. c. the credit card. d. the goods that are bought with the credit card. 49. Bach borrows funds from City Bank to pay his tuition. Dvorak co-signs the credit application. After the loan agreement is signed, Bach agrees to a higher rate of interest without telling Dvorak, who is thereby a. discharged from the agreement. b. liable at the higher rate of interest. c. liable at the lower rate of interest. d. liable for the principal only. 50. To purchase a farmhouse, Clay obtains a mortgage loan from Debit Bank. Clay defaults on the payments on the loan. The bank has a. the right to foreclose on the mortgaged property. b. the obligation to forbear part or all of the payments for a limited time. c. the duty to refinance the loan. d. the option to show a hardship and force a short sale of the property.

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Chap 29_15e 51. Coastal Bank agrees to lend Dobie the funds to buy a beach house. The loan has an unchanging rate of interest —the amount of each payment will be the same for the duration of the loan. In this deal, the borrower is a. a surety. b. a guarantor. c. a mortgagor. d. a mortgagee. 52. Equipment Company holds a lien on Fertile Farm’s equipment. The equipment can be sold to satisfy the debt a. if, before the sale, notice is given to Fertile Farm. b. if, before the sale, notice is given to Fertile Farm’s other creditors. c. if, before the sale, notice is given to the general public. d. without notice. 53. Because a mortgage conveys an interest in property to the lender, to protect the lender’s investment, the mortgage typically requires the borrower to a. maintain the property. b. ensure that the mortgage complies with the law. c. refinance within a short time after obtaining the mortgage. d. record the loan. 54. Dion has a mortgage loan with Eagle Bank that includes a prepayment penalty clause. If Dion repays his mortgage in full within the period specified in the clause, he will most likely be a. required to pay a penalty. b. reimbursed by the bank for the amount of the down payment. c. credited with the amount of the unpaid interest on the loan. d. penalized by the county where the property is located. 55. Personal property that is most often exempt from satisfaction of a creditor’s judgment debt on a debtor’s default, up to a specified amount, includes a. certain classified animals, usually including livestock. b. equipment used in a business or trade, such as tools. c. all of the choices. d. a vehicle for transportation. 56. Because a mortgage involves the transfer of real property, to comply with the Statute of Frauds, it must be a. in good faith. b. recorded. c. written. d. witnessed by a disinterested third party.

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Chap 29_15e 57. Because the homestead exemption interacts with other areas of the law that relate to creditors’ rights and remedies, it can sometime operate to cancel out a. a portion of a lien on a debtor’s real property. b. the creditor’s rights in bankruptcy. c. rights to collateral possessed by the creditor. d. any right that the creditor has against the debtor. 58. Petro Refinery asks Quality Bank for a loan to increase its inventory. Quality requires Roma, Petro’s president, to sign a personal guaranty to pay the debt if Petro defaults. The guaranty is required to be in writing because a. the debtor has a right of redemption. b. the co-signer has a right of contribution. c. the main purpose rule applies. d. the main purpose rule does not apply. 59. Construction Company has a claim against Diners Café to satisfy a debt that takes priority over other claims against the same property. This is a. a lien. b. a fraud. c. a guaranty. d. a garnishment. 60. Kari is a surety for Lore’s loan from Metro Bank. As a surety, Kari’s right of reimbursement entitles her to receive from the debtor a. any right that the creditor had against the debtor. b. a proportionate share of any overpayment due to the loan’s prepayment. c. all outlays made on behalf of the suretyship arrangement. d. title to and possession of the property serving as collateral for the loan. 61. To purchase an apartment, Les borrows funds from Metro Bank. The terms of the loan give the lender a lien on the property being acquired by the borrower as security for payment of the debt. This is a. a mortgage. b. a foreclosure. c. a short sale. d. a workout agreement. 62. To buy a townhouse, Becky obtains a mortgage loan from Countywide Bank. The lender should record the mortgage to a. be officially on record as holding an interest in the property. b. secure itself in the position of an unsecured creditor. c. preserve a copy of the loan in a separate location. d. obtain reimbursement for a portion of the loan if the debtor defaults.

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Chap 29_15e 63. Ari obtains a mortgage loan from Bayside Bank so that he can buy a house. The house costs $200,000. Ari makes a down payment of $20,000. Based on the amount of the price paid up front, Bayside will likely require Ari to a. obtain mortgage insurance. b. record the mortgage loan. c. agree to a prepayment penalty clause. d. pay all claims against the property. 64. Business Inc.’s debt to Cartage Company is past due. Cartage brings a legal action against Business to collect. To ensure that a judgment in the creditor’s favor will be collectible, Cartage asks the court to order the seizure of the debtor’s property. This is a request for a. an artisan’s lien. b. a mechanic’s lien. c. a writ of attachment. d. a writ of execution. 65. South Bank lends funds to Trucking Corporation to add a maintenance garage to Trucking’s property. Payment of the loan is guaranteed by the building. The law covering this transaction is provided by a. local building ordinances. b. state shipping regulations. c. federal banking rules. d. the Uniform Commercial Code. 66. Building Company adds a shipping dock to the property of Corporate Complex, but the owner does not pay. Building files a lien on Corporate’s property. The property a. can be held to guarantee payment of the debt. b. must be sold to provide payment of the debt. c. must be returned to the debtor within a certain period of time. d. none of the choices. 67. Ranch West owes Silo & Barn Inc. $5,000 on their contract, but refuses to pay. To collect, Silo files a mechanic’s lien, under which security for the debt is represented by a. Ranch’s personal property. b. Ranch’s real estate. c. the $5,000 owed on the contract. d. property held by a third party. 68. Brew Pub Company’s debt to Credit Service is past due. Credit obtains a judgment against Brew, but the firm refuses to pay. Credit asks the court to order the seizure of Brew’s property. This is a request for a. an artisan’s lien. b. a mechanic’s lien. c. a writ of attachment. d. a writ of execution.

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Chap 29_15e 69. To make a sale to Gourmet Inc., Hill Valley Commodities asks Gourmet’s outside accountant Ingre to co-sign a credit application. According to the terms, if Gourmet defaults, Hill Valley can look to Ingre for payment without first pursuing legal remedies against Gourmet. Ingre is a. a surety. b. a lienor. c. a guarantor. d. a creditor. 70. Auto Sales & Finance wants to get paid for its goods and services, so it will not sell goods or lend funds unless payment is guaranteed. To obtain those goods or services, a customer or borrower might pledge a. allegiance. b. forbearance. c. collateral. d. a composition agreement. 71. Rashi is a student at State University. To pay tuition, Rashi asks Tempo Loans Inc. for a short-term loan. The lender agrees to make a loan if Rashi will have someone who is financially responsible guarantee the loan payments. Upton, a well-known businessperson and a friend of Rashi’s family, calls Tempo and agrees to pay the loan if Rashi cannot. Because of Upton’s reputation, the loan is made. Rashi is making the payments, but because of illness he is unable to work for one month. He asks Tempo to extend the loan for three months. The lender agrees, raising the interest rate for the extended period. Upton is not notified of the extension (and thus does not consent to it). One month later, Rashi drops out of school. All attempts to collect the remainder of the loan from Rashi fail. Can Tempo assert a claim against Upton on the debt?

72. Coco and Delany borrow $110,000 from Employees Credit Union to buy a home. The loan is a fixed-rate mortgage at 3.38 percent with a thirty-year term, subject to an acceleration clause, and secured by the home. When the borrowers have paid off $10,000 of the mortgage—still owing $100,000, plus interest—they stop making payments. Meanwhile, the home’s market value declines to $85,000. After six months, the lender decides to take steps to recover the unpaid amount of the loan. What are the lender’s options? Which option seems most likely? Why? What steps are involved?

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Chap 29_15e Answer Key 1. True 2. True 3. True 4. False 5. True 6. False 7. False 8. False 9. True 10. False 11. False 12. True 13. False 14. False 15. False 16. False 17. True 18. False 19. True 20. False 21. True 22. True 23. False 24. False 25. True 26. False

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Chap 29_15e 27. True 28. True 29. True 30. False 31. False 32. False 33. True 34. True 35. False 36. b 37. a 38. a 39. b 40. c 41. c 42. d 43. d 44. a 45. a 46. b 47. b 48. b 49. a 50. a 51. c 52. a 53. a 54. a Copyright Cengage Learning. Powered by Cognero.

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Chap 29_15e 55. c 56. c 57. a 58. d 59. a 60. c 61. a 62. a 63. a 64. c 65. d 66. a 67. b 68. d 69. a 70. c 71. Tempo cannot hold Upton liable for two reasons. First, Upton’s agreement is a guaranty contract to answer for the debt of another. The contract with the lender provided that Upton would pay if Rashi could not—therefore, Upton was made a guarantor, with secondary liability. For a guaranty contract to be enforceable, it must be in writing unless the “main purpose” rule applies. Because the contract was made over the phone and the guaranty was not for Upton’s primary benefit, the oral guaranty contract is unenforceable. Second, guarantors have certain defenses against creditors that usually depend on certain actions being taken by the creditor. The extension agreement in this case is binding (the increased interest rate is the consideration), but it constitutes a material change in the original contract. Any binding, material change made in the terms of an original contract between a debtor and a creditor without the consent of the guarantor discharges the guarantor entirely, or at least to the extent that the guarantor suffers a loss. In this problem, that occurred when the lender agreed to extend the term of the loan at a higher interest rate without notifying and obtaining the guarantor’s consent. Thus, Upton has a defense against Tempo’s claim that would prevail even if the guaranty contract had been in writing.

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Chap 29_15e 72. The lender’s options include forbearance, a workout agreement, a short sale, and foreclosure. Forbearance is the postponement of part or all of the payments of a loan in danger of foreclosure. This may be based on a borrower’s securing a new job, selling the property, or some other factor. A workout agreement is a formal contract between the lender and the borrower to negotiate a payment plan for the amount due on the loan instead of going into foreclosure. A short sale is a sale of property for less than the balance due on a mortgage. A borrower— who typically must show some hardship—sells the property with the lender’s consent, and the lender gets the proceeds. Foreclosure is a process that allows a lender to legally repossess and auction off the property that is securing a loan. In this question, because the borrowers are uncooperative, the most likely option is foreclosure. To accomplish this, the lender must strictly comply with the applicable state statute. For example, on a judicial foreclosure, a court supervises the process. The lender’s first step is to file a notice of default with the appropriate state office. This puts the borrower on notice to pay the loan and cure the default. If this does not occur, the lender gives a notice of sale to the borrower, and usually also posts it on the property, files it with the county, and announces it in a newspaper. The property is then sold at auction on the courthouse steps. If the sale proceeds do not cover the amount of the loan, the lender can ask a court for a deficiency judgment. The acceleration clause would allow the lender to call the entire loan due. But because the market value of the home has declined, it would be unlikely to bring enough on a foreclosure sale to recover the unpaid amount of the loan, plus the lender’s fees and costs. This means that a deficiency judgment would be needed. To accomplish foreclosure, the lender must strictly comply with the applicable state statute.

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Chap 30_15e Indicate whether the statement is true or false. 1. Business as we know it could not exist without secured transactions because otherwise sellers and lenders would be less likely to sell and lend on credit. a. True b. False 2. A buyer in the ordinary course of business takes goods subject to any security interest created by the seller because otherwise the free flow of credit would be hindered. a. True b. False 3. The instrument normally filed to give public notice to third parties of a secured party’s security interest is collateral. a. True b. False 4. A security agreement determines most of the rights and duties of a debtor and a secured party. a. True b. False 5. With a binding agreement to extend credit, a secured party can obtain a security interest. a. True b. False 6. A secured party perfects a claim by filing a financing statement with the debtor. a. True b. False 7. To create an enforceable security interest, the collateral must be in the possession of neither the debtor nor the secured party, but in escrow. a. True b. False 8. When a debtor defaults, a secured creditor can relinquish the security interest but cannot then seek a judgment on the underlying debt. a. True b. False 9. Attachment ensures that a security interest between a debtor and a secured party is effective. a. True b. False

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Chap 30_15e 10. Providing only a debtor’s trade name in a financing statement is sufficient for perfection even if the trade name is not the legal name of the business. a. True b. False 11. When two conflicting security interests are unperfected, the last to attach has priority. a. True b. False 12. The legal process by which a secured party protects against the claims of third parties who wish to have their debts satisfied out of the same property of the debtor is perfection. a. True b. False 13. When a security interest is perfected, it has priority over any other perfected security interests. a. True b. False 14. A security agreement must describe the collateral because no security interest can exist unless the parties agree on the property subject to it. a. True b. False 15. A secured party may be liable to a debtor for failing to comply with the debtor’s request for confirmation of the amount of an unpaid debt. a. True b. False 16. Any transaction in which the payment of a debt is guaranteed by personal property owned or held by the debtor is a secured transaction. a. True b. False 17. When a debtor defaults, a secured creditor can take possession of the collateral without a court order and either retain or resell the collateral. a. True b. False 18. A security interest in proceeds is not perfected unless it is specifically provided in the security agreement. a. True b. False 19. When a debtor defaults, a secured party who does not choose to retain the collateral must relinquish the security interest to the debtor. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 30_15e 20. The last security interest to be perfected is the first in priority over any other perfected security interests. a. True b. False 21. A security interest can cover only property in which the debtor has present rights. a. True b. False 22. Every interest in personal property that guarantees the payment or performance of an obligation is a security interest. a. True b. False 23. Improper filing of a financing statement can render a security interest unperfected. a. True b. False 24. Because the UCC encourages a debtor and creditor to include in their security agreement the standards to measure their rights and duties, the parties can stipulate the conditions that will constitute a default. a. True b. False 25. One of a creditor’s main concerns is having priority over other creditors who have rights in the same property of the debtor. a. True b. False 26. For most collateral, possession by a secured party is impractical because it denies the debtor the right to use or derive income from the property to pay the debt. a. True b. False 27. The UCC’s classification or definition of collateral does not affect where or how to perfect a security interest. a. True b. False 28. Because of depreciation, an amount received on a sale of collateral may be less than the amount owed on the debt, but a debtor who has defaulted is not likely to have the funds to pay the deficiency. a. True b. False 29. Consideration to support a simple contract is not sufficient value to support the acquisition of a security interest. a. True b. False

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Chap 30_15e 30. When more than one security interest has been perfected in the same collateral, they are entitled to proportionate shares in the value of the property, but neither has priority. a. True b. False 31. Several documents may be considered together to comprise a security agreement. a. True b. False 32. A floating lien is a security interest retained in collateral even when the collateral changes in character, classification, or location. a. True b. False 33. A party who owes payment or performance of a secured obligation is a secured party. a. True b. False 34. A security interest cannot become perfected without the filing of a security agreement. a. True b. False 35. Retail Store Inc. can give Secure Loan Company a security interest in future inventory to be acquired by the debtor. a. True b. False 36. A debtor must have title to collateral to give a secured party a security interest in the property. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 37. The UCC does not define the term default. This encourages the parties to a secured transaction to a. include standards that align with the concept of unconscionability. b. run counter to the UCC’s provision regarding good faith. c. stipulate the conditions that will constitute a default. d. provide the creditor with the maximum protection possible. 38. To create an enforceable security interest between Finance Corporation and Global Trade Inc. in a written security agreement, the agreement must contain a description of a. the debtor. b. the creditor. c. all of the choices. d. the collateral. Copyright Cengage Learning. Powered by Cognero.

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Chap 30_15e 39. Proceeds from the disposition of collateral after default on the underlying debt are distributed first to pay a. reasonable expenses incurred by the secured party to sell the collateral. b. the balance of the debt owed to the secured party. c. junior lienholders who have made timely demands. d. the debtor. 40. Redevelopment Capital Inc. is the secured party in a secured transaction with Skyway Airport Corporation. Redevelopment Capital is also known as a. the debtor. b. the secured creditor. c. the security interest. d. collateral. 41. Capital Inc. holds a security interest in Discount Store’s inventory. The parties agree that the interest will continue in the collateral even if it is sold, exchanged, or disposed of in some other way. This is a. a floating lien. b. a purchase-money security interest. c. the right of redemption. d. a continuation statement. 42. Loan Office Inc. has a security interest against Manufacturing Company that is enforceable. In other words, with respect to the collateral, the creditor’s rights are said to a. attach. b. mature. c. perfect. d. process. 43. Guaranty Capital Corporation is given value by Housewares Wholesale Inc. in the form of a commitment to sell goods on credit. In terms of creating an enforceable security interest, this is a. the only requirement. b. a factor but not a requirement. c. irrelevant. d. required. 44. To buy furniture, Gina, a consumer, signs a purchase agreement with Home Store, the seller, to pay $100 down and $50 per month until the price is paid. Home Store takes a security interest in the furniture. Because it was created as part of purchase agreement with a consumer, the security interest a. is automatically perfected. b. cannot be perfected. c. can be perfected only by repossession. d. can be perfected only by filing.

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Chap 30_15e 45. To pay tuition at City College, Dora borrows funds from Equity Credit and gives as security a note on which Dora is the payee. Equity Credit’s loan officer agrees to hold the note as collateral. The lender does not file a financing statement. Equity Credit’s security interest is perfected because a. the lender possesses the note. b. default on a student loan is not a credible option. c. the collateral is intangible. d. Dora’s other creditors are not aware that Equity Credit holds the note. 46. Because the rights and remedies of secured parties under Article 9 are cumulative, if a secured creditor is unsuccessful in enforcing rights by one method, the creditor a. must notify any other secured party with an interest in the collateral. b. is required to renounce or modify the creditor’s other rights. c. can pursue another method. d. is forced to forego collection of the debt. 47. Kiosk Jewelers borrows from Lender Inc. and Mortgage Company, using the same collateral. Only Mortgage Company has a perfected security interest. Kiosk defaults on both loans. The party with first rights to the collateral is a. Kiosk Jewelers. b. none of the choices. c. Lender Inc. d. Mortgage Company. 48. Bob’s Barber Shop borrows from first Credit Company and then Debit Loans LLC, using the same property as collateral for both loans. Debit Loans perfects its security interest. Credit Company does not. The debtor defaults on both loans. The party with first rights to the collateral is a. Credit Company. b. Debit Loans LLC. c. Credit and Debit in proportion to the outstanding value of their loans. d. Bob’s Barber Shop. 49. Bay Marina borrows funds from Credit Union secured by Bay’s interest in the marina. If Credit Union fails to perfect its claim to the collateral, the claim will be reduced to that of a. an unsecured creditor. b. a state or local official. c. a secured party. d. a debtor. 50. In a financing statement to give notice of a loan to Lumber Yard Inc., Metro Finance Company wants to include a description of the collateral. A sufficient description would be a. “all the debtor’s personal property.” b. “all the debtor’s assets.” c. “all the debtor’s present and future inventory.” d. any of the choices. Copyright Cengage Learning. Powered by Cognero.

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Chap 30_15e 51. Ready Credit Inc. holds a security interest in inventory owned by Soy Products Inc. Ready Credit can protect its claim to the inventory in the event of Soy Products’ default by a. assignment. b. perfection. c. redemption. d. retention. 52. To create an enforceable security interest for a loan, in terms of the collateral, the debtor must have a. rights in it. b. title to it. c. possession of it. d. proof of its value. 53. Rolling Funds perfects a security interest in Steel Mill Inc.’s equipment by filing. When Steel Mill finally pays the debt, the debtor is entitled to the filing of a. none of the choices. b. a termination statement. c. a confirmation request. d. an amendment. 54. Equity Bank files a financing statement regarding a transaction with Fabrication LLC. To be valid, the financing statement must contain all of the following except a. a description of the collateral. b. a statement of the purpose for the transaction. c. the creditor’s name. d. the debtor’s name. 55. An agreement that creates or provides for a security interest is referred to as a. a financing statement. b. a security agreement. c. the UCC-1 form. d. collateral. 56. Rico borrows funds from Suburban Bank secured by Rico’s house. Rico defaults on the debt. The bank’s options include a. retaining the security interest and pursuing a judicial remedy. b. destroying the collateral and collecting the unpaid debt from Reg. c. disposing of the collateral in any commercially reasonable manner. d. repossessing the collateral and disavowing the security interest.

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Chap 30_15e 57. Appliance Sales & Repair wants to get paid for its goods and services, so it will not sell goods or perform services unless payment is guaranteed. This is the concept of a. good faith. b. fiduciary duty. c. a secured transaction. d. fair debt collection practice. 58. Maritime Bank holds a security interest in Ned’s fishing trawler. Ned defaults on the debt. Maritime takes possession of the boat and notifies Ned that it will be sold to recover some of the unpaid debt. Before the sale, Ned can regain possession by a. obtaining a deficiency judgment. b. agreeing to a floating lien. c. exercising the right of redemption. d. requesting a commercially reasonable sale. 59. Bayou Financial Corporation holds a security interest in property owned by Cajun Farms. Perfection of this security interest may not protect Bayou against the claim of a. a bank. b. a buyer in the ordinary course of business. c. a subsequent lien creditor. d. a trustee in bankruptcy. 60. To create an enforceable security interest between Mortgage Bank and National Property Company in a written security agreement, the agreement must be signed by a. the debtor. b. the creditor. c. all of the choices. d. a disinterested third-party witness. 61. Bond Bank assigns to Capital Invest LLC the bank’s security interest in certain real property owned by Developer Inc. Capital Invest becomes the secured party of record. The bank’s security interest in the collateral is a. extended. b. terminated. c. floated to other property owned by Developer Inc. d. subordinated to the assignee’s interest. 62. Best Feed Company and Countywide Loans Inc. each hold a security interest in property owned by Dairy Farm. Neither lender’s interest is perfected. Priority between these security interests is generally determined by a. the amount of the claim. b. the custom in the trade. c. the time of perfection. d. the time of attachment.

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Chap 30_15e 63. To buy a delivery truck, Food-To-Go LLC borrows funds from Grow-Your-Business Inc. secured by the borrower’s interest in the truck. The lender files a financing statement but not a continuation statement. Food-ToGo sells the truck to Haul-Away Corporation, a purchaser for value, and later defaults on the debt to Grow-YourBusiness. Entitled to the truck is a. Food-To-Go LLC. b. Grow-Your-Business Inc. c. Haul-Away Corporation. d. the state in which Food-To-Go LLC is registered. 64. To obtain working capital, Mining Company puts up all of its equipment as security to borrow $100,000 from National Bank, which agrees to advance up to $100,000 more in the future. The bank properly perfects its security interest. To use the same collateral as security for a future advance, the bank must a. execute a new security agreement. b. re-perfect its security interest by possession. c. none of the choices. d. file a new financing statement. 65. Lending Corporation holds a perfected security interest in Medical Clinic’s real property that includes priority to the proceeds from a sale of the collateral resulting from a bankruptcy. In relation to the bankruptcy trustee, this gives the secured party a. equal rights. b. superior rights. c. no rights. d. subordinate rights. 66. Highway Autos Inc. borrows funds from Investment Company under a security agreement. Later, the borrower buys new vehicles to add to its inventory. The lender has a security interest in the new vehicles if a. the security agreement included an after-acquired property clause. b. the lender has not yet filed a financing statement. c. the borrower bought the new vehicles with the lender’s funds. d. none of the choices. 67. Credit Financing Inc. and Debt Lending Company hold security interests in property owned by Fleet Cartage Inc. Both lenders’ interests are perfected. Priority between these security interests is generally determined by a. the amount of the claim. b. the custom in the trade. c. the time of perfection. d. the time of attachment.

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Chap 30_15e 68. In a security agreement with AAA Machine Parts Inc., Business Loan Company wants to include a description of the collateral. A sufficient description would be a. “all the debtor’s personal property.” b. “all the debtor’s assets.” c. “all the debtor’s present and future inventory.” d. any of the choices. 69. Bauxite Mine borrows $60,000 from Commerce Bank, with the loan secured by the borrower’s property. The debtor defaults on the loan. Commerce relinquishes its security interest to seek a judicial remedy. To obtain funds to satisfy the debt by a seizure and sale of the borrower’s nonexempt property, after a writ is issued, the creditor can use the process of a. retention. b. execution. c. levy. d. redemption. 70. Mobile Talk LLC sells phones. The phones are the collateral for a loan from Noble Bank to the seller. The parties agree to extend the UCC’s automatic-perfection period for proceeds. In regard to the bank’s interest in the proceeds, this agreement a. permits the interest to remain perfected. b. extinguishes the interest after the automatic-perfection period. c. effectively relinquishes the bank’s interest. d. has no effect on the bank’s interest. 71. The payment of Commerce Inc.’s debt to Debt Service LLC is guaranteed by the firm’s property. Debt Service is most likely to perfect its interest by a. insuring the property for the full amount of its value. b. calculating the precise amount of the debt. c. correcting grammatical errors in the parties’ written agreement. d. filing a financing statement with the appropriate authority. 72. Ezra owns Fans & Players, a retail sporting goods shop. When Great Lodge, a new ski resort, is built in the area, Ezra decides to expand and obtains a loan from Home Bank. The bank takes a security interest in Ezra’s present inventory and after-acquired inventory as collateral for the loan. The bank properly perfects the security interest by filing a financing statement. Ezra’s business is profitable, and he begins doubling his inventory. A year later, an avalanche destroys the ski resort. Ezra’s business takes a turn for the worse, and he defaults on his debt to the bank. The bank seeks possession of his entire inventory, even though it is twice as large as it was when the loan was made. Ezra claims that the bank has rights to only half of his inventory. Is Ezra correct? Explain.

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Chap 30_15e 73. Sara needs $1,500 to buy textbooks and other school supplies. Tomas agrees to loan Sara $1,500, accepting as collateral Sara’s car. They put their agreement in writing and sign it. Sara keeps possession of the car. Does Tomas have an enforceable security interest? How can Tomas let other creditors know of his interest in the car?

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Chap 30_15e Answer Key 1. True 2. False 3. False 4. True 5. True 6. False 7. False 8. False 9. True 10. False 11. False 12. True 13. False 14. True 15. True 16. True 17. True 18. False 19. False 20. False 21. False 22. True 23. True 24. True 25. True 26. True

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Chap 30_15e 27. False 28. True 29. False 30. False 31. True 32. True 33. False 34. False 35. True 36. False 37. c 38. d 39. a 40. b 41. a 42. a 43. d 44. a 45. a 46. c 47. d 48. b 49. a 50. d 51. b 52. a 53. b 54. b Copyright Cengage Learning. Powered by Cognero.

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Chap 30_15e 55. b 56. c 57. c 58. c 59. b 60. a 61. b 62. d 63. c 64. c 65. b 66. a 67. c 68. c 69. c 70. a 71. d 72. No. The bank will prevail because it held a properly perfected security interest in the entire inventory, not just in specific items or in the value of the inventory at the time the loan was made. The entire inventory (the present inventory and the inventory thereafter acquired) was given as collateral for the loan, and, regardless of the fact the inventory is now twice as large, the bank can rightfully take possession of the entire inventory on the debtor’s default on the loan payments. Of course, the value of the creditor’s right to the inventory does not extend beyond the balance of the borrower’s debt —the amount of the loan, plus whatever interest is due—and the cost of taking possession of the goods and disposing of them in a commercially reasonable sale. Other lienholders who make demands on the inventory are entitled to other proceeds from the disposition, and any surplus will go to the debtor.

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Chap 30_15e 73. The three requirements for an enforceable security interest are— • A security agreement in writing (or the secured party’s possession of the collateral). • The creditor’s giving something of value to the debtor. • The debtor’s having rights in the collateral. Once these requirements are met, the interest attaches. A security interest is enforceable when attachment occurs. Here, assuming the agreement includes a reasonably identifying description of the car, these requirements are met. The requirements for an effective, written security agreement are— • The debtor must sign it. • The agreement must contain a description of the collateral. • The description must reasonably identify the collateral. A creditor can put other creditors on notice by perfecting its interest. Perfecting is accomplished by filing a financing statement in the appropriate public office, or by taking possession of the collateral until the debtor repays the loan. In most states, filing is in a central office (of the state in which the debtor is located). For individual debtors, the place of filing is the state of the debtor’s principal residence. (Filing is the most common means of perfection. Perfection of an interest in some types of collateral, such as negotiable instruments, can only be accomplished by taking possession of the property, but that is not the situation in this question, which involves a car as collateral that the debtor has retained.) Thus, Tomas must file a financing statement. To be valid, a financing statement must include the names of the debtor and the creditor and describe the collateral covered by the security agreement. To avoid problems arising from different descriptions, a secured party can repeat the security agreement’s description in the financing statement or file the two together.

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Chap 31_15e Indicate whether the statement is true or false. 1. Voluntary petitions may be filed to initiate Chapter 7 or Chapter 11, but not Chapter 13, bankruptcies. a. True b. False 2. In a Chapter 11 proceeding, for an individual debtor, the court may order discharge at any time after the plan is confirmed. a. True b. False 3. A Chapter 13 proceeding is more expensive and complicated than a Chapter 11 or Chapter 7 proceeding. a. True b. False 4. If there is a presumption of abuse, the trustee must file a motion to dismiss a Chapter 7 petition or explain why such a motion would not be appropriate. a. True b. False 5. Any debtor who is eligible for bankruptcy relief under Chapter 7 is eligible under Chapter 11. a. True b. False 6. One of the Bankruptcy Code’s main goals is to ensure preferential treatment of certain creditors who are competing for a debtor’s assets. a. True b. False 7. In a Chapter 7 proceeding, the bankruptcy trustee collects the debtor’s estate and reduces it to cash, preserving the interests of the debtor and creditors. a. True b. False 8. Under Chapter 13, a plan may provide for the payment of all of the debtor’s obligations in full. a. True b. False 9. Anyone obligated to a creditor can declare bankruptcy. a. True b. False 10. A debtor who makes false statements under oath may be denied a discharge of his or her debts in the bankruptcy proceeding. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 31_15e 11. If all classes of creditors accept the debtor’s Chapter 11 plan, the court cannot refuse to confirm it. a. True b. False 12. Each state permits a debtor in bankruptcy to retain the family home in order to preserve some equity to pay any debts that are discharged. a. True b. False 13. Under Chapter 13, a plan may provide for the payment of an amount less than 100 percent of the debtor’s total obligations. a. True b. False 14. Because the purpose of a Chapter 7 proceeding is to provide a debtor with a fresh start, a discharge under Chapter 7 frees a debtor of all of his or her debts. a. True b. False 15. All bankruptcy proceedings are conducted in federal bankruptcy courts. a. True b. False 16. In a Chapter 13 bankruptcy, debtors retain most of their assets and agree to payments on their debts, most of which are discharged within three years. a. True b. False 17. In a Chapter 7 proceeding, at a meeting of creditors, one of the creditors is elected to take over the debtor’s assets. a. True b. False 18. In a Chapter 7 proceeding, the primary effect of a discharge is to void any judgment on a discharged debt and to prohibit any action to collect it. a. True b. False 19. If a debtor’s income falls below the median income in the area in which the debtor lives, bankruptcy abuse will be presumed. a. True b. False 20. In a Chapter 13 proceeding, the debtor retains possession of his or her assets. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 31_15e 21. Debts that remain after a liquidation are not discharged, and the debtor retains his or her obligation to pay them. a. True b. False 22. Once a bankruptcy petition is properly filed, creditors can commence or continue most legal actions against the debtor to recover claims. a. True b. False 23. Only the debtor may file a plan under Chapter 13. a. True b. False 24. In a Chapter 7 proceeding if the value of the debtor’s estate does not provide sufficient cash to pay all the creditors, it is given back to the debtor. a. True b. False 25. In a Chapter 7 proceeding, unsecured creditors’ claims are subordinate to the claims of secured creditors. a. True b. False 26. Businesses must be technically insolvent to file for bankruptcy relief. a. True b. False 27. Any person—including individuals, but not partnerships or corporations—may be a debtor under Chapter 7. a. True b. False 28. In a Chapter 11 proceeding, the role of a debtor in possession is similar to that of a trustee in a Chapter 7 proceeding. a. True b. False 29. The basic duty of a bankruptcy trustee in a Chapter 7 proceeding requires that the trustee be accountable for administering the debtor’s estate. a. True b. False 30. A court cannot dismiss a debtor’s petition under Chapter 13 even if the circumstances indicate bad faith. a. True b. False

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Chap 31_15e 31. To qualify for a Chapter 7 bankruptcy, a debtor must complete a means test to determine whether the debtor has been living within his or her means. a. True b. False 32. A debtor cannot defend against an involuntary bankruptcy petition because that would be contrary to the definition of involuntary. a. True b. False 33. Under Chapter 13, all debts are dischargeable. a. True b. False 34. Bankruptcy relief is provided under state, not federal, law. a. True b. False 35. In a Chapter 11 proceeding, a debtor corporation and its creditors agree on a plan under which the corporation pays a portion of its debt. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. Under Chapter 7, once the proceeds have been distributed, the obligations of the debtor most likely to be discharged are a. taxes accruing within the last three years. b. claims based on the debtor’s willful or malicious conduct or fraud. c. none of the choices. d. domestic-support obligations. 37. A voluntary petition in bankruptcy must include a. proof of each creditor’s claim. b. a list of the debtor’s creditors and the amount of the debt owed to each. c. all of the choices. d. a statement indicating that the debtor understands basic economics. 38. Chapter 7 of the Bankruptcy Code provides for a. the adjustment of debts of individuals—not businesses. b. liquidation proceedings. c. the reorganization of the obligations of the debtor. d. the adjustment of debts of businesses—not individuals.

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Chap 31_15e 39. Yang files a petition in bankruptcy under Chapter 7. Zhen takes control over her property and reduces it to money for distribution. Zhen is a. a secured creditor. b. a bankruptcy court judge. c. a bankruptcy trustee. d. a debtor who filed jointly for bankruptcy under a single petition. 40. Under Chapter 11, soon after the entry of the order for relief a. any business debtor can choose to avoid creditors’ committees. b. the debtor’s creditors file a plan to distribute the debtor’s assets. c. a creditors’ committee of unsecured creditors is appointed. d. the debtor’s assets are liquidated to pay tax claims. 41. Gina’s creditors attempt to force her into bankruptcy proceedings. The creditors will be unsuccessful if Gina a. owns a business with ten or more employees. b. is a farmer. c. is also a creditor. d. refuses to comply. 42. With respect to creditors, the main goal of bankruptcy law is to a. ensure that creditors will continue to lend to insolvent debtors. b. protect creditor assets from diminution in value. c. ensure equitable treatment in the competition for debtor assets. d. make all debtor property available for all creditor claims. 43. Under Chapter 7, the primary effect of a discharge is to a. extend the time for the debtor’s payment of overdue debts. b. allow a creditor to collect a previous judgment on a discharged debt. c. force a creditor to obtain a new judgment on a discharged debt. d. void a judgment on a discharged debt and prohibit an action to collect it. 44. A bankruptcy trustee must determine whether the debtor’s financial situation warrants relief based on a comparison of the debtor’s income with a. the profit of the debtor’s creditors. b. the income of other families in the same state. c. the wealth available to the debtor’s peers. d. the debtor’s expenses.

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Chap 31_15e 45. Under Chapter 11, a plan to conserve and administer the debtor’s assets must be submitted for acceptance and confirmation to a. the creditors only. b. the court only. c. the creditors and the court. d. the debtor only. 46. Compared to Chapter 7 and 11 plans, a Chapter 13 plan a. permits creditors to force a debtor into involuntary bankruptcy. b. allows a debtor to retain possession of his or her assets. c. is more expensive and more complicated. d. permits any interested party to file a repayment plan. 47. Under Chapter 7, to be entitled to receive a portion of a debtor’s estate, each creditor must file a proof of claim with the bankruptcy court within ninety days of a. the order for relief. b. the petition. c. the automatic stay. d. the creditors’ meeting. 48. Dana operates Energy Inc., a corporation in the fuel-supply business. Dana wants to create a plan under which the firm pays a portion of its debts, is discharged of the remainder, and is allowed to continue in business. Energy should file a petition in bankruptcy for relief through a. a liquidation. b. a reorganization. c. a repayment plan. d. an adjustment of debts. 49. Under any chapter of the Bankruptcy Code, failing to file the necessary documents with the debtor’s petition for relief can result in a. an automatic stay. b. the discharge of the debtor’s obligations. c. the dismissal of the petition. d. the distribution of the debtor’s assets to his or her creditors. 50. Under the Bankruptcy Code, the means test is used to a. keep higher-income people from abusing the bankruptcy process. b. force more people to file for Chapter 7 bankruptcy. c. determine the validity of a statement or claim by any party in interest. d. prioritize the claims of the creditors in an involuntary proceeding.

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Chap 31_15e 51. Under Chapter 13, a repayment plan must provide for a. the turnover of the debtor’s future income to the creditors. b. full payment of all claims, without exception. c. the same treatment of each claim within a particular class of claim. d. all of the choices. 52. Eligible for relief on a petition in bankruptcy under Chapter 11 is a. any debtor who is eligible under Chapter 7, and railroads. b. an individual, not a partnership or a corporation, with regular income and debts of less than a certain amount. c. any “person” except railroads and certain financial institutions. d. any party who is not eligible under a different chapter of the Code. 53. At the time of the filing of the petition and the time of the filing of the plan, Chapter 13 imposes on the debtor the requirement of a. goodwill. b. good faith. c. substantial means. d. sufficient credit. 54. Under Chapter 11, the debtor’s obligations most likely to be discharged are a. taxes accruing within the last three years. b. claims based on the debtor’s willful or malicious conduct or fraud. c. none of the choices. d. domestic-support obligations. 55. To force a debtor with twelve or more creditors into bankruptcy proceedings, at least three of those who join in the petition must have unsecured claims that add up to at least a. $155. b. $1,575. c. $15,775. d. $157,750. 56. If a voluntary petition in bankruptcy is found to be proper, the court’s entry of an order for relief a. puts into place an automatic stay. b. discharges the debtor’s obligations. c. dismisses the petition. d. distributes the debtor’s assets to his or her creditors.

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Chap 31_15e 57. A bankruptcy trustee is accountable for a. administering the debtor’s estate. b. exempting certain property from the bankruptcy. c. operating a debtor’s business to obtain maximum profit for the creditors. d. commencing actions against the debtor to recover creditors’ claims. 58. Under Chapter 13, after the completion of all payments under the plan, the court will grant a discharge of a. only the debts provided for by the plan. b. only the obligations not provided for by the plan. c. all claims, whether or not provided for by the plan. d. all obligations that remain unsatisfied. 59. Baby Day Care, a sole proprietorship, wants to pay as many of its obligations as reasonably possible, and be discharged of the rest. To accomplish this goal, the proprietorship should file a petition in bankruptcy under Chapter 13 for relief through a. a liquidation. b. a reorganization. c. a repayment plan. d. an adjustment plan. 60. Construction Inc. wants to agree with its creditors on a plan under which it pays a portion of its debt and is discharged of the rest. To accomplish this goal, the corporation should file a petition in bankruptcy under Chapter 11 for relief through a. a liquidation. b. a reorganization. c. a repayment plan. d. an adjustment plan. 61. All bankruptcy proceedings are held in a. federal bankruptcy courts. b. state bankruptcy courts. c. special cross-jurisdictional debtors courts. d. local small-claims courts. 62. An involuntary bankruptcy occurs when a debtor a. files forms designated for the purpose. b. is unable to pay his or her debts as they come due. c. is forced into bankruptcy proceedings by his or her creditors. d. has debts that exceed the fair market value of his or her assets.

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Chap 31_15e 63. In a Chapter 7 bankruptcy, on a finding that the use of Chapter 7 would constitute substantial abuse, the court is most likely to a. extend the time for the debtor’s payment of overdue debts. b. allow a creditor to collect a previous judgment on a disputed debt. c. force a creditor to obtain a new judgment on a claimed debt. d. dismiss the debtor’s petition. 64. Under Chapter 7, a debtor who fails to appear at the creditors’ meeting when required may be a. denied a discharge of his or debts in the bankruptcy proceeding. b. ordered to complete a means test. c. forced to submit to an examination by the creditors. d. told to turn over control of his or her property to a bankruptcy trustee. 65. In addition to financial statements, each voluntary petition in bankruptcy must include a. a plan outlining how debt payments will be made. b. a certificate proving the receipt of credit counseling. c. a creditors’ agreement allowing the debtor to continue in business. d. a statement of preference for one creditor over another. 66. Under Chapter 7, a discharge is most likely to be denied if the debtor a. conceals property to hinder or delay a creditor. b. destroys records of the debtor’s financial condition. c. fails to attend a required consumer education course. d. all of the choices. 67. Under Chapter 7 and Chapter 11 a. all of the choices. b. petitions can be filed voluntarily or involuntarily. c. the same principles govern the entry of the order for relief. d. the automatic stay provision applies. 68. Under Chapter 7, creditors are paid in a certain order of priority. The highest-priority class comprises claims for a. debts related to motor vehicles, household goods, and trade tools. b. domestic support. c. the debtor’s equity in his or her residence. d. student loans. 69. Under Chapter 7, once the proceeds of the bankruptcy estate have been distributed, the debtor’s remaining debts a. are discharged. b. paid by the court. c. renewed without legal action as obligations of the debtor. d. subject to legal actions to recover any unpaid amounts.

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Chap 31_15e 70. With respect to debtors, the main goal of bankruptcy law is to a. encourage the continued use of credit. b. ensure that third parties will continue to guarantee loans. c. provide a new start without creditors’ claims. d. shield assets from creditors’ claims. 71. eGear is a retail seller of phones, TVs, and other consumer electronic equipment. eGear sells Fiona a $2,400 television set on a retail installment security agreement on which she pays $100 down and agrees to pay the balance in equal installments. eGear retains a security interest in the set, and perfects that interest by filing a financing statement. Two months later, Fiona is in default on the payments to eGear and is involuntarily petitioned into bankruptcy by other creditors. Discuss eGear’s right to repossess the TV set or to be paid on the debt.

72. Shippers Dispatch Company orders office equipment from Office Outfitters, Inc., which has an unperfected security interest in the equipment until it is paid for. Meanwhile, Shippers Dispatch takes out a loan from Capital Credit, Inc., subject to a security interest in Shippers Dispatch’s building and equipment, which Capital perfects. Shippers Dispatch files a bankruptcy petition under Chapter 7. If the petition is granted, in what order will Shippers Dispatch’s creditors be paid?

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Chap 31_15e Answer Key 1. False 2. False 3. False 4. True 5. True 6. False 7. True 8. True 9. True 10. True 11. False 12. False 13. True 14. False 15. True 16. True 17. False 18. True 19. False 20. True 21. False 22. False 23. True 24. False 25. True 26. False

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Chap 31_15e 27. False 28. True 29. True 30. False 31. False 32. False 33. False 34. False 35. True 36. c 37. b 38. b 39. c 40. c 41. b 42. c 43. d 44. b 45. c 46. b 47. d 48. a 49. c 50. a 51. c 52. a 53. b 54. c Copyright Cengage Learning. Powered by Cognero.

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Chap 31_15e 55. c 56. a 57. a 58. a 59. d 60. b 61. a 62. c 63. d 64. a 65. b 66. d 67. a 68. b 69. a 70. c 71. eGear will not be able to repossess the set. The filing of the involuntary petition in bankruptcy operates as an automatic stay of any creditor’s action against the debtor or the property of the debtor. If eGear violates the automatic stay, eGear could be liable to any injured party. Therefore, eGear’s right of repossession is cut off by the bankruptcy proceeding. eGear’s right to be paid on the debt depends on its status as a secured creditor. A secured creditor has a security interest in collateral that secures the debt. If the collateral is surrendered to the secured creditor, the creditor can enforce the security interest either by accepting the property in full satisfaction of the debt or by selling the collateral and using the proceeds to pay off the debt. Should the collateral be insufficient to cover the secured debt owed, the secured creditor becomes an unsecured creditor for the difference. Here, eGear is a perfected secured party, and on a sale of the set, eGear is thus entitled to the proceeds up to the amount of balance of the debt. 72. The order of the priority of the creditors in this problem is (1) Capital, which has a perfected security interest in Shippers Dispatch’s building and equipment, and (2) Office Outfitters, which has only an unperfected security interest in Shippers Dispatch’s office equipment. This is because, under the priority established by the Bankruptcy Code, and between the creditors listed in this question, those with perfected security interests have the highest priority. In most cases, including this one, the claims of unsecured creditors are paid last, if at all.

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Chap 32_15e Indicate whether the statement is true or false. 1. Any person can be an agent, regardless of whether he or she has the capacity to contract. a. True b. False 2. An independent contractor is, by definition, an employee because the person’s physical conduct is controlled, or subject to control, by the employer. a. True b. False 3. When an agent’s acts create the appearance of an agency that does not in fact exist, the principal is estopped to deny the agency relationship. a. True b. False 4. When an agent is an employee, he or she is covered by state workers’ compensation insurance, which reduces the duty of the principal to provide safe working conditions. a. True b. False 5. The greater the employer’s control over the work, the more likely it is that the worker is an employee. a. True b. False 6. The agent must maintain separate accounts for the principal’s funds and for the agent’s personal funds, but may intermingle these accounts. a. True b. False 7. No breach of a fiduciary duty by an agent justifies a principal’s termination of the agency. a. True b. False 8. An agent can represent two principals in the same transaction, so long as neither is aware of the dual capacity. a. True b. False 9. A person who cannot legally enter into a certain contract directly can do so indirectly through an agent. a. True b. False 10. In some situations, the courts find an agency relationship where there is no formal agreement. a. True b. False

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Chap 32_15e 11. When the relationship between a principal and an independent contractor is not an employment relationship, it is an agency relationship. a. True b. False 12. The duties that an agent owes a principal must be set forth in the agency agreement because they do not arise by operation of law. a. True b. False 13. An agency relationship can arise by ratification, which involves a determination of intent expressed by words or conduct. a. True b. False 14. By using agents, a principal can conduct multiple business operations simultaneously in various locations. a. True b. False 15. If a sales agent and principal disagree on the commissions the agent should have received over a certain period, the agent can demand an accounting. a. True b. False 16. An agency relationship is based on the attributes of power, control, and financial self-interest—not the trust and confidence of a fiduciary relationship. a. True b. False 17. A principal has a duty to pay an agent in a timely manner the customary compensation for services rendered. a. True b. False 18. Agency relationships come about by voluntary consent and agreement of the parties—consideration is required, and the agreement must be in writing. a. True b. False 19. It is not illegal for a licensed professional to employ an unlicensed agent to perform professional acts. a. True b. False 20. When a third party sues a principal for an agent’s negligence, the principal can sue the agent for an equal amount of damages. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 32_15e 21. For every duty of an agent, the principal has a corresponding right, but not vice versa. a. True b. False 22. In an agency relationship, one party called the principal agrees to represent or act for another called the agent. a. True b. False 23. Agency relationships cannot exist outside employment, so agency law has a narrower reach than employment law. a. True b. False 24. An agent has the discretion whether to notify his or her principal of matters that come to the agent’s attention concerning the subject of the agency. a. True b. False 25. A principal who creates an exclusive agency and then competes with the agent can be held liable for the agent’s lost profits or sales. a. True b. False 26. There is no condition under which a principal must indemnify an agent for a tort claim arising from the agency relationship. a. True b. False 27. Anything that an agent obtains by virtue of an agency relationship is his or hers to keep. a. True b. False 28. For the same reasons that workers may benefit from having employee status, employers may benefit from identifying workers as independent contractors. a. True b. False 29. An agent must keep confidential any information acquired through an agency during the term of the relationship, but can disclose it after the agency ends. a. True b. False 30. A gratuitous agent can be liable to a principal for breach of contract, even in the absence of a contract, but not liable for the negligent performance of the deal. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 32_15e 31. A truck driver who drives a company truck on a regular basis is most likely an employee. a. True b. False 32. Under the principles of agency law, any sale of goods by a salesperson in a store to a customer can be binding on the owner of the store. a. True b. False 33. If a principal’s instructions are not clearly stated, an agent can fulfill the duty of obedience by acting in good faith and in a reasonable manner. a. True b. False 34. If an agent has represented himself or herself as possessing special skills, the agent is expected to use them. a. True b. False 35. A property owner who hires a realtor to sell the property thereby enters into an agency relationship with an employee for a limited time. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. Isabel is an agent for Julian. He gives her clear instructions to enter into contracts on his behalf only on Mondays. She enters into a contract on his behalf on Friday. Isabel has breached a. no duty. b. the duty of loyalty. c. the duty of performance. d. the duty of obedience. 37. Watercraft Inc. employs Vern as a sales agent for a trial period. At the end of the period, Watercraft and Vern disagree on the amount of the commissions Vern is due for sales that he made. Vern may demand a. a constructive trust. b. an accounting. c. nothing. d. specific performance. 38. Luce is married to Marc. Luce buys food for their children’s lunches and charges the cost to Marc’s account. This is a. an agency by agreement. b. an agency by estoppel. c. an agency by operation of law. d. not an agency relationship. Copyright Cengage Learning. Powered by Cognero.

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Chap 32_15e 39. Irv, an agent for Jin, signs an agreement with Kai on Jin’s behalf but neglects to tell Jin that the agreement requires the payment of a certain tax. The government prosecutes Jin for failing to pay the tax. Jin is a. liable, because notice to Irv is notice to Jin. b. liable, because notice to Kai is notice to Jin. c. not liable, because Irv did not notify Jin of the tax. d. not liable, because Kai did not tell Jin about the tax. 40. Life Insurance Company hires Minh to sell insurance policies for the company. Minh agrees to act on the firm’s behalf in the endeavor, and the company trusts Minh to so act. Minh is a. an employee and an agent. b. none of the choices. c. an agent and an independent contractor. d. a principal and an agent. 41. Hayes, a real estate broker, offers to sell Invers’s property at no charge. Hayes negotiates a sale to Jed, but negligently fails to complete the deal. The broker is most likely liable to the seller for a. breach of contract. b. negligence. c. an accounting. d. nothing. 42. Lau, an agent for Mae, acts outside the scope of her authority, to enter into a contract on Mae’s behalf. Mae approves of the deal and affirms the contract. This is a. agency by agreement. b. agency by estoppel. c. agency by ratification. d. the appearance of, but not in fact, an agency. 43. An agency contract between Trucking Company and United Dispatch does not expressly state that United will use reasonable skill and diligence in performing the work. United fails to meet this standard. The agent is most likely liable for a. breach of contract. b. failure to cooperate. c. an accounting. d. nothing. 44. Dino, a certified public accountant and an investor, and Elma, an insurance salesperson and a realtor, may create an agency relationship for a. a business purpose only. b. any legal purpose. c. any stated purpose. d. only a purpose related to these parties’ professions.

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Chap 32_15e 45. When an agent breaches an agency agreement, the right to avoid the contract can be exercised at the election of a. the principal. b. the agent. c. any party with whom the agent contracted. d. any of the choices. 46. Roc is an agent for Statistics Inc. On the firm’s behalf and at its request, Roc pays Tech LLC for specially customized software. Roc’s right to obtain the amount of the payment from Statistics Inc. arises under the duty of a. none of the choices. b. compensation. c. indemnification. d. reimbursement. 47. The most important factor weighted by the courts in determining employee status is a. the degree of control an employer exercises over the details of the work. b. the distinction between the occupations of a worker and an employer. c. the method of payment, whether by time period or completion of work. d. the skill required of the worker to do a job. 48. Masonry Corporation fails to inspect work areas and to warn agents and employees of unsafe situations in the firm’s plant. Noh, an employee, is injured in an accident whose cause can be attributed to the employer’s failure. Most likely, Masonry is liable to Noh for breach of the duty a. none of the choices. b. to provide safe working conditions. c. of cooperation and compensation. d. of reimbursement and indemnification. 49. Bern, a salesperson at Carpet Inc., tells Dan, a customer, “Buy your flooring here, and I’ll install it for less than the company would charge.” Dan buys carpeting, which Bern installs for half the firm’s price. Bern keeps the money. With respect Carpet Inc., Bern has breached a. no duty. b. the duty of loyalty. c. the duty of performance. d. the duty of obedience. 50. Orin works at Pumps Inc. He works in the company’s engineering department, interacting with third parties only to discuss technical issues. With respect to third parties, Orin is a. an independent contractor. b. an employee only. c. an employee and agent. d. a principal.

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Chap 32_15e 51. Rosa introduces Sol to her friend Trey as “my associate.” Sol purports to act as Rosa’s agent in a business transaction with Trey. If Rosa is liable for Sol’s actions, it will be because their relationship is a. an agency by agreement. b. an agency by estoppel. c. an agency by operation of law. d. not an agency relationship. 52. Anything that an agent obtains by virtue of an agency relationship is held in a constructive trust and thereby belongs to a. the principal. b. the agent. c. the party from whom the agent obtained it. d. the equitable trust. 53. Lorane, an attorney, contracts with Melos to incorporate the client’s business. Their contract stipulates the amount of the fee. On completion of the work, the attorney’s right to be paid this amount arises from the client’s duty of a. none of the choices. b. compensation. c. indemnification. d. reimbursement. 54. Curly Fries Inc. grants its agent Damon an exclusive territory in which to sell its products. The company cannot compete with Damon in that territory under the duty of a. none of the choices. b. cooperation. c. indemnification. d. reimbursement. 55. Ingmar asks Jess to contract with Kay’s Lawn Service to maintain Ingmar’s lawn. Jess orally agrees to do so. This is an agency by a. agreement. b. estoppel. c. operation of law. d. ratification. 56. Nora works at Oil & Gas Inc. She is a sales representative who works with Oil & Gas customers. The company closely supervises its sales reps, and dictates their schedules. With respect to third parties, Nora is a. an independent contractor. b. an employee only. c. an employee and agent. d. a principal.

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Chap 32_15e 57. Motor Parts Sales Inc. hires Nolly to work on its shipping dock, accepting deliveries, and dispatching trucks, and dealing with customers and drivers. With respect to Motor Parts, Nolly is most likely a. an agent. b. an agent and a principal. c. a principal. d. none of the choices. 58. The principal-agent relationship between Medical Clinic LLC and Network Referral Service is not contractual. If Medical, the principal, violates a duty to Network, the agent is entitled to a. recover for past services and future damages. b. sue for services and damages, and obtain specific performance. c. force the principal to allow the agent to continue acting as its agent. d. none of the choices. 59. Kit hires Lane to obtain insurance for Kit’s business. Lane agrees to act on Kit’s behalf in the effort, and Kit trusts Lane to so act. Their relationship is a. an employee and an agent. b. none of the choices. c. a broker and an independent contractor. d. a principal and an agent. 60. Ray is a delivery driver for Sicilian Pasta Company. Ray does exactly what the company tells him. Ray is a. an employee. b. an employer. c. an independent contractor. d. a principal. 61. Bread Company hires Craig to sell the company’s products in a certain area. Bread agrees to pay Craig a salary, plus commission, for a trial period. They also agree that he can sell using any methods and during any hours that seem appropriate. The key factor in whether Craig is Bread’s employee is a. the amount of the salary. b. the degree of the employer’s control over the details of the work. c. the length of the trial period. d. the size of the sales area. 62. Jon contracts with Kino to buy a certain number of sheep for Kino’s Animal Farm. Jon makes a deal with Lila for the sheep, but neither Jon nor Kino pays the price. Lila sues Jon for breach. Jon’s right to hold Kino liable for any damages is the right to a. none of the choices. b. compensation. c. indemnification. d. reimbursement.

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Chap 32_15e 63. Because those who cannot legally enter into contracts directly cannot do so indirectly through an agent, a principal must a. put an agency agreement into writing. b. proffer consideration to enter into an agency relationship. c. have contractual capacity to be a principal. d. employ only one agent at any given time. 64. Power Company employs Qin to negotiate the purchase of rights of way for a future power transmission project. Qin secretly buys some of the property along the planned route and sells the rights to Power at a profit. Qin has breached a. the duty of performance. b. the duty of loyalty. c. no duty. d. the duty of notification. 65. Rubio is injured in an accident with Stavros. Unable to use his hands due to the injury, Rubio indicates that Tam should sign a settlement agreement on Rubio’s behalf with Stavros’s insurance company. This is a. an agency by agreement. b. an agency by estoppel. c. an agency by operation of law. d. not an agency relationship. 66. Sal, an accountant, contracts with Torre to act on Torre’s behalf during a tax audit. Their contract does not expressly state that Sal will be paid for the service. Most likely, Torre must pay a. the customary compensation for the services. b. only the expenses accrued in the course of the audit. c. only the costs incurred if he accountant fails to perform. d. nothing. 67. Rosario is a chef and caterer who hires out on a per-project basis to companies with on-location work sites, as well as to the hosts of banquets and other events. In this capacity, Rosario is a. an agent. b. an employee. c. an independent contractor. d. a principal. 68. Lasers Inc. hires Mal to buy rare earth minerals on its behalf. In this relationship, Lasers is a. an employee. b. an independent contractor. c. a principal. d. an agent.

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Chap 32_15e 69. Ana, a sales agent for Bread Company makes claims for a product that the company has told its agents not to make. Croissant Café sues the firm when the product fails to stand up to the claim. The company can sue Ana for a. breach of a constructive trust. b. failure of specific performance. c. indemnification. d. reimbursement. 70. Pho enters into an exclusive agreement with Qin to find suitable property for Qin’s enterprise. Later, Qin signs an exclusive agreement with Row for the same purpose. Neither agent knows about the other, and each expends reasonable efforts to perform. Qin buys a building through Pho. Most likely, Qin may be liable to Row for a. none of the choices. b. breach of the duty of cooperation. c. negligence. d. an accounting. 71. Roman is the chief executive officer of Salty Snax Corporation. Roman’s responsibilities include decisions on product development, marketing, and other significant business directions. Roman is subject to the approval and oversight of Salty Snax’s board of directors. Teri is a Salty Snax manager whose duties include the firm’s day-today hiring, firing, purchasing, and selling. Umberto is a Salty Snax salesperson, whose daily activities are controlled by Teri. Velma writes sales manuals and promotional materials for Salty Snax’s products according to Roman’s instructions and subject to Salty Snax’s control, but has no dealings with the company’s customers or suppliers. Warren writes copy on a contract-per-project basis and is not otherwise subject to Salty Snax’s control. Who is a principal? Who is an agent? Who is an employee? Who is an independent contractor?

72. Yu contracts with Zach to buy a certain pub, Aficionado’s, for Yu, who asks Zach not to reveal her identity. Zach makes a deal with Burke, the owner of the pub, and makes a down payment. Yu fails to pay the rest of the price, and does not pay Zach for his services. Does Zach have any recourse against Yu? If so, on what basis, and to what extent?

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Chap 32_15e Answer Key 1. True 2. False 3. False 4. False 5. True 6. False 7. False 8. False 9. False 10. True 11. False 12. False 13. True 14. True 15. True 16. False 17. True 18. False 19. False 20. True 21. False 22. False 23. False 24. False 25. True 26. False

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Chap 32_15e 27. False 28. True 29. False 30. False 31. True 32. True 33. True 34. True 35. False 36. d 37. b 38. c 39. a 40. c 41. b 42. c 43. a 44. b 45. a 46. d 47. a 48. b 49. b 50. b 51. b 52. a 53. b 54. b Copyright Cengage Learning. Powered by Cognero.

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Chap 32_15e 55. a 56. c 57. a 58. a 59. d 60. a 61. b 62. c 63. c 64. b 65. a 66. a 67. c 68. c 69. c 70. b 71. Salty Snax is a principal. Roman, Teri, Umberto, and Velma are the company’s agents and employees. Warren is an independent contractor. In an agency relationship, an agent agrees to act for or on behalf of a principal. An agent is subject to the control of the principal. An employee is subject to the control of employer. An independent contractor is not subject to an employer’s control. A corporation is a “person” who has contractual capacity but who can act only through its agents. Salty Snax, as a corporation, is acting through its agents. Roman, Teri, Umberto, and Velma act on behalf of the company, from which they obtain their authority. This authority differs—Roman, Teri, and Umberto can bind Salty Snax in certain ways in their dealings with third parties, but Velma does not have the authority to legally bind the company. Because Roman, Teri, Umberto, and Velma are subject to the control of Salty Snax, through their superiors, they are employees. Because Warren is not subject to Salty Snax’s control with respect to the physical conduct in the performance of his contracts, Warren is an independent contractor.

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Chap 32_15e 72. Zach can seek to hold Yu liable for breach of contract, and Yu may be liable for whatever damages Zach has to pay to Burke, and more. With respect to the contract with Burke, a principal has a duty to indemnify an agent for liabilities incurred because of authorized and lawful acts and transactions and for losses suffered because of the principal’s failure to perform his or her duties. With respect to payment for Zach’s services, if an agent is not a gratuitous agent (that is, one who does not perform for money), a principal owes the agent compensation for his or her services rendered. In the facts of this question, if no amount had been agreed to, Yu would owe Zach the customary amount for his services. Of course, payment must be timely, and there may be a penalty associated with the delay. Also, a principal’s duties include the responsibility to reimburse an agent for expenses related to the agency, unless the parties have agreed otherwise. Thus, Yu may owe an amount for Zach’s disbursements, including the down payment, and other expenses, as well.

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Chap 33_15e Indicate whether the statement is true or false. 1. An undisclosed principal is one whose identity is totally unknown by an agent and a third party at the time a contract is made. a. True b. False 2. The equal dignity rule requires that a principal and an agent act in good faith and with mutual respect in their dealings with each other. a. True b. False 3. An agent impliedly warrants that he or she has the authority to contract on a principal’s behalf and therefore cannot be held liable to the third party. a. True b. False 4. An agent acting at a principal’s direction is not liable for the commission of a tortious act, even if the agent knew the act was wrong. a. True b. False 5. Authority to manage a business implies authority to do what is reasonably required to operate the business. a. True b. False 6. Giving an agent a power of attorney confers express authority. a. True b. False 7. Both parties to an agency relationship have the power and the right to terminate the relationship at any time. a. True b. False 8. Apparent authority in an agency relationship arises when the principal causes the agent to reasonably believe that he or she has the authority to act. a. True b. False 9. A principal is always directly responsible for an agent’s misrepresentation made within the scope of the agent’s authority. a. True b. False

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Chap 33_15e 10. The doctrine of respondeat superior is applied differently to a multi-national corporation than it is to a smalltown store with one clerk. a. True b. False 11. When a principal makes it possible for an agent to defraud a third party, the principal may also be liable for the fraud. a. True b. False 12. An agent may not exceed his or her actual authority, even in an unforeseen emergency to protect or preserve the property and rights of the principal. a. True b. False 13. When a principal has given a third party reason to believe that an agent has authority to act, the principal may be estopped from denying that authority. a. True b. False 14. The doctrine of respondeat superior imposes liability for an agent’s tort on a principal without regard to the personal fault of the agent. a. True b. False 15. If an e-agent fails to provide an on-screen confirmation of a purchase, the other party to the transaction can void the effect of any errors by avoiding the deal. a. True b. False 16. When an agent, acting within the scope of his or her authority, contracts with a third party, a disclosed principal is liable to the third party. a. True b. False 17. Using an agent provides benefits to a principal, without potential liability. a. True b. False 18. An event terminates an agency automatically when the occurrence of the event makes it impossible for the agent to perform. a. True b. False

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Chap 33_15e 19. There is no need to notify any third party in order to terminate an agent’s apparent authority. a. True b. False 20. When a contract involves unusually hazardous activities, a principal can be shielded from liability by using as independent contractor as an agent. a. True b. False 21. If an agent contracts outside the scope of his or her authority, the principal cannot become liable. a. True b. False 22. Generally, the liability of a principal on a contract formed by an agent with a third party depends on whether the agent was authorized to act. a. True b. False 23. An agent acting within the scope of his or her authority to contract with a third party is not liable on the contract if the third party knows the principal’s identity. a. True b. False 24. A principal is liable only for harm resulting from his or her own negligence, and not in any situation that results in the agent’s commission of a tort. a. True b. False 25. An undisclosed principal is not liable to a third party for failing to perform a contract entered into by an agent acting within the scope of his or her authority. a. True b. False 26. Because an agent’s authority can be implied by custom, it may contradict his or her express authority. a. True b. False 27. An executive corporate officer can normally conduct ordinary business transactions without first obtaining the corporation’s written authority. a. True b. False 28. The rationale for the doctrine of respondeat superior is based on the social duty that requires each of us to manage our affairs so as not to injure others. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 33_15e 29. Once the agency relationship between a principal and an agent has ended, the agent loses the right to bind the principal. a. True b. False 30. When an agent, acting within the scope of his or her authority, contracts with a third party, in most states, the agent is treated as a party to the contract. a. True b. False 31. An event does not automatically terminate an agency merely because its occurrence makes it improbable that the principal would want performance. a. True b. False 32. The principal is bound by the agent’s unauthorized act, unless the principal negates it. a. True b. False 33. In an emergency situation, an agent has the authority to act appropriately under the circumstances. a. True b. False 34. If an agent has the apparent authority to act, the principal will be liable unless the principal placed any undisclosed limitations on that authority. a. True b. False 35. Actual authority in an agency relationship arises from what a principal makes clear to a third party. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. Without authority, Dot contracts purportedly on Eva’s behalf with Field & Farm Equipment Inc. for the purchase of a tractor. Liability on the contract extends to a. none of the choices. b. Dot and Eva. c. Dot only. d. Eva only.

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Chap 33_15e 37. Lev, an agent for Mill Grains LLC, executes an unauthorized contract with National Grocers Inc. The deal is highly advantageous to Mill Grains, and the company ratifies the contract. The contract is a. valid. b. vicarious. c. void. d. voidable. 38. Without authorization, Race contracts on behalf of Sophie to have Theo paint Sophie’s Boutique. If Sophie decides to ratify the contract, she must affirm a. all of the contract. b. any part of the contract, with Race liable to Theo for the difference. c. any part of the contract before performance begins. d. any part of the contract at any time. 39. Farah hires Gil, a real estate broker, to act as her agent to sell her land for $150,000. Before the land is sold at the stated price, oil is discovered beneath it, causing its market value to increase considerably. The agreement between Farah and Gil is likely a. continued with a proportionate increase in Gil’s sales commission. b. continued until Gil tells prospective buyers of the discovery. c. terminated by act of the parties. d. terminated by operation of law. 40. Julia agrees to act as Kale’s agent to negotiate, in Kale’s presence, a sale of Kale’s ranch. A contract for a sale of land must be in writing. The agreement between Julia and Kale a. can be implied. b. must be in writing. c. may be oral or in writing. d. should be ratified, affirmed, or authorized orally. 41. Bev indicates that she is acting as an agent on behalf of an unidentified client—Cuisine LLC—when she enters into a contract with Diners Bistro. Cuisine is a. a disclosed principal. b. an apparent agent. c. an undisclosed principal. d. a partially disclosed principal. 42. Based on Jin’s conduct, Kai reasonably believes that Lore has the authority to act on Jin’s behalf even though Lore does not have the actual authority to do so. In this circumstance, Lore has a. apparent authority. b. express authority. c. implied authority. d. no authority.

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Chap 33_15e 43. Gaye agrees to act as a sales agent for Homewood Company on a commission basis. They further agree that either party can terminate the agency relationship at will. If Homewood ends their deal, the act of termination is called a. repudiation. b. ratification. c. renunciation. d. revocation. 44. Deft Construction Company hires Egan, an independent contractor, to excavate and grade a certain parcel of land for a commercial development. Negligence in Egan’s work causes the ground to subside, leading to the collapse of a building in which Deft workers are injured. Liability for the injuries extends to a. Deft, Egan, and the injured workers. b. Deft and Egan only. c. Deft only. d. Egan only. 45. Without express or implied authority, Xi contracts on behalf of Yan to purchase a certain building from Zhu. Yan and Zhu are not bound in contract unless Yan a. ratifies the contract before Zhu withdraws from the deal. b. affirms any part of the contract. c. views the contract as an unaccepted offer, awaiting Zhu’s acceptance. d. refuses to accept responsibility for the unauthorized contract. 46. Ira serves in a representative capacity for Jeff. Key is injured through Ira’s negligence. Jeff may be liable to Key if Ira’s conduct occurred a. due to a propensity Jeff was not and could not have been aware of. b. during normal working hours. c. in the course and scope of Ira’s employment. d. outside the parties’ employment relationship. 47. Luis hires Mieko to act as his agent to buy Noh’s Southeast Asian Café. Luis tells Mieko to reveal only that she is buying the restaurant on behalf of a third party, without telling Noh’s seller who that third party is. Luis is a. a disclosed principal. b. not a principal. c. an undisclosed principal. d. a partially disclosed principal. 48. Milos employs Natalie to handle a list of financial transactions on Milos’s behalf. This power will terminate on a. any transaction causing a loss to Milos. b. Milos’s death or incapacity. c. Milos’s sixty-fifth birthday. d. Natalie’s handling of one of each stipulated transaction.

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Chap 33_15e 49. Ben manages a warehouse and its inventory for Coffee Roaster Inc. To operate this part of the business, Ben’s authority can be inferred a. from the position Ben occupies. b. by a reasonable party with whom Coffee Roaster does business. c. to contradict Ben’s express authority. d. under no circumstances. 50. Ruiz agrees to act as Seth’s agent to sell Seth’s farm while Seth is away from the property. A contract for a sale of real estate must be in writing. The agreement between Ruiz and Seth a. can be implied. b. must be in writing. c. may be oral or in writing. d. should be ratified, affirmed, or authorized orally. 51. To cover potential liability for the conduct of an agent or employee, most employers a. do not ask applicants or workers about past misbehavior. b. classify agents and employees as independent contractors. c. require personnel to agree to liability waivers. d. purchase liability insurance. 52. Romero employs Supply Procurement Service as an agent under a written agreement that describes the rights and duties of both parties. This is a. apparent authority. b. equal authority. c. express authority. d. implied authority. 53. Ruby, an agent for Shipping Company, leases a warehouse from Transit Facilities Inc. without stating that she is acting on Shipping Company’s behalf. Liability for nonpayment of rent under the lease may be imposed on a. none of the choices. b. Ruby and Shipping Company. c. Ruby only. d. Shipping Company only. 54. Cal directs Diego, Cal’s agent, to harvest the hay on Edna’s farm, although neither Cal nor Diego has the right to go onto the land and cut and remove the crop. Liability for the trespass and damage to the property extends to a. Cal, Diego, and Edna. b. Cal and Diego only. c. Cal only. d. Diego only.

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Chap 33_15e 55. A power of attorney should be used with great caution and only in exceptional circumstances because a. failure to comply with the equal dignity rule makes a contract voidable. b. it grants extensive authority to an agent. c. an attorney must be licensed to practice law in the state of authority. d. the power to be exercised defines the duty to be obeyed. 56. Bristol is an officer of Commerce Company. To conduct ordinary business transactions on the firm’s behalf, Bristol a. none of the choices. b. needs formal, written authority. c. is required to have oral and written authority. d. must act only in the presence of other corporate officers or employees. 57. Qin, the owner of Reprocess Plant, instructs Shi, a plant supervisor, to fill a storage tank with a chemical made by Toxins Inc. that, as both Qin and Shi know, will combust if combined with the substance previously stored in the tank. And, as they also both know, the tank has not been cleaned. Liability for any resulting harm or damage extends to a. Toxins Inc. only. b. Qin and Shi only. c. Qin only. d. Shi only. 58. Flight Craft Corporation sends its agent Gavin to a sales convention hosted by Holiday Travel to showcase Flight’s new passenger jet. Gavin, who is authorized to make statements about the aircraft, makes false claims about its capability. Liability for injuries or damage to third parties who rely on the false claims extends to a. Holiday Travel only. b. Flight Craft and Gavin only. c. Flight Craft only. d. Gavin only. 59. Part of the rationale for the doctrine of respondeat superior is that an injured person should be afforded effective relief, which is usually best provided by a business because a. employers today are not the masters of their employees. b. employees are normally classified as independent contractors. c. agents and other personnel typically execute liability waivers. d. the cost of risk can be spread over an entire business enterprise. 60. Darya serves in a representative capacity for Ellen’s Botanicals. To accomplish the objectives of this relationship, Darya’s authority can be implied by a. contradiction. b. custom. c. any subjective measure. d. none of the choices.

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Chap 33_15e 61. Chu, an agent for Delivery Corporation, rents a truck from Equipment Inc. without revealing that he is acting on Delivery’s behalf. When Delivery fails to pay for the use of the vehicle, the lessor collects the unpaid amount from Chu by judicial process. Entitled to be indemnified is a. none of the choices. b. Chu. c. Delivery Corporation. d. Equipment Inc. 62. Corinne discloses that she is acting as an agent on behalf of Development LLC when she enters into a contract with Enterprise Funds Inc. Liability for nonperformance of the contract may be imposed on a. none of the choices. b. Corinne and Development LLC. c. Corinne only. d. Development LLC only. 63. In the course and scope of employment, Oscar, an agent for Processed Food Inc., violates state sanitation regulations by mishandling certain food products distributed by Quality Transport Corporation. In some jurisdictions, liability for the violations could extend to a. Processed Food Inc. b. Quality Transport Corporation. c. the state. d. none of the choices. 64. Clark hires Dell, a real estate broker, to sell his beach house. The house is destroyed in a storm before it can be sold. Dell is Clark’s agent a. until Clark’s insurer pays Dell’s commission. b. until the destroyed house is sold. c. until the destroyed house is rebuilt and sold. d. no more. 65. Gary drives a truck as an employee for Hauling Inc. Gary would most likely be considered acting outside the scope of her employment if he a. crashed into a car at the airport while off duty. b. hit a pedestrian in a parking lot during a “working” lunch. c. ran over an attendant at a gas station while refueling the truck. d. smashed into a store-front while intoxicated on-duty. 66. Based on Kim’s conduct, Lam reasonably believes that Minh has the authority to act on Kim’s behalf, although Minh does not have such authority. A contract between Lam and Minh calls for performance by Kim, who refuses to comply. In this situation, Kim may a. be estopped from denying that the agent had the requisite authority. b. cancel the contract at the principal’s election. c. force the agent to perform the contract. d. use a power of attorney to avoid the contract. Copyright Cengage Learning. Powered by Cognero.

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Chap 33_15e 67. A sudden storm threatens the property of Marina Bay LLC. Ngoc, Marina Bay’s sales agent, is on site, but lacks the express or implied authority to bind the firm to the cost of appropriate protective measures. Unable to communicate with Marina Bay, Ngoc a. has emergency powers to deal with the situation. b. cannot authorize the expense. c. must await the principal’s express ratification to act. d. can imply a power of attorney to assume the needed authority. 68. Hana indicates that she is acting as an agent on behalf of an unidentified client—In-Flight Service Inc.—when she enters into a contract with Jet Airlines. Liability to the airline for nonperformance of the contract may be imposed on a. none of the choices. b. Hana and In-Flight. c. Hana only. d. In-Flight only. 69. Raj agrees to act as a sales agent for Service Company on a commission basis. Their contract stipulates sixmonths’ notice of termination. The firm ends the deal without notice. If Raj seeks payment of commissions on sales for the six months following the termination, a court is most likely to hold that a. the amounts accrue to Service, which had the power to end the agency. b. any compensation on sales during the period should be split equally. c. Raj can recoup expenses but no profit. d. Raj is entitled to the commissions. 70. Velma is a purchasing agent for Wild-Caught Fish Inc., with the authority to buy the catches of commercial fishers up to a certain quantity. When the limit is reached, the agency relationship terminates a. automatically. b. following notice to all fishers within a reasonable geographic area. c. following notice to all fishers with whom Velma did business. d. following published notice. 71. Cropland Farms, LLC, hires Desiree to act as its agent to buy a certain tract of land from Ethan for $1,000 per acre. Cropland Farms does not want Ethan to know that it is the principal or that Desiree is its agent. Cropland Farms wants the land to test genetically modified seed products, and believes that Ethan may not sell the land for that purpose, or may demand a premium price if he knows that Cropland Farms is the buyer. Desiree makes the purchase, signing only her name to the contract as the buyer and not disclosing to Ethan the agency relationship. The transfer of the deed is to occur on June 1. Ethan learns of Cropland Farms’ identity on May 15. Can Ethan legally refuse to deed the property on June 1? Explain.

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Chap 33_15e 72. Beryl is a purchasing agent for Cable & Wire Corporation. Doyle, a Cable & Wire corporate officer, gives Beryl written authority to buy for the firm as much copper as necessary. The next day, Doyle calls Beryl and tells her to buy only a certain quantity of copper and no more. Beryl shows the written authority to Earth Resources Inc., and enters into a contract to buy more than the quantity specified by Doyle. Earth Resources ships the order to Cable & Wire. Is Cable & Wire liable to Earth Resources under the contract? Is Beryl liable? In each case, if so, why? If not, why not?

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Chap 33_15e Answer Key 1. False 2. False 3. False 4. False 5. True 6. True 7. False 8. False 9. True 10. False 11. True 12. False 13. True 14. False 15. True 16. True 17. False 18. True 19. False 20. False 21. False 22. True 23. True 24. False 25. False 26. False

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Chap 33_15e 27. True 28. True 29. True 30. False 31. False 32. False 33. True 34. False 35. False 36. c 37. a 38. a 39. d 40. c 41. d 42. a 43. d 44. d 45. a 46. c 47. d 48. b 49. a 50. b 51. d 52. c 53. b 54. b Copyright Cengage Learning. Powered by Cognero.

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Chap 33_15e 55. b 56. a 57. b 58. b 59. d 60. b 61. b 62. b 63. a 64. d 65. a 66. a 67. a 68. b 69. d 70. a 71. Generally, no. Although the identity of the principal in this problem was not disclosed, the principal still retains the usual contractual rights of a principal. Therefore, if the agent contracted with the third-party seller within the scope of the agent’s authority, the principal and the third-party seller are bound in contract. There are three possible exceptions to the general rule. If a third-party seller expressly excludes undisclosed principals from a contract with an agent, if a principal’s identity is undisclosed for the purpose of defrauding the third-party seller, or if the agent’s performance is personal to the contract, the third-party seller can legally refuse to perform. Because none of these exceptions appears to apply here, however, the third-party seller’s refusal to deed the property on the contract date would constitute a breach. 72. Cable & Wire is liable to Earth Resources. Beryl is not liable to Earth Resources. A principal is liable for the contracts of its agents entered into with actual or apparent authority. Actual authority may be express or implied. Apparent authority arises from what the principal causes a third party reasonably to believe regarding the agent’s authority to act, even if the agent does not have actual authority to act. If the third party changes its position in reliance on the principal’s representations, the principal is estopped from denying that the agent had authority. In this problem, Beryl had the actual authority to order a certain quantity of copper and apparent authority to order the rest, according to the written authorization that Doyle gave to Beryl and that Beryl showed to Earth Resources. Earth Resources’ contract rights are not limited by the limits placed on that authority by Doyle’s call to Beryl. Beryl is not liable to Earth Resources because she acted with apparent authority. Beryl is liable to Cable & Wire, however, for exceeding her authority. Copyright Cengage Learning. Powered by Cognero.

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Chap 34_15e Indicate whether the statement is true or false. 1. If an employer does not pay unemployment taxes, the government can place a lien on the business’s property to secure the debt. a. True b. False 2. An employer can waive or reduce the federal overtime pay requirements if the waiver or reduction is applied to all otherwise eligible and ineligible employees. a. True b. False 3. Employers who provide health insurance to their employees must ensure that the employees’ health information is not disclosed to unauthorized parties. a. True b. False 4. An express employment contract cannot protect an employee from discharge without good cause. a. True b. False 5. In states that require a minimum wage that is higher than the specified federal minimum wage, employees are entitled only to the lower federal amount. a. True b. False 6. The National Labor Relations Act established the right of private-sector employees to form unions and to strike. a. True b. False 7. If a state law requires employers to give employees one day off per week, an employee who works that one day may be entitled to overtime pay under federal law. a. True b. False 8. An employee must complete Form I-9, Employment Eligibility Verification, within three days of the commencement of employment. a. True b. False 9. An employer may fire a worker for reasons that violate a fundamental public policy if that policy is clearly expressed in statutory law. a. True b. False

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Chap 34_15e 10. Discharging an employee soon after hiring with a promise of “long-term employment” may give rise to an action against the employer for fraud. a. True b. False 11. Certain employers are required to keep occupational injury and health records for each employee, but due to privacy concerns, no employer is permitted to electronically post those records. a. True b. False 12. The Immigration Act limits the number of legal immigrants entering the United States. a. True b. False 13. To be eligible for unemployment compensation, a worker must be willing and able to work. a. True b. False 14. Notifying employees that their e-mails and phone calls may be monitored protects an employer who also monitors social media posts and text messages from liability for invasion of privacy. a. True b. False 15. To receive benefits under a state workers’ compensation law, an employee injured on the job must promptly sue the employer. a. True b. False 16. During collective bargaining sessions, both parties may engage in hard bargaining, but the process must be geared to reaching a compromise. a. True b. False 17. An employer is not prohibited from intercepting and monitoring all communications made on electronic devices by employees during business hours. a. True b. False 18. Employees who work ten hours a day, for four days a week, are entitled to overtime pay because they work more than eight hours a day. a. True b. False

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Chap 34_15e 19. The Immigration Reform and Control Act makes it legal to hire, recruit, or refer for a fee someone not authorized to work in this country. a. True b. False 20. An employer can eliminate a worker’s medical, optical, or dental insurance coverage on the voluntary termination of the worker’s employment. a. True b. False 21. Private employers are generally free to hire and fire workers at will. a. True b. False 22. To pay for social insurance programs administered by the Social Security Administration, employers, employees, and the unemployed must contribute. a. True b. False 23. To avoid permitting a key employee to take family or medical leave, an employer must show that the leave would cause “substantial injury” to the employer. a. True b. False 24. An eligible employee may take unpaid leave under the Family and Medical Leave Act for family or medical reasons, and in certain situations that arise from military service. a. True b. False 25. A worker who has voluntarily left his or her job qualifies for unemployment compensation to partially make up for the worker’s loss of income. a. True b. False 26. During an employee’s leave under the Family and Medical Leave Act, an employer must continue to compensate the employee to avoid the potential negative effect of unpaid leave on interstate commerce. a. True b. False 27. For a union election to be held, the organizers must show that a majority of the workers support the union. a. True b. False

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Chap 34_15e 28. The permissibility of a private employer’s drug testing of employees may hinge on whether the testing is reasonable. a. True b. False 29. A whistleblower is an employee who publicly reveals a co-worker’s unsafe or illegal activity. a. True b. False 30. An employee’s reasonable expectation in response to an employer’s promise is key to a finding of an implied employment contract. a. True b. False 31. An employer cannot discharge a worker who, in good faith, refuses to work in a high-risk area if bodily harm or death might result. a. True b. False 32. Federal wage-hour requirements apply to all employers engaged in interstate commerce, in producing goods for interstate commerce, and in certain other businesses. a. True b. False 33. When workers must be laid off, the company cannot consider union participation as a criterion for deciding whom to fire. a. True b. False 34. An injury that occurs while an employee is commuting to or from work is usually not considered to have occurred on the job or in the course of employment and hence is not covered by workers’ compensation law. a. True b. False 35. Most of the states and the federal government have enacted statutes to protect employees who report wrongdoing from employer retaliation. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. Good faith in collective bargaining between a union and an employer does not include a. rejecting a proposal without offering a counterproposal. b. being willing to compromise. c. negotiating with the belief that an agreement is possible. d. bargaining with the authority to enter into an agreement. Copyright Cengage Learning. Powered by Cognero.

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Chap 34_15e 37. Mica is an employee of Natural Gas Company and a member of a union of company employees. Under federal law, Mica and other union members have the right to a. bargain collectively with their employer through their representative. b. insist that their employer require union membership to work. c. require their employer to contribute financially to their union. d. none of the choices. 38. The employees of Beverage Bottling Company designate Cola Cappers Union as their bargaining representative. Beverage refuses to bargain with the union. This most likely violates a. the National Labor Relations Act. b. the Fair Labor Standards Act. c. the Labor-Management Relations Act. d. no federal law. 39. Retail Company is located in Seattle, Washington, where the city and the state have minimum wage laws. Retail pays its starting employees the legal minimum rate, which, among the governing laws, is a. the highest minimum wage. b. the federal minimum wage. c. the state minimum wage. d. the city minimum wage. 40. Rico works for Street Tacos Inc. The basis for Rico’s contribution under the Federal Insurance Contribution Act to help pay for benefits that will partially make up for his loss of income on retirement is a. an equitable share of his employer’s unpaid contribution. b. his annual wage base. c. his special job skills. d. the employer’s adjusted gross profits. 41. Salsa Inc. employs three hundred workers at four locations in two states. Under federal law, Salsa must provide each employee, during any twelve-month period, family or medical leave of a. up to twelve days. b. up to twelve weeks. c. up to twelve pay periods. d. no limited duration. 42. Berry Farm Inc. employs hundreds of seasonal and permanent workers, both skilled and unskilled, in three states. Under federal immigration law, Berry Farm can hire illegal immigrants a. if either the employer or the immigrants file special forms. b. only if the employer files a special form. c. only if the immigrants file special forms. d. under no circumstances.

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Chap 34_15e 43. Lin is an employee at Manufacturing Plant Inc. Lin is called for jury duty and as a result cannot work her scheduled shift. The plant fires Lin, who subsequently successfully sues her employer for reinstatement. With respect to the employment-at-will doctrine, this is a. an example of the doctrine. b. an exception based on contract theory. c. an exception based on public policy. d. an exception based on a statute. 44. Interstate Commodities Inc. keeps a file of I-9 verifications forms, which are required by the Immigration Reform and Control Act. To monitor compliance with the act, random audits and enforcement actions are conducted by a. the local office of the National Labor Relations Board. b. the governments of interested foreign nations. c. the government of the state in which the company is based. d. the federal government. 45. Steel Mill Inc., employs five hundred workers. For the Occupational Safety and Health Administration, Steel must do all of the following except a. keep occupational injury and illness records for each employee. b. report any work-related diseases. c. report any work-related injuries. d. pay employees higher wages for working in more dangerous areas. 46. Investment Corporation wants to monitor business communications on phones that the employer provides to the employees. The employer’s best course of action to avoid liability under laws related to employee monitoring is to inform a. no one. b. its employees. c. its clients and others who communicate with the employees. d. the public generally. 47. Games Inc. employs four hundred workers at three locations in three states. Workers who lose their jobs with Games have a right to continued health-care coverage under the company’s group plan unless they a. are fired for gross misconduct. b. are laid off for budgetary reasons. c. have their hours decreased from full-time to part-time. d. quit their jobs voluntarily. 48. Federal overtime provisions apply only after a covered employee works more than a. eight hours in a day. b. forty hours in a week. c. twenty days in a month. d. one year for the same employer.

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Chap 34_15e 49. Tom is seventeen years old. Under the Fair Labor Standards Act, he cannot a. work in any job. b. work in a hazardous occupation. c. work for her parents. d. deliver newspapers. 50. Owen is an employee of Paving Inc., which is performing a contract for the federal government. Owen learns that Paving is overcharging for the work. If he publicly reports the fraud, the law may protect him from being fired from his job. With respect to the employment-at-will doctrine, this is a. an example of the doctrine. b. an exception based on contract theory. c. an exception based on public policy. d. an exception based on a statute. 51. Frank is an employee of Guitar Makers LLC. Guitar’s employee manual states that workers, such as Frank, will be dismissed only for good cause. With respect to the employment-at-will doctrine, this is a. an example of the doctrine. b. an exception based on contract theory. c. an exception based on public policy. d. an exception based on a statute. 52. Luke takes temporary family leave from his job at Metal Works Corporation to arrange for child care and deal with financial and legal matters when Nancy, his spouse, a U.S. Marine on active duty, is deployed overseas. On Luke’s return from the leave, Metal Works must a. restore him to his same position or a comparable position. b. reimburse him for his expenses while on leave. c. promote him to the status of a key employee. d. do nothing. 53. Gobi is an employee of Haz-Mat, Inc. He refuses a transfer to a Haz-Mat department in which several employees suffered serious injuries from exposure to hazardous materials. Under the Occupational Safety and Health Act, Gobi may be a. entitled to higher wages for working in a hazardous department. b. reported to the Occupational Safety and Health Administration. c. entitled to protection from discharge. d. subject to discharge. 54. Heber, Irma, and Jon apply to work for Kitchen Chicken Inc. in Louisiana. These individuals’ eligibility to work must be verified by a. Kitchen Chicken. b. the applicants. c. state officials. d. federal authorities.

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Chap 34_15e 55. The purpose of state workers’ compensation laws is to establish an administrative process for compensating workers for a. all of the choices. b. retirement, disability, death, and hospitalization insurance. c. injuries that arise in the course of employment, regardless of fault. d. periods of unemployment, subject to eligibility requirements. 56. Elin is thirteen years old. Under the Fair Labor Standards Act, she cannot a. work in any job. b. work in a hazardous occupation. c. work for her parents. d. deliver newspapers. 57. Analytic Data Inc. wants to hire Benazir, a noncitizen. A work visa is most likely to be set aside for a noncitizen if a. the noncitizen is of “ethnic similarity to the employer’s workforce.” b. there is a shortage of qualified U.S. workers capable of doing the work. c. hiring the worker will adversely affect the labor force. d. the noncitizen is a “person with an extraordinary work ethic.” 58. After a union election campaign among the employees of Frozen Food Company, the Food Workers Union does not obtain a majority vote in the election. This most likely violates a. federal labor law. b. state right-to-work laws. c. federal wage-and-hour laws. d. no federal or state law. 59. Health Clinic Inc. has no written employment manual or oral discharge policy, avoids abusive treatment of its staff, and acts to prevent illegal and unsafe activities. The clinic freely hires and fires its employees, who are similarly free to quit at any time. With respect to the employment-at-will doctrine, this is a. an example of the doctrine. b. an exception based on contract theory. c. an exception based on public policy. d. an exception based on a statute. 60. Finance Accountants, P.A., is a private employer. In most circumstances, federal law generally prohibits Finance from subjecting its employees to a. electronic monitoring. b. none of the choices. c. drug tests. d. lie-detector tests.

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Chap 34_15e 61. Denny works for Engineers P.A. While working on an Engineers project, Denny is injured. Under state workers’ compensation laws, he will be compensated only if the injury was a. incidental. b. material. c. accidental. d. intentional. 62. Vehicle Assembly Inc. operates a plant near the border between the United States and Mexico. Due to the location, it would be easier for the company to employ noncitizens. In this circumstance, it is legal for a U.S. employer to a. hire persons not authorized to work in the United States. b. recruit persons not authorized to work in the United States. c. refer for a fee persons not authorized to work in the United States. d. none of the choices. 63. Devon takes temporary family leave from her job at Equipment Sales Company to care for a newborn baby. With respect to Devon’s health-care coverage, during the leave, under the Family and Medical Leave Act, Equipment a. must continue it. b. may suspend it. c. may terminate it. d. must add the baby to it. 64. Ceramic Workers Union represents the workers of Delta Tile LLC. The union fails to hold elections for union officers. This most likely violates a. the Labor Management Reporting and Disclosure Act. b. the Fair Labor Standards Act. c. the Labor-Management Relations Act. d. no federal law. 65. Aircraft Corporation employs mechanics, programmers, outside salespersons, and professionals, including pilots. Employees exempt from the Fair Labor Standards Act’s overtime provisions include all of the following except a. mechanics. b. programmers. c. outside salespersons. d. professionals. 66. Floral Workers Union represents the employees of Garden Variety Inc. The company does not require its new hires to join the union as a prerequisite to obtaining employment. This most likely violates a. the Labor-Management Relations Act. b. the Fair Labor Standards Act. c. the Norris-LaGuardia Act. d. no federal law.

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Chap 34_15e 67. Technicians Union represents the workers of United Engineering Inc. The union and the employer bargain in good faith but are unable to reach an agreement because of genuine differences of opinion. The union may call a strike a. if the parties are deadlocked. b. if the negotiations are ongoing. c. if the subjects of bargaining include working conditions and worker pay. d. under no circumstances. 68. Food Mart Company employs workers, including Gina, at six locations in two states. Food Mart’s discharge of Gina against the terms of an implied employment contract may result in a. the employer’s liability for breach of contract. b. the employee’s ineligibility for unemployment compensation. c. a court’s imposition of an express employment contract. d. a claim under the Whistleblower Protection Act. 69. The Family and Medical Leave Act requires certain employers to provide eligible employees with family or medical leave for any of the following reasons except a. to care for a newly adopted child. b. to care for a newly placed foster child. c. to go on an extended family vacation. d. if the employee is unable to perform the essential functions of his or her job due to a serious health condition. 70. Baristas Union petitions the National Labor Relations Board for an election on organizing a union among the employees of Coffee Café Company. For an election to be held, the union must represent a. all of Coffee’s employees. b. employees whose skills, duties, and pay are similar. c. no more than 30 percent of Coffee’s employees. d. Coffee’s best interest. 71. Healthy Harvest Company runs a fruit processing and packaging plant. Most of Healthy Harvest’s business is done during holiday seasons, especially between Halloween and New Year’s Day, and in the spring. The company hires a large temporary workforce during its busiest times. Can Healthy Harvest hire noncitizens for its temporary, seasonal work? If so, what procedures must the employer follow to do this hiring? If not, how can Healthy Harvest be assured that it is hiring only citizens?

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Chap 34_15e 72. Northwest Energy Company is subject to mandatory workers’ compensation laws in the states in which it does business. Odell and Phelps work for Northwest Energy as part of a crew that travels to remote locations to repair broken pumps and other damaged equipment. At a distant site, Odell is injured in an accident that is entirely Phelps’s fault. Odell files a claim for workers’ compensation. Should the claim be granted? What would be Northwest Energy’s best defense against it?

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Chap 34_15e Answer Key 1. True 2. False 3. True 4. False 5. False 6. True 7. True 8. False 9. False 10. True 11. False 12. True 13. True 14. False 15. False 16. True 17. False 18. False 19. False 20. False 21. True 22. False 23. False 24. True 25. False 26. False

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Chap 34_15e 27. False 28. True 29. False 30. True 31. True 32. True 33. True 34. True 35. True 36. a 37. a 38. a 39. a 40. b 41. b 42. d 43. c 44. d 45. d 46. b 47. a 48. b 49. b 50. d 51. b 52. a 53. c 54. a Copyright Cengage Learning. Powered by Cognero.

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Chap 34_15e 55. c 56. b 57. b 58. d 59. c 60. d 61. c 62. d 63. a 64. a 65. a 66. d 67. a 68. a 69. c 70. b 71. It is illegal to hire for work in the United States a person who is not authorized to work here. Thus, under no circumstances can an employer legally hire a noncitizen who is in the United States unlawfully. An employer is subject to penalties for illegally employing noncitizens. But an employer may hire a noncitizen who is a lawful permanent resident. The principal responsibility to verify an individual’s identity and eligibility to work rests with the employer. The employee must produce documents that establish his or her identity and legal employability. The U.S. Citizenship and Immigration Services (CIS) supplies a form—Form I-9, Employment Eligibility Verification—that an employer must complete within three days of hiring an employee (and retain for three years). 72. Odell’s claim should probably be granted. Northwest Energy’s best defense in this situation, as in all workers’ compensation cases, is that Odell’s injury did not arise out of and in the course of employment. That defense would not likely be successful here, however. Under workers’ compensation laws, employers are strictly liable without regard to whether or not they are at fault. Even if the employer is not negligent, he or she is liable if an employee’s injury arose out of and in the course of employment. “Liability” in this context means that an injured employee is entitled to workers’ compensation benefits for his or her injury. An injury must be work-related, arising out of activity that is normal for the kind of job involved. “In the course of employment” means that the employee was either at work or performing work at a different location. That a co-worker caused an injury to an employee does not block the employee’s recovery of workers’ compensation benefits. Also, although an employee is not covered while driving to work from home, the employee is covered while performing a work-related service at an off-site location. Copyright Cengage Learning. Powered by Cognero.

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Chap 35_15e Indicate whether the statement is true or false. 1. Normally, an employer is liable for a supervisor’s sexual harassment only if the supervisor took a tangible employment action against an employee. a. True b. False 2. Sexual harassment occurs when a pattern of sexually offensive conduct runs throughout a workplace and the employer takes no steps to prevent it. a. True b. False 3. Disparate-impact discrimination occurs when a protected class is adversely affected by the practice or procedure of an employer who intended that result. a. True b. False 4. The use of interviews and tests, and minimum educational requirements, to choose among a large number of applicants for job openings is prima facie employment discrimination. a. True b. False 5. A plaintiff who sues on the basis of disparate-treatment discrimination in hiring must make out a prima facie case of illegal discrimination, and will win in the absence of a legally acceptable employer defense. a. True b. False 6. Many states have their own laws that protect employees against discrimination, but none provide more protection to employees than federal laws. a. True b. False 7. Constructive discharge is a theory that plaintiffs can use to establish any type of discrimination claim under Title VII and other federal discrimination laws. a. True b. False 8. The Age Discrimination in Employment Act prohibits employment discrimination on the basis of age against individuals up to forty years of age. a. True b. False 9. A business necessity is a defense against employment discrimination based on the genuine requirements of a business. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 35_15e 10. The Equal Pay Act requires equal pay for male and female employees working at the same establishment, regardless of the work they do. a. True b. False 11. Under the Age Discrimination in Employment Act, if an employer offers a legitimate reason for its action, an employee’s case is held to be a pretext. a. True b. False 12. Under the Americans with Disabilities Act, employees with disabilities must reasonably accommodate the needs of their employers. a. True b. False 13. Affirmative action programs are often found to be unconstitutional because they deprive members of protected classes of equal protection. a. True b. False 14. Under the Age Discrimination in Employment Act, the plaintiff must show that the unlawful discrimination was only one of the reasons for an adverse employment action. a. True b. False 15. Under the Uniformed Services Employment and Reemployment Rights Act, any person who has served in the military is entitled to more favorable treatment in the workplace than a co-worker who has not served. a. True b. False 16. An employer cannot classify jobs as male or female but can refuse to promote employees based on their gender. a. True b. False 17. Constructive discharge occurs when an employer, to avoid conflict among workers, discharges an employee engaging in an unconventional act, such as wearing a hijab. a. True b. False 18. The Americans with Disabilities Act permits employers to take adverse employment actions based on assumptions about individuals who associate with people who have disabilities. a. True b. False

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Chap 35_15e 19. Title VII of the Civil Rights Act prohibits job discrimination on the basis of income. a. True b. False 20. If an employer sued for an adverse employment action on the basis of discrimination articulates a legal reason for the action, the employer wins. a. True b. False 21. An employer must reasonably accommodate its employees’ religious practices, but only if they are based on the doctrines of a traditionally recognized religion. a. True b. False 22. To bring a Title VII claim as a class action, employees must prove a company-wide policy of discrimination that has a common effect on all of the plaintiffs. a. True b. False 23. A worker who is dissuaded from filing a charge of discrimination by an employer’s threat to change the benefits of the job has a basis for a claim of retaliation. a. True b. False 24. An employer can require employees to participate in such religious activity as weekly prayer meetings with other employees. a. True b. False 25. Under federal law, the definition of gender discrimination has not been expanded to include discrimination based on pregnancy. a. True b. False 26. When Title VII applies to an employer, any employee—including an undocumented worker—can bring an action for employment discrimination. a. True b. False 27. An employer can avoid liability under Title VII by showing that the employer’s standards for hiring and promoting have a substantial, demonstrable relationship to realistic qualifications for the job at issue. a. True b. False

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Chap 35_15e 28. The Age Discrimination in Employment Act extends to federal government employees but state employers are usually immune from age-based claims. a. True b. False 29. Workers in the United States generally have less protection against sexual harassment in the workplace than workers in other countries. a. True b. False 30. The laws designed to protect certain workers against discrimination are aimed at providing equal rights for all and eliminating special privileges for the few. a. True b. False 31. Under the Americans with Disabilities Act, employers must accommodate the needs of persons with disabilities, even if doing so causes undue hardship. a. True b. False 32. An employer can avoid liability for sexual harassment by taking prompt remedial action. a. True b. False 33. Punitive damages may be recovered in a case of discrimination against a private employer if the employer acted with malice or reckless indifference. a. True b. False 34. The Americans with Disabilities Act defines disability to include a physical or mental impairment that causes “undue hardship.” a. True b. False 35. A state does not have the inherent power to ban affirmative action within that state. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. Cady files an employment discrimination suit against Durable Goods Corporation under the Civil Rights Act. If Cady shows that Durable Goods acted with malice or reckless indifference, she may recover a. an unlimited amount of compensatory and punitive damages. b. a limited amount of compensatory and punitive damages. c. compensatory, but not punitive damages. d. punitive, but not compensatory, damages. Copyright Cengage Learning. Powered by Cognero.

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Chap 35_15e 37. Fitness Club employs only female staff to assist its female-only members in the club. Greg, a forty-one-year-old male, applies for a staff job, but is not hired. In his suit against the club under the Civil Rights Act, the club most likely has a. a prima facie case. b. a bona fide occupational qualification defense. c. a business necessity defense. d. immunity. 38. Oren believes that Plumbing Contractor discriminated against him on the basis of race. He files a suit against Plumbing under the Civil Rights Act. To establish a prima facie case of employment discrimination, Oren must show that a. he is a member of a protected class. b. the employer has no legal defenses against the claim. c. discriminatory intent motivated the employer’s act. d. no other firm in the industry has committed a discriminatory act. 39. Marv files a suit against the state of New Hampshire, alleging employment discrimination under the Age Discrimination in Employment Act. The state asks the court to dismiss the suit. The court is most likely to rule that a. the state is immune from the suit. b. the suit can proceed. c. the plaintiff is immune from any defense. d. the court is immune from the request. 40. Bib replaces Chloe in her job at Data Market Corporation. To succeed with an age-discrimination claim against Data Market, Chloe will have to show that a. Bib is not qualified for the job. b. Chloe is qualified for the job. c. the employer’s qualifications for the job are too high. d. no one could do the job as well as Chloe could. 41. An affirmative action plan may be found to be constitutional if it a. attempts to remedy past discrimination. b. makes use of quotas or preferences. c. violates the equal protection clause of the Fourteenth Amendment. d. is not changed or eliminated after accomplishing its goal. 42. Olive is a supervisor for Pasta Garden, a restaurant. Qui is a Pasta Garden employee. The owner announces that some employees will be discharged. Olive tells Qui that for sexual favors, she will give him an excellent performance review and recommend a raise. This is a. employer retaliation. b. hostile-environment harassment. c. none of the choices. d. quid pro quo harassment. Copyright Cengage Learning. Powered by Cognero.

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Chap 35_15e 43. Beal, a member of a protected class, applies for a job with Coffee Brew Corporation, but fails the company’s employment test and is not hired. Beal believes that the test has an unintentionally discriminatory effect. If so, this is a. a constructive discharge. b. disparate-impact discrimination. c. disparate-treatment discrimination. d. not discrimination. 44. Myra, a female, and Neil, a male, are employees of Operation Business Corporation. Myra regularly e-mails sexually explicit images via Operation’s network to Neil, who finds the images offensive. This is most likely a. hostile work environment harassment. b. none of the choices. c. quid pro quo harassment. d. a constructive discharge. 45. Federal employment discrimination laws restrict the ability of employers to discriminate against workers on the basis of a. experience. b. gender. c. education. d. all of the choices. 46. Riverside Resort replaces Sharon, a forty-five-year-old employee, with Terry. Sharon files a suit against the employer under the Age Discrimination in Employment Act. To establish a prima facie case, she must show, among other things, that she is a. deserving of higher pay than the individual who replaced her. b. generally more dependable than the individual who replaced her. c. older than the person who replaced her. d. qualified for the position. 47. Dona, a fifty-five-year-old member of a racial minority with a disability, believes that she is a victim of employment discrimination. Potentially the most widespread form of discrimination is based on a. age. b. disability. c. gender. d. race. 48. Pipeline Corporation requires its employees to have a high school diploma. In a suit against Pipeline under the Civil Rights Act, the employer shows a connection between a high school education and job performance. Most likely, this is a. a prima facie case. b. a bona fide occupational qualification defense. c. a business necessity defense. d. disparate-impact discrimination. Copyright Cengage Learning. Powered by Cognero.

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Chap 35_15e 49. Lisa brings a successful suit against her employer Mold & Die Corporation for employment discrimination. Lisa may be awarded a. back pay, but not retroactive promotions. b. retroactive promotions, but not back pay. c. damages, but not back pay. d. back pay, retroactive promotions, and damages. 50. Vim applies for a job at Welding Inc. She passes a test to determine which applicants are eligible for hiring, but Welding discards the results, and Vim is rejected. To successfully defend against a claim for discrimination under Title VII of the Civil Rights Act, the employer must show that a. the practice in question was justified. b. the employer feared it would be sued if it used the test results. c. any discriminatory effect was unintended. d. statistically the practice in question is discriminatory in effect. 51. Sara believes that she was rejected for a position at Tour & Travel Agency on the basis of her race. Sara files a suit against Tour & Travel under the Civil Rights Act. To establish a prima facie case of employment discrimination, Sara must show all of the following except that a. she is a member of a protected class. b. she applied and was qualified for the job in question. c. she was rejected for a position by the employer. d. other persons of her race hold similar positions with similar employers. 52. To succeed in a suit against a potential employer for discrimination under the Americans with Disabilities Act, a job applicant must show that he or she a. was not hired solely because of a disability. b. has a disability that does not limit any major-life activity. c. suffers from a disability that causes undue personal hardship. d. is willing to reasonably accommodate the employer’s needs. 53. The Uniformed Services Employment and Reemployment Rights Act applies to a. all public employers. b. all private employers. c. U.S. employers operating in foreign countries. d. all of the choices. 54. Batteries Corporation is a private employer involved in an employment discrimination suit under the Civil Rights Act. Punitive damages may be recovered against Batteries a. if it acted with reckless indifference to an individual’s rights. b. if it can easily afford to pay the amount. c. if it has one hundred or more employees. d. under no circumstances.

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Chap 35_15e 55. The Americans with Disabilities Act applies to workplaces with at least a. fifteen workers. b. five workers. c. ten workers. d. one worker. 56. Gino applies for a job with Hobby Company. The employer does not hire him because of his ethnicity, or national origin. This is a. a constructive discharge. b. disparate-impact discrimination. c. disparate-treatment discrimination. d. not discrimination. 57. Jon, a paraplegic, applies for a broadcaster’s job with a radio station. The manager says, “You meet all our requirements. But we need someone who can move around the studio without accommodation.” Most likely, Jon could recover from the station under a. no federal law. b. Title VII of the Civil Rights Act. c. the Age Discrimination in Employment Act. d. the Americans with Disabilities Act. 58. Metro Fabrication Inc. may be liable for the sexual harassment of an employee if the company knew or should have known about the harassment, failed to take immediate action, and the harassment was committed by a. the employee’s previous employer. b. a company supervisor. c. a competitor. d. any of the choices. 59. Ivy is blind. Jerold has cancer. Kim has cerebral palsy. Considered to have a disability under the Americans with Disabilities Act is a. only Ivy. b. Ivy, Jerold, and Kim. c. none of the choices. d. only Ivy and Kim. 60. Inez files an employment discrimination suit against Jiffy Delivery Inc. under the Civil Rights Act, based on Jiffy’s discharge of Inez. Possible relief includes a. imprisonment. b. reinstatement. c. fines. d. an order to close the employer’s business.

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Chap 35_15e 61. Qin applies for a job at Rocket Science Inc. He passes a test to determine which applicants are eligible for hiring, but Rocket discards the results, and Qin is rejected. To support a claim for discrimination against the employer under Title VII of the Civil Rights Act, Qin must be a member of a. a protected class. b. a majority group. c. an employers’ association. d. a union. 62. Holly files an employment discrimination suit against Industrial Inc. under Title VII of the Civil Rights Act on a disparate-impact theory. To succeed, Holly must show in part that she was adversely affected by the employer’s a. practice. b. any of the choices. c. business necessity. d. bona fide occupational qualification. 63. Compliance with Title VII of the Civil Rights Act is monitored by a. protected classes. b. businesses affected by interstate commerce. c. state and local governing agencies. d. the Equal Employment Opportunity Commission. 64. Gil and Hera are employees of IT Solutions Inc. Under the Equal Pay Act, IT Solutions can legitimately pay different wages to male and female employees on the basis of a. merit. b. marital status. c. similar work at the same facility. d. gender. 65. Kyla replaces Lomax in his job at Motor Corporation. Lomax believes that he has been discriminated against on the basis of his age. For the Age Discrimination in Employment Act to apply a. Kyla must be forty years of age or younger. b. Motor must have been in business for at least forty years. c. Lomax must be forty years of age or older. d. Lomax must have been Motor’s employee for at least forty years. 66. Beth participates in an investigation into possible violations of Title VII of the Civil Rights Act at ChemCo Inc., where she is an employee. As a result, the employer demotes her. Beth can file a. none of the choices. b. a retaliation claim. c. a constructive discharge claim. d. a disparate-impact discrimination claim.

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Chap 35_15e 67. Laura is the only female employee in the maintenance department of Motor Service Inc. Her supervisor teases and plays tricks on her so relentlessly that she feels compelled to quit. This is most likely a. a constructive discharge. b. employer retaliation. c. a voluntary quit. d. none of the choices. 68. Emily, an employee of Farm Supplies Inc., files a suit against her employer, alleging sexual harassment by her supervisor Gowan. The employer may be liable if it had effective harassment policies and complaint procedures that were followed by a. none of the employees. b. Emily. c. Emily’s co-workers. d. Gowan. 69. Under the Equal Pay Act, an employer can legitimately pay different wages to male and female employees on the basis of a. the primary duties of the jobs. b. all of the choices. c. a seniority or merit system. d. any factor other than gender. 70. Title VII of the Civil Rights Act applies to employers and labor unions with at least a. fifteen employees or members. b. five employees or members. c. ten employees or members. d. one employee or member. 71. Sweet Air Filtration Products Company, a major supplier of air filters sold throughout the United States, employs one hundred workers at its principal manufacturing plant. The plant is located in Thunder Bay, which has a population that is 50 percent white and 25 percent African American, with the balance Hispanic American, Asian American, and others. Sweet Air requires a high school diploma as a condition of employment for its cleaning crew. Three-fourths of the white population completed high school, compared with only one-fourth of those in the minority groups. Sweet Air has an all-white cleaning crew. Has Sweet Air violated the Civil Rights Act? Explain.

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Chap 35_15e 72. Vero is a repairperson for Wind Power Company. The job requires traveling to remote areas to make repairs to windmills, transmission towers, and power stations under any conditions. Vero has had the job longer than other employees. Vero applies for a promotion to a supervisory position that requires constant communication with others in the field. Wind Power rejects the application on the ground that Vero is hearing impaired. Wind Power acknowledges that Vero is otherwise qualified, but asserts that it “needs someone who does not have a hearing problem.” Vero files a suit against Wind Power under the Americans with Disabilities Act. What is the issue, and what are the relevant considerations on which its resolution depends?

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Chap 35_15e Answer Key 1. True 2. True 3. False 4. False 5. True 6. False 7. True 8. False 9. True 10. False 11. False 12. False 13. False 14. False 15. False 16. False 17. False 18. False 19. False 20. False 21. False 22. True 23. True 24. False 25. False 26. True

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Chap 35_15e 27. True 28. True 29. False 30. True 31. False 32. True 33. True 34. False 35. False 36. b 37. b 38. a 39. a 40. b 41. a 42. d 43. b 44. a 45. b 46. d 47. a 48. c 49. d 50. a 51. d 52. a 53. d 54. a Copyright Cengage Learning. Powered by Cognero.

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Chap 35_15e 55. a 56. c 57. d 58. b 59. b 60. b 61. a 62. a 63. d 64. a 65. c 66. b 67. a 68. b 69. b 70. a 71. Most likely, yes, Sweet Air has violated the Civil Rights Act. Sweet Air as an employer falls under the Civil Rights Act. Under that act, an employer can legally impose an educational requirement if the requirement is directly related to, and necessary for, performance of the job. In this situation, the employer is requiring a high school diploma as a condition of employment for its cleaning crew. A high school diploma is not related to, or necessary for, the competent performance of a job on a cleaning crew. Therefore, if someone were to challenge Sweet Air’s practices, a court would be likely to consider the disparate impact that the educational requirement had on Sweet Air’s hiring of minorities. Sweet Air’s educational requirement resulted in its hiring an all-white cleaning crew in an area in which 75 percent of the pool of qualified applicants were minorities. Therefore, Sweet Air’s educational requirement would likely be considered unintentional (disparate-impact) discrimination against minorities.

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Chap 35_15e 72. The issue is whether hiring a sign interpreter is a reasonable accommodation for an employee or an undue hardship for the employer. The Americans with Disabilities Act (ADA) prohibits employers from refusing to hire (or promote) disabled persons who are otherwise qualified for a particular position. An employer may have to make reasonable accommodations for a disabled applicant, but that will not cause the applicant to be considered unqualified. Reasonable accommodations might include creating new job assignments, and creating or improving training materials and procedures. Employers who do not wish to make such accommodations must demonstrate that the accommodations will cause “undue hardship.” The law offers no uniform standards for identifying what is an undue hardship, but there are limits to the employer’s obligation to accommodate an employee under the ADA. Accommodation cannot impose a “significant difficulty or expense” on the employer. Also, if a disabled employee can perform the essentials of his or her job without accommodation, then no violation of the ADA has occurred. Besides hiring a sign interpreter to accompany a deaf employee, in some cases a company could train an employee’s co-workers in American Sign Language. The basics of sign language can be learned in just a few hours, so the expense to the company would be minimal. In the facts of this question, contact among distant field workers might be accomplished via texting and other visual means.

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Chap 36_15e Indicate whether the statement is true or false. 1. To protect a franchisor’s reputation, a franchise contract may provide a degree of control over the franchisee’s operation to the franchisor. a. True b. False 2. The duration of a franchise is a matter set by state law, not to be otherwise determined between the parties. a. True b. False 3. The Franchise Rule does not require a franchisor to make any disclosures to prospective franchisees but what is disclosed must be material and informative. a. True b. False 4. To protect franchisees against arbitrary or bad faith termination, a state law may require certain procedures be followed in terminating a franchise. a. True b. False 5. After notice of termination, a franchisee must be given a reasonable time to wind up the business. a. True b. False 6. The Franchise Rule requires a franchisor to provide potential earnings figures to its prospective franchisees. a. True b. False 7. Anyone who does business without creating a separate business organization has a franchise. a. True b. False 8. The law considers all new businesses to be sole proprietorships. a. True b. False 9. Any business—except a sole proprietorship—must comply with state tax registration requirements. a. True b. False 10. To avoid conflicts with the First Amendment, no state requires a franchisor to submit ads aimed at prospective franchisees to the state for approval. a. True b. False

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Chap 36_15e 11. The proprietor pays only personal income taxes on a sole proprietorship’s profits. a. True b. False 12. In determining whether a franchisor acted in good faith when terminating a franchise agreement, a court will attempt to balance the rights of both parties. a. True b. False 13. A franchisor does not have good cause to terminate a franchise for a franchisee’s failure to meet specified sales quotas. a. True b. False 14. A court may decide that a franchisor has wrongfully terminated a franchise if the franchisor’s decision was arbitrary. a. True b. False 15. A proprietor’s opportunity to raise capital for a sole proprietorship is limited. a. True b. False 16. Limited legal liability can be an advantage for a small business wishing to raise capital. a. True b. False 17. The Franchise Rule requires a franchisor to establish and enforce rules with respect to its franchisees. a. True b. False 18. To maintain the quality of a product or service, a franchisor can exercise any degree of control over a franchisee’s operation without risking potential liability. a. True b. False 19. Anyone who does business must create a separate business organization. a. True b. False 20. A franchise contract cannot give exclusive territorial rights to a certain geographic area to a franchisee, due to antitrust laws. a. True b. False

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Chap 36_15e 21. A franchisee’s breach of the duty of honesty and fidelity is not enough to allow a franchisor to terminate a franchise if their contract contains a notice-and-cure provision. a. True b. False 22. In a sole proprietorship, the proprietor bears the burden of any liabilities incurred by the business enterprise. a. True b. False 23. In a sole proprietorship, the owner is not the business. a. True b. False 24. To prevent deception, all representations by a franchisor to a prospective franchisee must have a reasonable basis at the time they are made. a. True b. False 25. State regulation of franchising is often aimed at protecting franchisees from unfair practices. a. True b. False 26. Because each type of franchise relationship is similar, franchise contracts tend to be similar. a. True b. False 27. As a means of controlling quality, a franchise agreement can limit the franchisee’s ability to sell the franchise to another party. a. True b. False 28. Because a franchise can involve the license of a trademark, a trade name, or a copyright, the law governing intellectual property may apply in some situations. a. True b. False 29. Because a franchisor’s termination of a franchise can adversely affect a franchisee, much franchise litigation involves claims of wrongful termination. a. True b. False 30. Case law governing franchising emphasizes the importance of good faith and fair dealing. a. True b. False

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Chap 36_15e 31. A franchisor can mandate retail prices for the goods that a franchisee sells. a. True b. False 32. Among the factors an entrepreneur will consider in selecting an organizational form for a business is the liability of the owners for the acts of the firm. a. True b. False 33. A court may decide that a franchisor has wrongfully terminated a franchise if the franchisor’s decision to do so was made in the normal course of business. a. True b. False 34. A franchisee can operate as an independent businessperson and choose any business form but still obtain the advantages of a regional or national organization. a. True b. False 35. When the owner of a sole proprietorship dies, the business does not dissolve—it is automatically transferred to family members or other heirs. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. Rugged Adventures Inc. wants to terminate its franchise arrangement with Stillwater Kayaking. Their contract does not provide for notice of termination or set a time for winding up the business. This means that to wind up, Stillwater a. has a reasonable time, with notice. b. has whatever time the franchisor determines, with or without notice. c. is entitled to notice, but nothing more. d. must close immediately. 37. Sodas Inc. and Tom’s Bottling Plant have a manufacturing franchise arrangement. This involves the transfer of a. a license. b. a trade name. c. the formula to make a certain product. d. the ownership of the business. 38. Haute Dogs Inc. sells a franchise to Ilene’s Cuisine, a lunch truck. Ilene’s Cuisine is a. a franchisee. b. a franchisor. c. a partner. d. a principal. Copyright Cengage Learning. Powered by Cognero.

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Chap 36_15e 39. Donuts Whole Inc. offers an entrepreneur the opportunity to operate a franchise bakery under the Donuts Whole trade name. Before a franchise contract is signed, Donuts Whole must explain a. the contract’s termination provisions. b. the nature and operation of a franchise. c. the laws governing franchising. d. all of the choices. 40. Instead of setting up a business to market her own products, Rita considers entering into a distributorship franchise with Sports Equipment Corporation. This involves the transfer of a. a license. b. a trade name. c. the formula to make a certain product. d. the ownership of the business. 41. Gary buys from Hook, Line & Sinker Corporation the exclusive right to sell its trademarked fishing gear in a certain area. Their franchise agreement requires Gary to pay certain administrative expenses. Their agreement may also require the franchisee to pay a percentage of the franchisor’s a. advertising costs. b. personal expenses. c. retirement income. d. all of the choices. 42. Juice Inc. offers entrepreneurs the opportunity to operate a franchise under the Juice trade name as a member of a group of dealers that engage in retail beverage sales. To prospective franchisees, Juice must disclose a. the range of goods and services included. b. the value of the franchise. c. the estimated profitability of the franchise. d. all of the choices. 43. Sean buys a franchise from Taco Mission Inc. This relationship, like all other franchise relationships, is governed by a. contract law. b. all of the choices. c. the federal Franchise Rule. d. applicable state law. 44. Ling owns and operates Metro Delivery Service as a sole proprietorship. When she dies, the business will automatically a. dissolve. b. transfer to Ling’s heirs. c. reform with its employees as the owners. d. transfer to its creditors.

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Chap 36_15e 45. Cathy buys an exclusive territory in which she is authorized to set up a plant to make Delite dairy products. After receiving the recipes, Cathy begins making Evie’s-brand yogurt and other Delite products. This is a. a chain-style franchise. b. a distributorship franchise. c. a manufacturing franchise. d. not a franchise. 46. Flynn is interested in buying a franchise from Gas Up Inc. The franchisor must disclose material facts that Flynn needs to make an informed decision concerning this purchase, according to a. no law. b. federal antitrust laws. c. the Federal Trade Commission’s Franchise Rule. d. the Petroleum Marketing Practices Act. 47. eSports Inc. offers entrepreneurs the opportunity to operate a franchise under the eSports trade name as the owner of a game-playing venue. To possible franchisees, eSports makes earnings claims. For those claims, the franchisor a. can have a hypothetical basis. b. must have a reasonable basis. c. must have an actual basis. d. can have any or no basis. 48. Sandor wants to go into the business of construction contracting. Among the reasons that might convince Sandor to set up his business as a sole proprietorship would be a. its greater organizational flexibility. b. its limited liability. c. its perpetual existence. d. the ease of transferring the business to other family members. 49. Riki contracts to buy a franchise from Sushi Inc. In this contract, as in most franchise contracts, the determination of the territory to be served is made by a. other Sushi franchisees within the same state. b. Riki. c. Sushi. d. Sushi customers. 50. Espresso Brew Inc. uses a Web site to provide downloadable information to prospective franchisees. This electronic information is the equivalent of an offer that must comply with a. no law. b. federal antitrust laws. c. the Federal Trade Commission’s Franchise Rule. d. the Dealers Day in Court Act.

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Chap 36_15e 51. Tasty Wings LLC wants to present information in “disclosure documents” via the Internet to prospective franchisees. Among other legal requirements with which the franchisor must comply, prospective franchisees must a. agree to settle any lawsuits that may arise over the documents. b. be able to download or save all electronic documents. c. provide e-mail addresses for Savory Wraps to verify users’ authenticity. d. register with the Federal Trade Commission via Savory Wraps’ website. 52. Made in the USA Clothing Inc. gives notice to Neely that it is terminating their franchise arrangement. Winding up the business requires a. a new franchise agreement. b. nothing more than closing immediately. c. Neely’s death, disability, or insolvency. d. the return of the franchisor’s property. 53. Digital Wizards Inc., a franchisor of computer technicians, wishes to standardize the pricing practices of its franchisees because they have engaged in price-cutting to increase their respective shares of the market. The most prudent action might be for Digital Wizards to a. mandate the prices at which its franchisees sell their services. b. suggest the prices at which its franchisees sell their services. c. require its franchisees to pay a premium based on their market share. d. threaten its franchisees with a suit for material breach of contract. 54. Maeve sells New Energy, a sole proprietorship that makes and sells solar panels, to Olaf. This is a. the establishment of a franchise. b. the creation of a partnership. c. none of the choices—a sole proprietorship cannot be sold. d. a transfer of the ownership of the business. 55. Bayard organized, and owns and operates, Cypress Tours in the simplest form of business organization. This is a. a partnership. b. a franchise. c. a corporation. d. none of the choices. 56. Ford is the sole proprietor of Go, a game subscription service. As a sole proprietor, on the business’s profits, Ford pays a. no income taxes. b. only personal income taxes. c. only business income taxes. d. both personal and business income taxes.

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Chap 36_15e 57. Pay-Most Convenience Stores, Inc., is a franchisor. Randy operates a Pay-Most franchise. Seth is one of Randy’s employees. As a franchisor, if Pay-Most controls the day-to-day operations of the business to a significant degree, it may be liable for tortious acts by a. no one. b. any person on the franchise premises. c. only persons with legitimate reasons to be on the franchise premises. d. Pay-Most, Randy, or Seth. 58. Chase, the owner of Data Master, a sole proprietorship, wants to obtain additional business capital. This opportunity is most likely limited to a. borrowing funds. b. bringing in partners. c. issuing stock. d. selling the business. 59. Bob buys a Club Fitness Inc. franchise, which the franchisor later terminates. In determining whether the termination was proper, a court will generally a. balance the rights of both parties. b. emphasize the right of Club Fitness to its business operation. c. focus on the right of Bob to be dealt with fairly. d. underscore the interest of consumers in affordability. 60. Raceway LLC licenses the trademarks to its products to Stadium Markets Inc. to reproduce on clothing and other goods for sale. This is a. a franchise. b. none of the choices. c. a partnership. d. a sole proprietorship. 61. Del owns Everlast Painting, a sole proprietorship. Del’s liability is a. limited by state statute and varies from state to state. b. limited to the extent of capital expenditures. c. limited to the extent of his or her original investment. d. unlimited. 62. Mai-Lin’s Martial Arts, Inc., grants a franchise to Naomi to operate a Mai-Lin’s school. Mai-Lin’s may require Naomi to pay the franchisor a percentage of her a. annual sales or volume of business. b. weekly payroll expense. c. monthly overhead savings. d. income from unrelated business activities.

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Chap 36_15e 63. Beeline Inc. offers entrepreneurs the opportunity to operate a franchise under the Beeline trade name as a dealer that sells and leases Beeline equipment. To potential franchisees, Beeline must provide a. actual earnings figures. b. hypothetical earnings figures. c. projected earnings figures. d. none of the choices. 64. Anton enters into an agreement with Burgers Inc. to operate a franchise in Centre City. Later, the franchisor grants franchises to others within the same territory, causing Anton to suffer a significant loss in profits. In Anton’s suit against the franchisor, his best argument is that Burgers a. violated the antitrust laws. b. violated the implied covenant of good faith and fair dealing. c. violated the Federal Trade Commission’s Franchise Rule. d. granted Anton the first Burgers franchise in Centre City. 65. Lara owns and operates Market Place, a venue for growers, crafters, and others to sell their goods, without creating a separate business organization. She receives all the profits from the vendors’ fees and concession sales. This is most likely a. a partnership. b. a franchise. c. a sole proprietorship. d. none of the choices. 66. Teresa buys a franchise from Urgent Care Clinics LLC. If their agreement is like most franchise agreements, it will specify that Urgent can terminate the franchise a. at will. b. for any reason. c. for cause only. d. for no reason. 67. Without creating a separate business organization, Rey starts up Street Cruisers, a pre-owned auto sales enterprise. This enterprise is a. none of the choices. b. a corporation. c. a franchisee. d. a sole proprietorship. 68. Ruby is interested in buying a franchise from Snax Stores Inc. This transaction, like other franchise deals, is regulated to protect a. certain types of anticompetitive agreements. b. franchisors from dishonest prospective franchisees. c. prospective franchisees from dishonest franchisors. d. the government’s power to restrict freedom of contract.

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Chap 36_15e 69. Nina, the owner of Organic Farm, a sole proprietorship, wants to obtain additional capital to operate. This can be accomplished by a. a bank loan. b. a Small Business Administration Loan. c. an infusion of Nina’s personal funds. d. any of the choices. 70. Carl starts up, and assumes the financial risk of, DataWorks, a new marketing enterprise. As a sole proprietorship, the enterprise must meet legal requirements relating to a. none of the choices. b. licensing and registration. c. intellectual property laws. d. all of the choices. 71. Owen plans to open Owen’s Pets, a pet sales and supplies outlet, and to hire Quimby and Ruth. Owen will invest only his own money. He does not expect to make any profit for at least two years and to make almost no profit for the first three years, but he hopes to expand eventually. Which form of business organization would be most appropriate? What are the chief characteristics, advantages, and disadvantages of this form of business organization? If Owen wants to obtain additional capital to expand the business, but does not want to lose control of the firm, what is his best option?

72. Mucho Tacos Inc. sells franchises. Mucho Tacos imposes on its franchisees standards of operation and personnel training methods. What is the potential pitfall to Mucho Tacos if it exercises too much control over its franchisees?

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Chap 36_15e Answer Key 1. True 2. False 3. False 4. True 5. True 6. False 7. False 8. False 9. False 10. False 11. True 12. True 13. False 14. True 15. True 16. True 17. False 18. False 19. False 20. False 21. True 22. True 23. False 24. True 25. True 26. False

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Chap 36_15e 27. True 28. True 29. True 30. True 31. False 32. True 33. False 34. True 35. False 36. a 37. c 38. a 39. a 40. a 41. a 42. d 43. b 44. a 45. c 46. c 47. b 48. a 49. c 50. c 51. b 52. d 53. b 54. d Copyright Cengage Learning. Powered by Cognero.

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Chap 36_15e 55. d 56. b 57. d 58. a 59. a 60. a 61. d 62. a 63. c 64. b 65. c 66. c 67. d 68. c 69. d 70. d 71. When a business is relatively small and is not diversified, employs relatively few people, has modest profits, and is not likely to expand significantly or require extensive financing in the immediate future, the most appropriate form for doing business may be a sole proprietorship. A sole proprietorship is easier and less costly to start than other forms of business, because few legal forms are involved. The owner is free to make business decisions without consulting others. Taxes are paid on the business’s income as the owner’s personal income. In a sole proprietorship, the owner and the business are the same. Anyone who creates a business without designating a specific form for its organization is doing business as a sole proprietorship. An advantage of the sole proprietorship is its greater organizational flexibility over other forms of business organization. The owner can operate the enterprise without any formalities. A significant disadvantage of this form of organization, however, is that unlike most other forms of business organization, there are no limits on the liability of the owner for the debts and obligations of the firm. Another disadvantage of the sole proprietorship form can be the ability of a sole proprietor to raise capital while maintaining control and retaining the same form. This course may be limited chiefly to borrowing funds. Bringing in partners would convert the business to a partnership. Issuing stock would require incorporating or establishing another form of business. Selling the business would sacrifice all control. The only way to obtain additional business capital without accumulating it through business profit is by borrowing funds.

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Chap 36_15e 72. A provision in a franchise agreement permitting the franchisor to establish and enforce certain quality standards is valid and unquestionable. A franchisor has a legitimate interest in maintaining the quality of its products or services to protect its name and reputation. But too much control over the operations of its franchisees risks potential liability. For example, under the doctrine of respondeat superior, the exercise of too much control may result in the franchisor’s liability for the torts of a franchisee’s employees. That is, if the franchisor has a right to control the franchisee’s operations and exercises this right to a significant degree, and an employee under this control acts in a tortious or criminal manner that results in an injury to another, the franchisor may be held vicariously liable.

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Chap 37_15e Indicate whether the statement is true or false. 1. Among three partners, unless they agree otherwise, unanimous consent is required to manage the business of the partnership. a. True b. False 2. A limited partner can force the dissolution of a limited partnership even if the other partners want to continue the business. a. True b. False 3. The articles of partnership can include any terms that the partners wish, including terms that might be illegal or against public policy in other situations. a. True b. False 4. A partner can bring an action for an accounting during the term of the partnership and the firm’s property can be sold to satisfy the partner’s personal debts. a. True b. False 5. Generally, the law recognizes a partnership as an independent entity. a. True b. False 6. A partner always has the right to dissociate from the partnership. a. True b. False 7. During the winding up stage of dissolution, no party can make a claim on the partnership assets. a. True b. False 8. In some states, limited partners cannot withdraw from a limited partnership. a. True b. False 9. Regardless of the partners’ consent or agreement, the voluntary dissociation of a partner begins the dissolution of the partnership. a. True b. False

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Chap 37_15e 10. The payment of a percentage of profits from the ownership of property to repay a loan does not prove the existence of a partnership. a. True b. False 11. A partner can put his or her self-interest before the interest of the partnership without violating any fiduciary duty owed to the firm. a. True b. False 12. A partnership agreement must apportion profits and losses in the same ratio as the partners’ investment of time and capital in the business. a. True b. False 13. When a partnership that was supposed to dissolve after one partner’s death continues to operate, a court is estopped from ordering its dissolution. a. True b. False 14. When a person who is not a partner holds himself or herself out as a partner, a court may impose liability—and partnership rights—on the alleged partner. a. True b. False 15. A partner who withdraws from a partnership for a term before its expiration date can be held liable for any resulting losses. a. True b. False 16. The Uniform Partnership Act governs the operation of partnerships in spite of a different agreement among the partners. a. True b. False 17. A court can order the dissolution of a partnership if the business can only be operated at a loss. a. True b. False 18. Every act of a partner concerning partnership business binds the firm. a. True b. False 19. A single person carrying on a business for profit, with control over its operation, can constitute a partnership. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 37_15e 20. A partner can be held liable for a partnership obligation only if he or she participated in, or knew about, whatever it was that gave rise to the obligation. a. True b. False 21. In most states, in a dispute on a partnership matter, a third party cannot sue an individual partner but must file an action against the entire firm. a. True b. False 22. In a limited partnership, every partner has full responsibility for the management of the partnership and its obligations. a. True b. False 23. A partner is liable for simple negligence in judgment in conducting partnership business because such an act implies intent to engage in misconduct. a. True b. False 24. One of the essential elements of a partnership is an equal right to be involved in the management of the business. a. True b. False 25. A partner always has the power to dissociate from the partnership. a. True b. False 26. Dissociation occurs when a partner ceases to be associated in the carrying on of the partnership business. a. True b. False 27. In a limited partnership, a general partner assumes no liability for partnership debts beyond the amount of capital contributed. a. True b. False 28. In many instances, agency law governs the relationships among partners. a. True b. False 29. To eliminate costly negotiations or litigation, partners may agree on how the firm’s assets will be valued or divided if the partnership dissolves. a. True b. False

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Chap 37_15e 30. A limited liability partnership allows professionals to avoid personal liability for the malpractice of other partners. a. True b. False 31. At the option of the partners, a partnership can be a pass-through entity or a taxpaying entity. a. True b. False 32. A key element of a partnership is the intent to act in good faith. a. True b. False 33. When there is no formal, written partnership agreement, an agreement to form a partnership is unenforceable. a. True b. False 34. Dissociation terminates some of the rights of the dissociated partner, requires the firm to buy his or her interest, and alters the parties’ liability to third parties. a. True b. False 35. Only a managing partner has the right to full and complete information concerning the conduct of all aspects of partnership business. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. Dean, a partner in Equipment Sales, applies for a loan with Farmers Bank allegedly on Equipment’s behalf but without the authorization of the other partners. The bank knows that Dean is not authorized to take out the loan. Liability in the event of default will be imposed on a. none of the choices. b. Dean. c. Equipment. d. Farmers Bank. 37. Olin is a partner in Precision Plumbing. When the partners decide to dissolve the firm, Olin collects and distributes the assets. This results in a. nothing with respect to the firm’s existence. b. the continuation of the firm’s business. c. the termination of the firm’s legal existence. d. the temporary suspension of the firm’s business.

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Chap 37_15e 38. Bhat and Cho do business as Data Security, a partnership. In most states, for the purposes of collecting judgments and having accounting performed, this firm would be treated as a. a combination of individuals. b. a proprietorship. c. an independent entity. d. an aggregate. 39. Brent and Char are limited partners in Dental Center, a limited partnership. In terms of the firm’s books and information regarding partnership business, Brent and Char are entitled to a. access in proportion to their participation in management of the firm. b. access to the parts that directly relate to their capital contributions. c. no access. d. complete access. 40. Rosa is a partner in Sugar & Spice, a partnership consisting of the owners of a bakery. Sugar & Spice incurs debt for new ovens. With respect to this debt, Rosa is a. not liable. b. only liable to the amount of her capital contribution. c. only liable in proportion to the number of partners in the firm. d. personally liable to the full extent. 41. Amber owns and operates Bistro Café in space leased in a building owned by Ciera. The lease requires a base rent of $1,500, plus 10 percent of Bistro’s profits, each month. The term is two years. Amber and Ciera are a. not partners, because Ciera does not have an ownership interest or management rights in Bistro. b. not partners, because the lease includes “base rent.” c. not partners, because the rent includes only 10 percent of the profits. d. partners in a partnership for two years. 42. The essential elements of a partnership do not include a. a sharing of profits and losses. b. a joint ownership of the business. c. an equal right in the management of the business. d. an intent to act in good faith. 43. Development LP is a limited partnership that invests in residential real estate projects. Its limited partners include more than 150 sophisticated investors and investment professionals, including Ethan. Ethan loses his limited liability if he a. participates in the firm’s management. b. does not participate in the firm’s management. c. invests in a project that the firm has declined. d. votes to sell or dissolve the firm.

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Chap 37_15e 44. Nell is considering forms of business organization for Optic Center, a medical eye clinic. An advantage of a limited liability partnership is that, depending on the applicable state statute, partners can avoid personal liability for a. their own wrongful acts. b. any partnership obligation. c. their own and other partners’ wrongful acts. d. none of the choices. 45. Gwen and Hera do business as G&H Civil Engineers, a partnership. The Uniform Partnership Act governs the firm a. in the absence of an express agreement. b. in the absence of an implied agreement. c. only under an express agreement. d. under all circumstances. 46. Blake is one of three partners in Commercial Custodial. With respect to Blake’s interest in the firm, when she dies, her heirs are most likely entitled to a. nothing. b. a payout of her capital contribution without more. c. the buyout price paid by the firm for the interest. d. one-third of the value of the interest. 47. Cornell and Duke are partners in Equity Lending. They decide to admit Fran to the firm as a new partner. Fran’s liability for partnership debts incurred before her admission is a. limited to her capital contribution to the firm. b. limited to her personal assets. c. nothing. d. unlimited. 48. Glen is a partner in Home Builders, a construction firm. Glen’s assignment of his interest in the partnership to Investment Consultants results in a. nothing with respect to Home Builders. b. the automatic termination of Home Builders’ legal existence. c. Glen’s liability for all of Home Builders’ debts. d. Glen’s wrongful dissociation and liability for any damages. 49. Vern is one of three partners in Waffles Food Truck. Concerning all aspects of the partnership business, Vern is entitled to information a. on a complete basis. b. only on an “as needed” basis. c. only for a reasonable purpose. d. only related to the partner’s capital contribution.

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Chap 37_15e 50. Dain is a limited partner in Eco Baits, a pest control service organized as a limited partnership, which cannot pay its debts. Dain is liable for the debts a. in proportion to the number of partners in the firm. b. to no extent. c. to the extent of his capital contribution to the firm. d. to the full extent. 51. Quint and Reba are partners in Sofas Plus, a furniture store. Quint dissociates from the business. This ends Quint’s a. right to participate in the partnership business. b. right to have his interest in the partnership purchased by the firm. c. duty of care with respect to events that occurred before dissociation. d. all of the choices. 52. Oscar is a partner in Party Caterers. Oscar’s death will a. dissolve the partnership. b. breach the partnership agreement. c. dissociate the partner from the firm. d. wind up the business. 53. Obie operates Pizza Palace. Obie hires Qua to take and fill customers’ orders at an hourly wage of $15.00, plus tips. Obie and Qua are a. not partners, because Qua does not have an ownership interest or management rights in Pizza Palace. b. not partners, because the pay includes an hourly wage. c. not partners, because the pay includes tips. d. partners in a partnership. 54. Sol and Thom agree to form a partnership to sell real property. To be enforceable under the Statute of Frauds, their agreement must be a. filed in the appropriate state office. b. in writing. c. signed by a witness. d. all of the choices. 55. Kim and Lyle are partners in K&L Sales, which exports technical equipment. If Congress declares that the equipment can no longer be exported, K&L a. can continue its business for one twelve-month period. b. can continue its business indefinitely. c. dissolves immediately unless the partners change its business. d. is immediately subject to criminal prosecution and penalties.

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Chap 37_15e 56. Deb and Eve are partners in Foundations, a construction outfit. Deb manages the business. For this service, unless the partnership agreement states otherwise, she is entitled to pay in proportion to her a. effect on the business. b. effort. c. capital contribution. d. none of the choices. 57. Cathy, Don, and Ethel are partners in Fruit Orchard Farms. Cathy gives notice to quit the firm, which otherwise continues to do business. This is a. dissociation. b. dissolution. c. unethical. d. illegal. 58. Cal, Dex, and Erin agree to be partners in Fajitas, a food cart outfit, splitting the profits equally. Cal contributes 65 percent of the capital. When Fajitas is dissolved, its liabilities are greater than its assets. The losses are paid by a. all of the partners in proportion to their capital contributions. b. all of the partners in proportion to their shares of the profits. c. Cal because he contributed most of the capital. d. Dex and Erin because they contributed the least of the capital. 59. The major features of an LLP are that it limits the personal liability of the partners and a. it allows the partnership to continue as a pass-through tax entity. b. LLP statutes do not vary from state to state. c. it can only do business in the state in which it was formed. d. only a few states have enacted LLP statutes. 60. Beth and Connie do business as Dig Excavators. In acting on the firm’s behalf, Beth makes an honest error in underestimating the cost of a certain project. In this situation, to her firm, Beth is liable for a breach of the duty of a. care. b. accounting. c. loyalty. d. none of the choices. 61. Otto is a limited partner in Port Exports, a limited partnership. By participating in the firm’s management, Otto is liable for its obligations a. in proportion to the number of partners in the firm. b. to no extent. c. to the extent of his capital contribution to the firm. d. to the full extent.

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Chap 37_15e 62. Olivia is a partner in Pacific Trade. In the majority of states, with respect to any partnership obligations that Olivia does not participate in, know about, or ratify, she would be liable for a. none of the obligations. b. all of the obligations, jointly and severally. c. all of the obligations, jointly but not severally. d. only the contractual obligations. 63. Stef and Tyler agree in an exchange of e-mail to form a partnership to buy and sell real property. Their partnership agreement is legally binding a. only if a copy of the agreement is filed in the appropriate state office. b. only if the agreement is printed in hard copy and signed by the parties. c. only if the parties exchange valid consideration. d. without more. 64. Kris and Linda are partners in Mobile Devise, an online marketing firm. Kris signs a contract with Nature’s Best Chocolate, a candy maker, apparently on Mobile’s behalf. The contract is binding on a. Kris, Linda, and Mobile. b. Kris only. c. Mobile only. d. Nature’s Best only. 65. Vaughn starts Wind Systems to make and sell turbines. Later, Vaughn contracts with Xi to invest additional capital in the firm in exchange for 25 percent of the profits. Vaughn and Xi are not partners in Wind Systems because a. they do not share the profits equally. b. their agreement does not provide for the sharing of losses. c. Vaughn started the firm before Xi agreed to invest additional capital. d. they do not have joint control over the business. 66. Nora and Owen do business as Property & Profit, a real estate investment partnership. In acting on the firm’s behalf, Nora takes advantage of an opportunity to make a secret profit. To her firm, Nora is liable for a breach of a. the duty of care. b. contract. c. the duty of loyalty. d. none of the choices. 67. Brad and Carol are partners in Doctors for Children, a medical clinic. Brad’s dissociation from the firm results in a. the automatic termination of the firm’s legal existence. b. the partnership’s buyout of Brad’s interest in the firm. c. the immediate maturity of all partnership debts. d. the temporary suspension of the partnership’s business.

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Chap 37_15e 68. Jana and Kwan are partners in Lawyers LLP, a limited liability partnership. Jana supervises the firm’s associate Milo, who negligently fails to appear in court on behalf of Norm, a client. Liability to Norm rests only with a. Jana and Milo. b. Jana. c. Milo. d. Jana and Kwan. 69. Resort Gift Shop is operated as a partnership, with five partners. Shan has a one-third interest in the firm. Each of the other partners has a one-sixth interest. Thieu is the senior partner. With respect to management decisions a. a majority of the partners must agree. b. Shan rules. c. Thieu decides. d. unanimous consent is required. 70. Del and Efron want to form a limited partnership to do general business bookkeeping with an emphasis on tax accounting. In most states, a limited partnership will be created when Del and Efron a. file a certificate of limited partnership. b. execute a partnership agreement. c. accept their first client. d. make their capital contributions. 71. Fresco and Garcia form a partnership—HVAC Pros. Garcia’s capital contribution is $10,000, and Fresco’s is $15,000. The partnership agreement provides that profits are to be shared, with 40 percent for Garcia and 60 percent for Fresco. Later, Garcia makes a $10,000 loan to the partnership when it needs working capital. When the partnership is dissolved, its assets are $50,000, and its debts are $8,000. How should the assets be distributed?

72. Shih was the manager of Thai Bistro, a restaurant specializing in Southeast Asian foods. Shih opened a bank account in Thai Bistro’s name, signing the account signature card as “owner.” Umeko, who was often at Thai Bistro and had free access to its office, told others that she was “an owner” and “a partner.” She also opened a bank account in Thai Bistro’s name, and signed the account signature card as “owner.” Shih told Vijay, the owner of Wong Noodles Inc., that Umeko was a member of a partnership that owned Thai Bistro. On this basis, Wong Noodles delivered its goods to Thai Bistro on credit. In fact, Thai Bistro was owned by a corporation. When the unpaid account totaled more than $10,000, Wong Noodles filed a suit against Umeko to collect. On what basis might Umeko be liable for the debt?

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Chap 37_15e Answer Key 1. False 2. False 3. False 4. False 5. False 6. False 7. False 8. True 9. False 10. True 11. False 12. False 13. False 14. False 15. True 16. False 17. True 18. True 19. False 20. False 21. False 22. False 23. False 24. True 25. True 26. True

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Chap 37_15e 27. False 28. True 29. True 30. True 31. False 32. False 33. False 34. True 35. False 36. b 37. c 38. c 39. d 40. d 41. a 42. d 43. a 44. b 45. a 46. c 47. a 48. d 49. a 50. c 51. a 52. c 53. a 54. b Copyright Cengage Learning. Powered by Cognero.

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Chap 37_15e 55. c 56. d 57. a 58. b 59. a 60. d 61. d 62. b 63. d 64. a 65. d 66. c 67. b 68. a 69. a 70. a 71. On the dissolution and winding up of a partnership, the order of liability payment of the assets is as follows: (a) debts owed to partnership creditors, including partners; and (b) capital contributions of partners and profits as provided or, in the absence of an agreement, equally. In this question, the partnership’s creditors would be paid $8,000 first, leaving a balance of $42,000 from the $50,000. Next, Garcia would be paid $10,000 for the loan, or advance, leaving $32,000. From this amount, Garcia would receive $10,000 and Fresco $15,000 as payment for their capital contributions, leaving a balance of $7,000. The $7,000 would be split as profits, with 40 percent going to Garcia ($2,800) and 60 percent to Fresco ($4,200). 72. The theory under which Umeko would most likely be liable for Thai Bistro’s debt to Wong Noodles is partnership by estoppel. The first requirement of this theory is a representation, by a non-partner or by another with the non-partner’s consent, that the non-partner is a partner. The second requirement is reliance on that representation. In this case, Wong Noodles could prove both elements. Both Shih and Umeko made representations with respect to Umeko’s status in relation to Thai Bistro—they both signed bank cards as “owner,” Umeko was often at Thai Bistro and had free access to its office, Umeko told others that she was a “partner” in the business, which is what Shih also told Vijay. As for the reliance element, Wong Noodles extended credit to Thai Bistro only because Wong Noodles believed that Thai Bistro was owned by a partnership.

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Chap 38_15e Indicate whether the statement is true or false. 1. Because the activities of a partnership are more limited than the business of a joint venture, the members of a joint venture are presumed to have more power to bind their co-venturers. a. True b. False 2. Most states apply to a limited liability company formed in another state the law of the state in which the firm currently does most of its business. a. True b. False 3. If the members of a limited liability company want to reinvest profits in the business, they may opt for the firm to be taxed as a corporation. a. True b. False 4. When a member of a limited liability company guarantees payment of a loan to the firm, the member is personally liable for the obligation. a. True b. False 5. If the members of a limited liability company do not stipulate in their operating agreement how voting rights will be apportioned, in most states, only the member-managers will be entitled to vote. a. True b. False 6. The operating agreement of a limited liability company cannot provide for the calculation of a buyout price on a member’s dissociation because the event has not yet occurred. a. True b. False 7. The beneficiaries of a business trust are personally liable for the trust’s debts and obligations. a. True b. False 8. A syndicate may be organized as a corporation or a partnership, or in some situations as no recognizable form of business organization. a. True b. False 9. In most circumstances, the manager of a limited liability company is liable in that capacity for the liability of the firm. a. True b. False

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Chap 38_15e 10. The members of a limited liability company have considerable flexibility in managing the business of the firm. a. True b. False 11. When the member of a limited liability company engages in fraud on the firm’s behalf, the member is not likely to be held personally liable. a. True b. False 12. If a member of a limited liability company dissociates from the firm, the other members can continue the firm’s business, and the dissociated member can continue to act as an agent for the firm. a. True b. False 13. In a state in which the managers of a limited liability company owe fiduciary duties to the firm and its members, those members can sue the managers for breaching a fiduciary duty. a. True b. False 14. If a member of a limited liability company dissociates from the firm in violation of the operating agreement, the member can be held liable for any loss to the business resulting from the withdrawal. a. True b. False 15. The members of a limited liability company should protect their interests by creating a written operating agreement. a. True b. False 16. A limited liability company is an aggregate of its members, not a separate legal entity. a. True b. False 17. The operating agreement of a limited liability company and a state’s LLC statute can be applied together to determine the outcome of a dispute between the firm’s members. a. True b. False 18. If a joint venturer secretly profits from a project that was supposed to be a venture-related deal, the other joint venturers may be awarded damages for the breach of loyalty. a. True b. False 19. A cooperative can be incorporated. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 38_15e 20. If a limited liability company is not meeting the economic purpose for which it was established, a court may order the dissolution of the firm. a. True b. False 21. Like a sole proprietorship or a partnership, the members of a limited liability company have unlimited liability for the firm’s debts. a. True b. False 22. An operating agreement is required for a limited liability company to exist, and it must be in writing. a. True b. False 23. Unlike a sole proprietorship or a partnership, a limited liability company cannot be held liable for a loss caused by the wrongful acts of its members. a. True b. False 24. A limited liability company is a citizen only of the state in which it was formed. a. True b. False 25. In a joint stock company, the shareholders are considered to be agents of one another, as the partners are in a partnership. a. True b. False 26. As in a partnership, a limited liability company may pay no taxes—profits can be passed through to the members, who pay personal taxes on the profits. a. True b. False 27. To form a limited liability company, articles of organization must be filed with an attorney’s office. a. True b. False 28. Organizing as a limited liability company prevents the firm from attracting foreign investors. a. True b. False 29. The management of a limited liability company must include at least one of the members. a. True b. False

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Chap 38_15e 30. Choosing a business organizational form that limits its owners’ liability may lead to greater profits for the firm. a. True b. False 31. When the promoter of a limited liability company enters into a preformation contract on the firm’s behalf, the company must adopt the contract to enforce it. a. True b. False 32. When a limited liability company is dissolved, the members may preserve the assets for a reasonable time to optimize their return during the winding up process. a. True b. False 33. Like partners, unless otherwise agreed, joint venturers have an equal voice in controlling a venture-related project. a. True b. False 34. Because title to the property of a limited liability company must be held in the name of one or more of its members, disputes over its ownership is avoided. a. True b. False 35. Like a partner in a partnership, the member of a limited liability company has the power to dissociate from the firm at any time, but may not have the right. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. Valu Food Market is an incorporated cooperative. Like other incorporated cooperatives, Valu Food distributes profits to its owners on the basis of a. the amount of capital they contribute. b. the degree to which they participate in management. c. their transactions with the cooperative. d. the requirements of the state in which it was incorporated. 37. Like other limited liability companies, for federal jurisdictional purposes, Rodeo Productions LLC is most likely a citizen of a. all states in the United States. b. every state of which its members are citizens. c. any state in which it does business. d. no state—an LLC is not a “citizen.”

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Chap 38_15e 38. Rural Development Company and Suburban Real Estate Corporation form a joint stock company. This firm can be formed for, at the most, a. an implied duration of not more than six months. b. a perpetual existence. c. a single activity or transaction. d. an express duration of not more than one year. 39. Rocket Corporation and Star Inc. wish to combine their capabilities to launch a single flight to the moon. The appropriate legal entity for this project is most likely a. a business trust. b. a joint stock company. c. a joint venture. d. a syndicate. 40. To gain an advantage in a business deal, Masonry LLC engages in fraud. Nicole, a member of Masonry, significantly contributes to the firm’s misconduct. For any resulting damages, a court is most likely to hold Nicole a. personally absolved. b. personally liable. c. liable but only to the extent of the member’s investment in the firm. d. liable but only to the extent of any amount that the firm cannot pay. 41. Leon, Michael, Nolan, and O’Neill join together to buy a professional basketball franchise. Their selected form of business organization is an investment group, which is also known as a. a business trust. b. a joint stock company. c. a joint venture. d. a syndicate. 42. GMO Grain Corporation and Hybrid Yields, Inc., form a joint stock company. The ownership of this company is represented by a. partnership certificates. b. shares of stock. c. title documents. d. trust certificates. 43. A limited liability company that operates in more than one state may not receive consistent treatment. This is because, according to the principle that in most states determines the law that applies to a foreign limited liability company, one state’s courts must a. interpret and apply another state’s laws. b. strictly apply its own jurisprudence. c. arrive at a consensus between sometimes conflicting rules. d. equitably balance the different state laws.

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Chap 38_15e 44. A limited liability company that wants to distribute profits to its members could avoid “double taxation” by electing to be taxed as a. a person. b. a corporation. c. a sole proprietorship. d. a partnership. 45. Orly’s Adventure Travel and Paquito’s Wild River Tours form a joint venture. Orly can participate in the venture’s management to a. the extent that she assumes liability for the venture’s debts. b. the extent of her investment in the venture. c. any extent. d. no extent. 46. Global Capital S.A. is a foreign investor. With respect to the operations of a limited liability company in the United States, Global can a. become a member, but cannot otherwise participate. b. become a member. c. not become a member, but can participate. d. not become a member or participate. 47. Dairy Products, Inc., and Eden Farms Corporation form a joint venture to make and test-market Frosty Ice Cream. If this joint venture is like most joint ventures, it will continue a. for an implied duration of not more than six months. b. for a single project only. c. for an express duration of not more than one year. d. in perpetuity. 48. Singh, a member of Trucking LLC, ceases to be associated in the carrying on of the business of the firm. Despite the dissociation a. the member’s duty of care continues with respect to prior events. b. the member’s duty of loyalty continues until the firm dissolves. c. the member does not lose the right to participate in management. d. the member does not lose the right to act as an agent for the firm. 49. As the promoter of Glassworks LLC, Hans enters into a contract with Interstate Transport Company. Once formed, Glassworks can a. forego an adoption process and simply enforce the contract. b. adopt the contract through novation. c. obtain the benefits of the deal without obligation. d. pierce Interstate’s “corporate veil” to hold Hans liable on the contract.

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Chap 38_15e 50. Croissants Corporation and Donuts Company transfer their assets to Edibles Inc., which manages the assets and distributes the profits to Croissants and Donuts. This arrangement is a. a business trust. b. none of the choices. c. a joint venture. d. a syndicate. 51. Phone Apps LLC is forming as a limited liability company. To become a manager-managed firm, Phone Apps’ members must a. refrain from participating in the firm’s operations. b. designate a person or group of persons to manage the firm. c. elect to apply the principles of partnership law to their firm. d. expressly adopt the corporate form of business organization. 52. A group of consumers form Grocers Mart Cooperative. This form of business organization makes it possible for these consumers to a. avoid personal liability for the acts of the cooperative. b. obtain an exemption from the state laws governing corporations. c. pay no taxes on their business income. d. pool their resources to gain an advantage in the marketplace. 53. Loren, Marie, and Nina form a syndicate to buy a professional soccer franchise. This syndicate could be set up as a. a joint venture. b. a corporation. c. a sole proprietorship. d. a limited liability company. 54. Paving LLC is a foreign limited liability company in the state of Ohio. In dealing with Paving, Ohio will apply the law of the state where the firm a. was formed. b. is headquartered. c. does business. d. will receive consistent treatment. 55. Licensed fishing outfits in Bayou City form a business organization to provide, without profit, an economic service to its members. This is a. a business trust. b. a cooperative. c. a corporation. d. a joint stock company.

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Chap 38_15e 56. In some states, to form a limited liability company, a business must have a. a registered promoter. b. a designated founder. c. at least two members. d. a non-member manager. 57. With respect to taxes imposed on limited liability companies, most states a. follow the federal rules. b. exempt the firms from federal taxes. c. permit the firms to choose whether to follow the federal rules. d. offer a hybrid tax regime. 58. Accounting LLC is a member-managed limited liability company. Unless the members have agreed otherwise, all decisions with respect to the firm’s business are made by a. majority vote. b. the firm’s board. c. the senior members. d. the firm’s chief executive officer. 59. Among the states, the law governing limited liability companies is far from uniform because a. there is no Uniform Limited Liability Company Act. b. a limited liability company is a hybrid form of business organization. c. state limited liability company statutes vary from state to state. d. the federal government has not enforced the law uniformly. 60. A business organizational form that limits its owners’ liability allows the firm to lawfully a. act recklessly. b. engage in misconduct. c. take risks. d. all of the choices. 61. Greenway Corporation and Happy Trails Inc. combine their efforts to build a network of biking and hiking trails along an unused railroad spur. Their form of business organization is a. a business trust. b. a joint stock company. c. a joint venture. d. a syndicate.

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Chap 38_15e 62. Overseas Shipping Corporation and Port Storage Company transfer their assets to Quality Operations, Inc., which manages the assets and distributes the profits to the beneficiaries. This form of business organization is a. a business trust. b. a joint stock company. c. a joint venture. d. a syndicate. 63. Grape Vineyards LLC, the members of which include Howie and Ilya, can hold title to property because as a limited liability company the firm is a. the sum of its members. b. a non-entity c. a legal person. d. a holding company. 64. Data Analytics LLC is a limited liability company. Unless the firm’s articles of organization specify otherwise, it will most likely be assumed that the firm is a. member-managed. b. manager-managed. c. an aggregate of member and non-member managers. d. run by an outside professional management group. 65. In most situations, with respect to a limited liability company’s debts, the firm’s members are shielded from a. all personal liability. b. no personal liability. c. the loss of their capital investment in the firm. d. liability for conduct that leads to a piercing of the “corporate veil.” 66. Trans-Pacific Company and USA Export, Inc., form a business organization to engage in importing and exporting. Its assets are held in the names of the members and its shareholders have personal liability. This organization is a. a business trust. b. a joint stock company. c. a joint venture. d. a syndicate. 67. Bayside Restaurant LLC is a limited liability company. Its sole member is Conrad. For federal income tax purposes, unless the firm indicates otherwise, it will automatically be taxed as a. a person. b. a corporation. c. a sole proprietorship. d. a partnership.

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Chap 38_15e 68. Oil Inc. and Petro Corporation form a joint venture to design and test petroleum storage facilities and equipment. When a dispute arises, Oil files a suit against Petro. The court is most likely to apply the same principles to this joint venture as it applies to a. sole proprietorships. b. limited liability companies. c. corporations. d. partnerships. 69. Ensure Care LLC’s owners are Fez and Guan. As a limited liability company, Ensure Care enters into contracts a. as an aggregate of its owners. b. only through its owners c. as a legal entity apart from its owners. d. only in conjunction with its owners. 70. Start-Up LLC is a limited liability company without a written operating agreement. Among the members, a dispute arises concerning the division of profits. Under most LLC statutes, the profits will be a. distributed according to members’ proportionate ownership in the firm. b. divided equally among the members. c. forfeited to the state. d. reinvested in the business until the dispute is resolved. 71. Commerce & Trade Corporation and Distance Shipping & Transport, Inc., form a business trust. eCharge Auto Company and Fleet Electric Corporation form a joint stock company. Green AgriCorp and Harvest Farms, Inc., form an incorporated cooperative. What features do these combinations of business organization have in common?

72. Business Media, a partnership, publishes periodicals, including Cycle Review. DangerZoners, also a partnership, publishes Extreme Sports. Business Media and DangerZoners agree to pool their resources in a one-time deal to print and market a book, Future Runs. In contracting with Geo Cache, Inc., for supplies to print the book, Business Media commits fraud. In contracting with Host Articles Agency for materials to use in Extreme Sports, DangerZoners commits fraud. Geo Cache and Host Articles file suits against Business Media and DangerZoners. What type of business organization has Business Media and DangerZoners formed? To whom, if anyone, is Business Media liable? To whom, if anyone, is DangerZoners liable?

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Chap 38_15e Answer Key 1. False 2. False 3. True 4. True 5. False 6. False 7. False 8. True 9. False 10. True 11. False 12. False 13. True 14. True 15. True 16. False 17. True 18. True 19. True 20. True 21. False 22. False 23. False 24. False 25. False 26. True

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Chap 38_15e 27. False 28. False 29. False 30. True 31. True 32. True 33. True 34. False 35. True 36. c 37. b 38. b 39. c 40. b 41. d 42. b 43. a 44. d 45. c 46. b 47. b 48. a 49. b 50. a 51. a 52. d 53. b 54. a Copyright Cengage Learning. Powered by Cognero.

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Chap 38_15e 55. b 56. c 57. a 58. a 59. c 60. c 61. c 62. a 63. c 64. a 65. c 66. b 67. c 68. d 69. c 70. b 71. There are differences among these forms of business organizations, but all of them resemble corporations. For example, the joint stock company features ownership by shares of stock, management by directors and officers, and perpetual existence. Similar to a corporation, a business trust distributes profits to persons who are not personally responsible for the debts of the firm, and the management of the business is accomplished by trustees (a corporation is managed by its directors and officers). An incorporated cooperative, which is subject to state laws covering nonprofit corporations, distributes profits to its owners.

72. Business Media and DangerZoners formed a joint venture. Business Media is liable to Geo Cache, but not to Host Articles. DangerZoners is liable to Geo Cache and Host Articles. A joint venture is an association of two or more business entities that combine their efforts or property for a single transaction or a series of related transactions or projects. This is what Business Media and DangerZoners did: they combined efforts to undertake a single project, the publishing of the book Future Runs. Each joint venturer is liable to a third party for the actions of the other members of the joint venture in pursuit of the enterprise’s common goal. Each member is not liable to a third party for the actions of other members pursuing their own separate interests. In this question, Business Media and DangerZoners are each liable for Business Media’s fraud to Geo Cache, because it was committed in pursuit of their common enterprise. Only DangerZoners is liable for DangerZoners’s fraud to Host Articles, however, because the fraud was committed in pursuit of DangerZoners’s interest only.

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Chap 39_15e Indicate whether the statement is true or false. 1. A de jure corporation is one that is formed to accomplish a single purpose within a limited time. a. True b. False 2. To pierce the corporate veil is to disregard the corporate entity and hold the directors liable for a corporate obligation. a. True b. False 3. If the procedures for incorporation are not followed precisely, others may be able to challenge the existence of the corporation. a. True b. False 4. The primary document needed to incorporate a business is the articles of incorporation—the primary source of authority for the firm’s organization and functions. a. True b. False 5. In many states, close corporations have more flexibility in determining their rules of operation. a. True b. False 6. A key advantage of the corporate form is the unlimited liability of its owners. a. True b. False 7. When a shareholder commingles personal and corporate interests so that the firm has no separate identity, the shareholder may be held liable for the firm’s debts. a. True b. False 8. Because state corporate laws differ, persons wishing to incorporate may look for the state that offers the most advantageous tax or other provisions. a. True b. False 9. A corporation is not liable for the misconduct of its agents or officers. a. True b. False

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Chap 39_15e 10. A shareholder in a professional corporation generally cannot be held liable for malpractice by other professionals at the firm. a. True b. False 11. Corporate resolutions of the corporation’s board of directors provide guidelines but cannot grant or restrict corporate powers. a. True b. False 12. If a business says it is a corporation, and a third party deals with it as a corporation, neither party can question the validity of the business’s status. a. True b. False 13. Issuing securities is the only way for a new corporation to raise capital. a. True b. False 14. Because corporate officers have the implied power to bind the firm in matters directly connected to its business, there is no limit to what the officer can do. a. True b. False 15. Shareholders’ assumption of personal liability, as guarantors, for the obligations of a corporation can enable the firm to obtain credit. a. True b. False 16. A corporation is recognized under U.S. law as a person. a. True b. False 17. A close corporation need not meet all of the specific requirements set forth in state statutes for corporations because it is essentially a sole proprietorship. a. True b. False 18. Common stockholders and preferred stockholders benefit when the market price of the stock increases. a. True b. False 19. A businessperson who enters into a contract with an investor on behalf of a future corporation is not personally liable on the deal, even though the firm is not yet formed, because the nature of investment is risk. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 39_15e 20. To pierce the corporate veil means to reveal the identity of its true owner. a. True b. False 21. A corporation needs to be careful about whom it hires because a firm may be liable for the misconduct of its employees. a. True b. False 22. A foreign corporation that has not obtained a certificate of authority to do business in a state can nevertheless maintain an action in the state’s courts. a. True b. False 23. Because bonds do not represent debt, they need never be repaid. a. True b. False 24. A court will pierce the corporate veil of a corporation when the corporate privilege is abused for personal benefit. a. True b. False 25. A business firm whose shares are held by a single person may be a sole proprietorship, but it cannot a corporation. a. True b. False 26. Because a close corporation is one whose shares are held by a relatively small group of persons, the firm often operates like a partnership. a. True b. False 27. A benefit corporation is designed to make a profit and thereby provide long-term shareholder benefit. a. True b. False 28. Individual state laws should be relied on to determine corporate law because, despite the existence and use of model corporation acts, there is considerable variation among the states. a. True b. False 29. Like the partners in a partnership, the shareholders in a corporation cannot change without affecting the continued existence of the firm. a. True b. False

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Chap 39_15e 30. The implied powers of a corporation can be found in the state and federal constitutions. a. True b. False 31. The primary document needed to incorporate a business is the bylaws—the primary source of guidelines for the firm’s management and operation. a. True b. False 32. Stocks, or equity securities, represent the purchase of ownership in the business firm. a. True b. False 33. A corporation whose shares are held by relatively few persons is a close corporation. a. True b. False 34. A corporation is intangible and invisible, and exists only in the contemplation of the law. a. True b. False 35. The directors of a benefit corporation must, during the decision-making process, consider the impact of a decision on society and the environment. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. Instead of issuing securities, Artificial Intelligence Inc. pursues other sources of funds. To obtain venture capital financing, the firm will most likely a. borrow funds to be returned on a designated maturity date. b. give up a share of its ownership. c. pool funds to invest in a business venture. d. pay periodic dividends. 37. A corporation’s authority to act and its liability for those actions is, with respect to the firm’s owners, a. proportional. b. one and the same. c. joint and several. d. separate and apart.

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Chap 39_15e 38. Because it may result in a piercing of the corporate veil, shareholders’ continuous use of corporate property should most especially be avoided by a. a benefit corporation. b. a publicly held corporation. c. no corporation—corporate shareholders’ liability is limited. d. a close corporation. 39. Nile is a holder of preferred stock in Oasis Hotels Inc. Nile a. has no ownership interest in the corporation. b. has priority over holders of common stock as to payment of dividends. c. follows common stockholders as to payment on the firm’s termination. d. has a proportionate interest in the corporation with regard to control. 40. Corporate bonds a. represent the true ownership of a corporation. b. have priority over holders of common stock as to payment of dividends. c. require a corporation to remain profitable until maturity. d. provide a proportionate interest in a corporation with regard to control. 41. An S corporation avoids taxes at a. none of the choices. b. the market level. c. the corporate level. d. the shareholder level. 42. A corporation is a. a natural being. b. a tangible thing. c. an artificial legal person. d. a non-entity. 43. The first step in the incorporation of a business firm is to a. identify the appropriate market and adopt a business plan. b. select the state of incorporation. c. secure promises of financial support from potential investors. d. hold the first organizational meeting. 44. Metro Moving Service holds itself out to customers as being a corporation but makes no attempt to incorporate. In this circumstance, the outfit is most likely a. a corporation by estoppel. b. a de facto corporation. c. a de jure corporation. d. ultra vires. Copyright Cengage Learning. Powered by Cognero.

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Chap 39_15e 45. Cattle Ranch Inc. is a for-profit corporation that is owned by six shareholders who are members of the same family. Cattle Ranch is a. an S corporation. b. a close corporation. c. a benefit corporation. d. a public corporation and a private corporation. 46. Apt Adapt Inc. is formed to coordinate the design and delivery of projects and products to help communities cope with the effects of climate change. The stated purpose is to have a material positive impact on society and the environment, and to make a profit. Apt Adapt is a. a nonprofit corporation. b. not a corporation. c. a benefit corporation. d. a public corporation. 47. Welding Corporation makes a good faith attempt to incorporate but there is a defect in its incorporation. Welding undertakes business as a corporation. In this circumstance, the firm’s existence may be challenged by a. any third party. b. the state. c. a director, officer, or shareholder. d. any corporation with which it does business. 48. Precision Pipe Inc.’s stated purpose is to install plumbing. Precision Pipe contracts with Quality Contracting to pour a new building’s foundation despite lacking the skill and license to do such work. This is most likely a. an ultra vires act. b. within the corporation’s express powers. c. within the corporation’s implied powers. d. allowable and proper as an act to profit corporate shareholders. 49. Corporate shareholders will most likely be held personally liable for the firm’s debts if they a. insist on separating their personal interests from those of the firm. b. refuse to transfer their shares to dilute control of the firm. c. encourage the firm to unsuccessfully enter a new market. d. use the firm to perpetrate a fraud. 50. Under the doctrine of respondeat superior, a corporation can be held liable for a. acts perpetrated by its market competitors. b. breaches of contract by its customers and suppliers. c. torts committed by its agents or officers. d. none of the choices.

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Chap 39_15e 51. Funds invested in an existing corporation to buy and reorganize it, and possibly sell shares in the reorganized company in an initial public offering, are known as a. preferred shares of corporate stock. b. private equity capital. c. crowdfunds. d. corporate bonds. 52. Any corporation whose shares are publicly traded in securities markets is a. a benefit corporation. b. a private corporation. c. a public corporation. d. a publicly held corporation. 53. The day-to-day operations of a corporation are overseen by a. the directors. b. the officers. c. the owners. d. the shareholders. 54. Most likely to appear in the articles of incorporation are the names of the company’s initial a. officers and employees. b. shareholders and creditors. c. market and competitors. d. registered office and agent. 55. Market Data Corporation’s articles list an incorrect address for its incorporator. Under this circumstance, Market Data is most likely a. a corporation by estoppel. b. a de facto corporation. c. a de jure corporation. d. ultra vires. 56. All of a certain corporation’s small number of shareholders agree that the firm can operate without directors, bylaws, shareholder meetings, stock certificates, and formal records of shareholders’ decisions. This firm is most likely a. a close corporation. b. a corporation by estoppel. c. a de facto corporation. d. a de jure corporation.

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Chap 39_15e 57. To avoid sharing control with someone they do not know or like, it would be most effective for the shareholders of a close corporation to a. require more than a majority of directors approve any board action. b. restrict the transferability of shares to outside persons. c. reorganize into a sole proprietorship or partnership. d. hold special shareholders’ or directors’ meetings on an annual basis. 58. Robotics Inc. is a corporation. Its express powers can be found in a. all of the choices. b. its articles of incorporation. c. the law of the state of incorporation. d. the state and federal constitutions. 59. Eton owns Fast Freight Company. He uses the firm’s funds to pay his personal expenses, creates Go Trucking Inc. to engage in the same business, transfers Fast Freight’s assets to Go Trucking, and petitions Fast Freight into bankruptcy. This most likely warrants a. a bonus to Eton for effectively eliminating the firm’s debts. b. a discharge for Fast Freight in bankruptcy. c. a pierce of the corporate veil. d. the application of the doctrine of corporation by estoppel to Go Trucking. 60. Rex forms Shell Company to assume debts that he does not wish to pay. The firm is not intended to make a profit, and Rex does not provide it with sufficient capital. This most likely warrants a. tricking Rex into disclosing Shell’s true purpose to Rex’s creditors. b. recognizing Shell as a de facto corporation. c. piercing Shell’s corporate veil. d. requiring Rex to commingle his personal funds and Shell’s funds. 61. Local Oil Inc. is a private, for-profit corporation that is owned by five shareholders who are members of the same family. Mace, the majority shareholder, misappropriates company funds. The shareholders whose interests are injured by Mace’s misconduct should a. have their shares appraised and be paid the fair market value for them. b. promote the transferability of the company’s shares to outside persons. c. reorganize the firm into a sole proprietorship or partnership. d. hold a special shareholders’ meeting to elect new directors. 62. To help small businesses raise capital, the Securities and Exchange Commission allows the companies to advertise investment opportunities to the public. This most likely encourages a. venture capitalizing. b. crowdfunding. c. piercing the corporate veil. d. private equity capitalizing.

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Chap 39_15e 63. To prevent a majority shareholder from dominating the management and operation of a close corporation, the firm should a. require more than a majority of directors approve any board action. b. restrict the transferability of shares to outside persons. c. reorganize into a sole proprietorship or partnership. d. hold special shareholders’ or directors’ meetings on an annual basis. 64. Medical and investment professionals network and pool funds to invest in Medical Online Consult Inc. This is a. venture capitalizing. b. crowdfunding. c. piercing the corporate veil. d. ultra vires. 65. To bring a corporation into existence requires securing a corporate name that is a. the same or deceptively similar to the name of an existing corporation. b. selected by the state of incorporation, for convenience and cost. c. promises to attract financial support from investors. d. available as a domain name, subject to state approval. 66. Sweetwater Corporation is incorporated in Texas. Outside that state, within the United States, the firm is a. a domestic corporation. b. a foreign corporation. c. an alien corporation. d. a corporation by estoppel. 67. Masonry Inc.’s stated purpose is to perform the stonework on buildings and other structures. Masonry contracts with New Contracting to pour the pilings for a bridge’s foundation despite lacking the skill and license to do the work. This is most likely a. an ultra vires act. b. within the corporation’s express powers. c. within the corporation’s implied powers. d. allowable and proper as an act to profit corporate shareholders. 68. Limited liability business forms, such as LLCs, LPs, and LLPs, offer tax advantages that are similar to those offered by a. an S corporation. b. a benefit corporation. c. a close corporation. d. any corporation.

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Chap 39_15e 69. With the exception of malpractice, liability for torts committed by others in a firm cannot be imposed on the shareholders of a. a professional corporation. b. a benefit corporation. c. a close corporation. d. any corporation. 70. The primary document needed to incorporate a business is a. the website of the secretary of state of the state of incorporation. b. the minutes of the first organizational meeting. c. the articles of incorporation. d. the bylaws. 71. PrimarySource.com Corporation is a new online educational-resource business. How can PrimarySource.com obtain capital to finance its operations?

72. Agents and employees of Deco Arts Corporation and Echo Imitations Inc. are convicted of conspiring to violate a federal law that is punishable by a term of imprisonment and a fine. Can the corporations be held liable for these crimes? If so, how can they be punished?

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Chap 39_15e Answer Key 1. False 2. False 3. True 4. True 5. True 6. False 7. True 8. True 9. False 10. False 11. False 12. True 13. False 14. False 15. True 16. True 17. False 18. True 19. False 20. False 21. True 22. False 23. False 24. True 25. False 26. True

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Chap 39_15e 27. False 28. True 29. False 30. False 31. False 32. True 33. True 34. True 35. True 36. b 37. d 38. d 39. b 40. b 41. c 42. c 43. b 44. a 45. b 46. c 47. b 48. a 49. d 50. c 51. b 52. d 53. b 54. d Copyright Cengage Learning. Powered by Cognero.

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Chap 39_15e 55. c 56. a 57. b 58. a 59. c 60. c 61. a 62. b 63. a 64. b 65. d 66. b 67. a 68. a 69. a 70. c 71. Generally, to obtain capital, a corporation issues securities, principally stocks and bonds. A security usually represents either an ownership interest in a firm (stock) or a debt owed by the firm (bond). Some debt is also in the form of accounts payable and notes payable, which can, like bonds, be marketed to obtain capital. The two major types of stock are common stock and preferred stock. Other possibilities include venture capital financing and private equity capital. Venture capital is provided by professional, outside investors, who often also offer managerial and technical expertise. In return for their capital and advice, these investors expect to be given some control over the financed firm’s decisions. Private equity capital can come from a pool of investors who combine their funds. These investors often expect to buy an entire corporation, however, and reorganize it, selling off parts of the firm to pay debts. PrimarySource.com, or any business firm, can also obtain capital by borrowing against or selling some of its assets. 72. Yes, the corporations can be held liable for the crimes of their agents and employees. As for punishment, the corporations cannot be imprisoned, but they can be fined. Under certain circumstances, corporate directors and officers may also be imprisoned for the criminal acts of agents and employees under their direct supervision. And any culpable party can be fined as much as hundreds of millions of dollars.

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Chap 40_15e Indicate whether the statement is true or false. 1. When directors vote on issues affecting the corporation, ordinary matters generally require a greater-thanmajority vote. a. True b. False 2. Because of officers’ positions within the corporation, they can be held liable for negligence if their failure to exercise due care results in harm to the firm. a. True b. False 3. Directors, but not officers, are fiduciaries of the corporation. a. True b. False 4. When it comes to managing a corporation, the corporation relies on its board of directors and officers. a. True b. False 5. Shareholders, not directors, make major corporate policy decisions. a. True b. False 6. The board of directors hires the corporation’s officers, and normally can remove them at anytime with or without cause. a. True b. False 7. How many directors serve on a corporation’s board can be set forth in the corporation’s bylaws. a. True b. False 8. A shareholder’s right to transfer his or her shares to another party can be subject to restrictions set out in the bylaws or a shareholder agreement. a. True b. False 9. The board of directors conducts business by holding formal meetings with recorded minutes. a. True b. False 10. If a board attempts to manipulate the shareholders’ election of a director to reduce the shareholders’ influence, the shareholders can challenge the election in court. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 40_15e 11. The primary function of a corporation’s officers is to authorize major corporate policy decisions. a. True b. False 12. The initial board of directors of a corporation is normally appointed by the incorporators when the corporation is created. a. True b. False 13. Because of their positions within the corporation, directors can use confidential corporate information for personal advantage. a. True b. False 14. Quorum requirements vary among jurisdictions. a. True b. False 15. A corporate officer is liable to the corporation or its shareholders for a bad business decision. a. True b. False 16. A corporate director is not liable to the corporation or its shareholders for an honest mistake of judgment. a. True b. False 17. To make informed decisions and supervise corporate officers and employees, the directors need an unrestricted right to inspect corporate books and records. a. True b. False 18. Because of their positions within the corporation, directors must make full disclosure of any conflicts of interest with respect to corporate contracts. a. True b. False 19. When directors do not act in the best interests of their corporations, the shareholders may sue them on the company’s behalf. a. True b. False 20. To focus on individual subjects and increase efficiency, a corporate board can delegate certain tasks to committees of directors. a. True b. False

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Chap 40_15e 21. To participate in a shareholders’ meeting, a shareholder must present a proxy. a. True b. False 22. Directors are not answerable to the corporation for breaching their duty of care. a. True b. False 23. Directors have a right to be notified of all board meetings. a. True b. False 24. If a director commits a breach of fiduciary duty, the shareholders have the inherent power to remove the director from office by a majority vote. a. True b. False 25. Under the business judgment rule, directors cannot be held liable for the negligence or mismanagement of corporate personnel. a. True b. False 26. A director who becomes involved in litigation because of his or her position has no right to be indemnified for the costs. a. True b. False 27. In most states, an individual can hold only one corporate office. a. True b. False 28. A director’s right to access the corporation’s books can be restricted by the corporate articles. a. True b. False 29. Corporate officers do not act as agents of the corporation. a. True b. False 30. Because of their positions within the corporation, directors cannot be held personally liable for violations of statutes enacted to protect the environment. a. True b. False

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Chap 40_15e 31. Corporate officers have responsibility for all policymaking decisions necessary to the management of corporate affairs. a. True b. False 32. Because of their positions within the corporation, directors cannot be held liable for the crimes of corporate employees. a. True b. False 33. If a shareholder’s derivative suit is successful, any damages recovered normally go into the corporation’s treasury. a. True b. False 34. Every corporation is governed by a committee of managerial employees. a. True b. False 35. A breach of fiduciary duties by those who own a close corporation normally constitutes oppressive conduct. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. The number of directors that serve on a corporate board is determined by its a. articles of incorporation. b. bylaws. c. board of directors. d. quorum. 37. The executive committee of a publicly held corporation handles a. the selection, compensation, and oversight of accountants who audit the firm’s financial records. b. interim business decisions between board meetings. c. dividends, amendments to the bylaws, and the issuance of stock. d. none of the choices. 38. The audit committee of a publicly held corporation is responsible for a. the selection, compensation, and oversight of accountants who audit the firm’s financial records. b. interim business decisions between board meetings. c. dividends, amendments to the bylaws, and the issuance of stock. d. none of the choices.

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Chap 40_15e 39. Guy is a director of Healthcare Corporation. Guy attempts to use his best judgment in guiding corporate management but makes a few honest mistakes. He may be protected from liability for these mistakes by a. business success insurance. b. the business judgment rule. c. the duty of loyalty. d. none of the choices. 40. Kay and Leo form Metro Delivery Inc. Responsibility for all policymaking decisions related to corporate affairs lies with Metro’s a. board of directors. b. high-level managers. c. chief executive officer. d. shareholders. 41. Deb is a director and Erv is an officer of Fast Food Inc. Liability for the firm’s intentional disregard of consumerprotection statutes may extend to a. Deb only. b. Erv only. c. Deb and Erv d. none of the choices. 42. The rights of the director of a corporation include a right to a. access the corporation’s books, records, facilities, and other property. b. subordinate the corporation’s welfare to his personal interest. c. use confidential corporate information for personal advantage. d. self-deal by taking advantage of an opportunity offered to the firm. 43. Most states provide that the minimum number of directors that must be present before the board may transact business is a. all of the directors authorized in the articles or bylaws. b. a majority of the number authorized in the articles or bylaws. c. any odd number. d. one. 44. Liability for negligence in the performance of corporate duties may extend to a. directors only. b. officers only. c. directors and officers. d. none of the choices.

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Chap 40_15e 45. Randy is a director of STEM Inc. As a director, with respect to the corporation, Randy is expected to use a. prudent business judgment. b. perfect business judgment. c. prolonged business judgment. d. pluperfect business judgment. 46. Risk Insurance Inc. has a board of five directors. Risk’s bylaws do not state any quorum requirements. As in most states, a quorum for Risk’s board meetings is a. one director. b. three directors. c. four directors. d. all of the directors. 47. Kathy is a director of Line Production Inc. As a director, with respect to the corporation, Kathy is expected to subordinate a. her personal interests to the corporation’s welfare. b. the corporation’s welfare to her personal interests. c. her knowledge and training in the corporation’s interest. d. her business judgment in the shareholders’ interests. 48. A corporate director may not a. act in accord with his or her own knowledge and training. b. use prudent business judgment in the conduct of corporate affairs. c. delegate work to corporate officers. d. engage in self-dealing. 49. To avoid potential liability for misconduct in corporate operations, directors can refrain from reasonable supervision of work delegated to a. corporate officers. b. corporate employees. c. board committees. d. none of the choices. 50. With respect to a corporation, an officer’s rights are defined by a. employment contracts. b. state statutes. c. court review. d. shareholder votes.

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Chap 40_15e 51. Dhani, Ezra, and Finn are the first directors on the board of Global Shipping Corporation. Subsequent directors will be elected by a majority vote of Global’s a. incorporators. b. board. c. officers. d. shareholders. 52. Holly is an officer of Indelible Inc. The board removes Holly in violation of an employment contract. Indelible may be liable for breach of a. contract. b. the business judgment rule. c. the duty of loyalty. d. none of the choices. 53. Molly is a director and Ned is an officer of Online Education Inc. Liability for the torts of employees under their supervision may extend to a. Molly only. b. Ned only. c. Molly and Ned. d. none of the choices. 54. Erin, a shareholder of Finance Inc., demands the right to inspect corporate records to determine whether management has engaged in self-dealing that impacts the company. The firm refuses the request. On Erin’s challenge, a court is most likely to hold that her request constitutes a. harassment. b. unreasonable access to trade secrets and other confidential information. c. a proper purpose. d. potential abuse. 55. Sara and Tim form Urban Foods Inc. When it comes to managing Urban, the firm relies on a. the board of directors. b. the business judgment rule. c. the officers. d. the chief executive officer. 56. Carmen and Diego are shareholders of Espresso Inc. Carmen’s written authorization to Diego to vote her shares at a shareholders’ meeting is a. a corporate resolution. b. a cumulative vote. c. a proxy. d. a quorum requirement.

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Chap 40_15e 57. Roy is a director of Sales Inc. Sales enters into a contract with TeleCenter Corporation in which Roy has a personal interest. Roy must a. apply the “don’t ask, don’t tell” rule of personal conduct. b. use the situation to his personal advantage. c. make a full disclosure of the conflict of interest. d. none of the choices. 58. Drones Inc. has three directors, a president, two vice presidents, a secretary, and a treasurer. Ethel is a Drone director. In most states, Ethel can also hold a Drone corporate office a. under no circumstances. b. under any circumstances. c. if she resigns as director. d. if the shareholders consent. 59. As a director of InstaTalk Inc., Jin has a right of inspection. This right can be restricted by a. the corporate articles. b. the bylaws. c. an act of the board. d. none of the choices. 60. Bhat is elected as a director to the board of Crispy Treats Inc. He will most likely serve for a term of one a. decade. b. four-year period. c. lifetime. d. year. 61. When a vacancy occurs on a corporate board, how the position will be filled is most likely set forth in a. the corporation’s articles or bylaws. b. shareholder proxies. c. the business judgment rule. d. the board’s recorded minutes. 62. When directors vote on issues affecting the corporation, ordinary matters generally require a. a greater-than-majority vote. b. a majority vote. c. one vote. d. a unanimous vote. 63. A corporate officer a. authorizes major corporate policy decisions. b. manages day-to-day operations of the corporation. c. all of the choices. d. makes and announces corporate financial decisions. Copyright Cengage Learning. Powered by Cognero.

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Chap 40_15e 64. Belle is a director on the board of Construction Corporation. The board delegates certain tasks to Dido, the corporate president, and other officers. Belle fails to reasonably supervise the work. She is most likely liable for a. negligence or mismanagement. b. breach of the business judgment rule. c. breach of the duty of loyalty. d. none of the choices. 65. With respect to a corporation, a director is a. a fiduciary. b. an actuary. c. a notary. d. all of the choices. 66. Han is a shareholder of Insulation Inc. When the directors fail to undertake an action to redress a wrong suffered by the firm, Han files a suit on its behalf. Any damages recovered by the suit will go to the firm’s a. shareholders, excluding Han. b. treasury. c. directors. d. shareholders, including Han. 67. Gil is an officer for HVAC Corporation. Due to a bad choice of supplier on Gil’s part, HVAC’s costs increase. Gil is most likely liable for breach of a. breach of trust and confidence. b. breach of the business judgment rule. c. negligence or mismanagement. d. none of the choices. 68. Daisy is a director of Excavation Corporation. She opposes an offer to merge Excavation with Fill Inc. because she would lose her board position. Daisy is most likely liable for breach of a. the duty of care. b. the business judgment rule. c. the duty of loyalty. d. none of the choices. 69. Betsy is a director of ChemCo Inc. Because of this position, she becomes involved in litigation. With respect to the costs, fees, and damages involved, she has a right to a. access the corporation’s books, records, facilities, and other property. b. be reimbursed, or indemnified. c. use confidential corporate information for personal advantage. d. subordinate the corporation’s welfare to the director’s personal interest.

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Chap 40_15e 70. Initiating and negotiating the sale and lease of corporate assets outside the regular course of business is a responsibility of the corporation’s a. board of directors. b. high-level managers. c. chief executive officer. d. shareholders. 71. Gaye is Hot Java Company’s majority shareholder. Gaye decides to sell her Hot Java stock. The sale will be an effective transfer of the control of the company. Does Gaye owe a duty to Hot Java or its minority shareholders in this situation?

72. AstroStar Inc.’s board of directors consists of three members—Eckhart, Dolan, and Macero. At a regular board meeting, the board selects Galiard as president of the corporation. Later, an audit reveals that during his term as president he has openly embezzled $500,000 from AstroStar. The same audit reveals that the board knew when it selected Galiard that he had been previously convicted of embezzlement. Can the corporation hold directors Eckhart, Dolan, and Macero personally liable?

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Chap 40_15e Answer Key 1. False 2. True 3. False 4. True 5. False 6. True 7. True 8. True 9. True 10. True 11. False 12. True 13. False 14. True 15. False 16. True 17. True 18. True 19. True 20. True 21. False 22. False 23. True 24. True 25. False 26. False

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Chap 40_15e 27. False 28. False 29. False 30. False 31. False 32. False 33. True 34. False 35. True 36. a 37. a 38. a 39. b 40. a 41. c 42. a 43. b 44. c 45. a 46. b 47. a 48. d 49. d 50. a 51. d 52. a 53. c 54. c Copyright Cengage Learning. Powered by Cognero.

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Chap 40_15e 55. a 56. c 57. c 58. b 59. d 60. d 61. a 62. b 63. b 64. a 65. a 66. b 67. d 68. c 69. b 70. a 71. Yes. A single shareholder—or a few shareholders acting together—who owns enough stock to exercise de facto control over a corporation owes the corporation and its minority shareholders a fiduciary duty when transferring those shares. A breach of this fiduciary duty by those who control a closely held corporation can constitute what is known as oppressive conduct. A breach of this duty may also occur if a majority shareholder attempts to exclude minority shareholders from receiving certain benefits from participating in the firm. Thus, for example, refusing to perform a valuation of the company, or denying the minority shareholders access to corporate information to which they would otherwise be entitled, would constitute a violation of this duty. 72. Directors are personally answerable to the corporation for breach of their duty to exercise reasonable care in conducting the affairs of the corporation. Reasonable care is defined as being the degree of care that a reasonably prudent person would use in the conduct of personal business affairs. When directors delegate the running of the corporate affairs to officers, the directors are expected to use reasonable care in the selection and supervision of such officers. Failure to do so will make the directors liable for negligence or mismanagement. The questions in the case of AstroStar, Inc., are whether the directors failed to use reasonable care in the selection of the president and whether they failed to provide a reasonable amount of supervision during his term. Analyze of the selected officer’s previous conviction for embezzlement and that officer’s open embezzlement of corporate funds indicates failure on both issues. Thus the directors can be held personally liable.

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Chap 41_15e Indicate whether the statement is true or false. 1. When dissolution takes place by voluntary action, the members of the board of directors act as trustees of the corporate assets. a. True b. False 2. All states have statutes authorizing consolidations. a. True b. False 3. A merger will not affect the rights and liabilities of the corporations involved. a. True b. False 4. The shareholder’s appraisal right does not normally apply to sales of substantially all of the corporate assets. a. True b. False 5. A court cannot dissolve a corporation for failure to commence business operations. a. True b. False 6. Appraisal rights do not normally apply to short-form mergers. a. True b. False 7. Dissolution of a corporation can be brought about by an agreement between the shareholders and the board of directors. a. True b. False 8. The business judgment rule may apply to determine whether directors acted reasonably in resisting a takeover attempt. a. True b. False 9. Only one of the boards of directors of the corporations involved must approve a merger. a. True b. False 10. No state allows the combination of domestic and foreign corporations. a. True b. False

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Chap 41_15e 11. Generally, a corporation that acquires any assets of another corporation needs to obtain shareholder approval for the purchase. a. True b. False 12. Merger and consolidation refer to two legally distinct proceedings, but consolidation is also used to refer to all types of corporate combinations. a. True b. False 13. Before a vote is taken on a proposed combination, the shareholders must be given sufficient information to evaluate the deal. a. True b. False 14. A share exchange can be used to create a holding company. a. True b. False 15. Shareholders are not required to vote to approve a plan of merger. a. True b. False 16. During the liquidation process, corporate assets are converted into cash. a. True b. False 17. To resist a takeover, a target company may make a self-tender. a. True b. False 18. An appraisal right is available only when a federal statute specifically provides for it. a. True b. False 19. Generally, a corporation that is selling all of its assets must obtain the approval of the shareholders. a. True b. False 20. On a consolidation, a new corporation acquires all of the assets and liabilities of the corporations that were consolidated. a. True b. False

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Chap 41_15e 21. Corporate creditors are required to approve a plan of consolidation. a. True b. False 22. A shareholder may not petition a court for corporate dissolution. a. True b. False 23. When a corporation is dissolved voluntarily, its assets can be liquidated without notice to its creditors. a. True b. False 24. Appraisal rights cannot be lost even if the statutory procedures are not followed precisely. a. True b. False 25. A short-form merger can be accomplished only with the approval of the shareholders. a. True b. False 26. In a merger, the surviving corporation assumes all of the assets and liabilities of the disappearing corporation. a. True b. False 27. A court can dissolve a corporation for abuse of corporate powers. a. True b. False 28. All forms of business organizations limit the liability of their owners. a. True b. False 29. In a consolidation, two or more corporations combine in such a way that only one of the corporations continues to exist. a. True b. False 30. All states have statutes authorizing share exchanges for domestic corporations. a. True b. False 31. One corporation that owns all of the shares of another corporation is a subsidiary corporation. a. True b. False

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Chap 41_15e 32. Through a tender offer, an acquiring corporation deals directly with a target company’s management in seeking to purchase the target’s stock. a. True b. False 33. A takeover is the acquisition of control over a corporation through a purchase of substantially all of its assets. a. True b. False 34. A short-form merger is the acquisition of control over a corporation through a purchase of stock. a. True b. False 35. Dissolution of a corporation can be brought about by the shareholders’ majority vote to initiate dissolution proceedings. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. Lender Inc. owns all of the shares of Mortgage Company. Lender Inc. is a. a holding company. b. a parent corporation. c. a subsidiary corporation. d. all of the choices. 37. Lunch Truck Inc. owns more than 90 percent of the shares of Meal Prep Company. A plan for a merger of Lunch Truck and Meal Prep must be approved by the shareholders of a. both corporations. b. Lunch Truck only. c. Meal Prep only. d. neither corporation. 38. Quantum Company exchanges some of its shares for some of the shares of Rocket Corporation. The exchange is used to create Space Inc., whose business activity is to hold the shares of the two companies. Space Inc. is a. a holding company. b. a parent corporation. c. a subsidiary corporation. d. a foreign corporation. 39. The sale and distribution of the assets of a business on its termination is a. a takeover. b. dissolution. c. a breach of fiduciary duty. d. liquidation. Copyright Cengage Learning. Powered by Cognero.

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Chap 41_15e 40. Repair Inc. issues a plan to combine operations with Service Company. A shareholder who disapproves of the deal may be entitled to an appraisal right if the combination is a. a merger or a short-from merger. b. none of the choices. c. a purchase of substantially all of the assets of either corporation. d. a dissolution or winding up of either corporation. 41. Mergers, consolidations, and share exchanges are authorized by a. all states. b. most states. c. no states. d. the federal government. 42. Garden Company and Home Corporation make a plan to consolidate. Once approved, the plan will be filed with a. a holding company. b. a parent corporation. c. the appropriate state’s secretary of state. d. the U.S. Department of Commerce. 43. Dissolution of a corporation can be brought about by a. any of the choices. b. competitors. c. customers, suppliers, and other corporate stakeholders. d. a court order. 44. Doris wants to form a new firm—eBeats—to market a new app. Fees are required to form all of the following business organizations except a. a sole proprietorship. b. a corporation. c. a limited partnership. d. a limited liability company. 45. Business Inc. acquires all of the assets of Commerce Corporation by direct purchase. Dot is a Commerce shareholder who does not approve of the deal. In most states, Dot can a. reverse the deal so Commerce acquires all of the assets of Business. b. insist that the companies carry out their corporate purposes. c. demand appraisal rights. d. require the parties to cancel the deal.

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Chap 41_15e 46. Rice Inc. seeks to purchase a substantial number of the voting shares of Sushi Company. The directors of Sushi resist Rice’s takeover attempt. In analyzing whether this is reasonable, a court would apply a. an appraisal right. b. a takeover defense. c. the corporation’s policies. d. the business judgment rule. 47. Revenue Inc. owns more than 90 percent of the shares of Sales Corporation. A copy of a plan for a merger of Revenue and Sales must be sent to each shareholder of a. both corporations. b. Revenue. c. Sales. d. neither corporation. 48. Carrier Company exchanges some of its shares for some of the shares of Dispatch Corporation. The plan for this exchange must be approved by each corporation’s a. directors only. b. shareholders only. c. directors and shareholders. d. none of the choices. 49. Dynamo Corporation combines its assets and liabilities with those of Energy Company to form Fuel Inc. Dynamo and Energy cease to exist. The formation of Fuel Inc. is a. a takeover. b. a consolidation. c. a liquidation. d. a share exchange. 50. Through a certain transaction, Café Inc. acquires all of the shares of Diner Corporation for some of Café’s shares. Both Café and Diner continue to exist. This is a. a consolidation. b. a share exchange. c. a short-form merger. d. a purchase of assets. 51. Sweet Company acquires all of the assets of Tart Inc. by direct purchase. Approval of the deal between Sweet and Tart is subject to the approval of the shareholders of a. both corporations. b. Sweet. c. Tart. d. neither corporation.

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Chap 41_15e 52. Afton wants to go into business as Boom! to make and market fireworks. When deciding which form of business organization would be most appropriate, Afton would normally take into account all of the following except a. the liability of the owners. b. the forms of competitors’ business organizations. c. tax considerations. d. the need for capital. 53. Apps Inc. decides to combine its operations with Beta Company to form Computer Software Inc. Apps and Beta are domestic corporations. Before a vote is taken on the proposed combination, sufficient information to evaluate the deal must be given to each corporation’s a. shareholders. b. creditors. c. officers and other employees. d. none of the choices. 54. Market Company exchanges some of its shares for some of the shares of Niche Corporation. On the exchange of shares between Market and Niche a. both companies continue to exist. b. both companies cease to exist. c. only Market survives. d. only Niche survives. 55. Farm Inc. combines its assets and liabilities with those of Grain Company to form Harvest Corporation. Farm and Grain cease to exist. With respect to the liabilities of Farm and Grain, Harvest acquires a. none. b. only those acquired after the combination was proposed. c. an amount equal to the ratio of the firms’ pre-merger market values. d. all. 56. Bank Company decides to combine its operations with Credit Corporation to form Debit Finance Inc. Bank and Credit are domestic corporations. The plan for Bank and Credit’s combination must be approved by the board of directors of a. each corporation. b. Bank only. c. Credit only. d. neither corporation. 57. Rock Quarry Inc. merges with Stonework Inc. Only Stonework remains. Rock Quarry held rights in certain real property. With respect to these assets, in the merger Stonework assumes a. none. b. only those acquired after the merger was proposed. c. an amount equal to the ratio of the firms’ pre-merger market values. d. all.

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Chap 41_15e 58. Salmon Company decides to combine its operations with Tuna Corporation to form United Seafood Inc. Salmon and Tuna are domestic corporations. The plan for Salmon and Tuna’s combination must be approved by the shareholders of a. each corporation. b. Salmon only. c. Tuna only. d. neither corporation. 59. Lipstick Inc. merges with Mascara Inc. Only Mascara remains. The articles of merger a. amend the articles of Mascara. b. disappear once the merger is complete. c. create an entirely new organization. d. take the place of the articles of Mascara. 60. Operation Corporation acquires all of the assets of Process Inc. by direct purchase. Operation assumes the liabilities of Process if a. a court does not impose the liabilities on Operation. b. the sale does not amount to a merger or a consolidation. c. Operation replaces Process’s personnel without continuing its business. d. none of the choices. 61. Enchilada Inc. seeks to purchase a substantial number of the voting shares of Fajita Company. Enchilada deals directly with the shareholders of Fajita. Enchilada offers a price higher than the market price of Fajita’s shares. This is a. a poison pill. b. a tender offer. c. a self-tender. d. a breach of the business judgment rule. 62. All of the shares of GMO Company are owned by Hybrid Inc. GMO Inc. is a. a holding company. b. a parent corporation. c. a subsidiary corporation. d. none of the choices. 63. Beef Inc. merges with Chicken Corporation. Beef absorbs Chicken. After the merger, the surviving corporation is a. a different, new entity—Diners Choice Inc. b. Beef and Chicken. c. Beef only. d. Chicken only.

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Chap 41_15e 64. Building Corporation and Construction Inc. combine so that only Construction continues to exist. This is a. a takeover. b. a merger. c. a liquidation. d. a share exchange. 65. Bus Corporation exchanges some of its shares for some of the shares of Car Company. The exchange is used to create Drive Inc., whose business activity is to hold the shares of the two companies. Once the formalities are satisfied, a certificate of the exchange is issued by a. Drive Inc. b. none of the choices. c. the appropriate state. d. the U.S. Department of Commerce. 66. Kudos Corporation combines its assets and liabilities with those of Livestream Company to form MedOnline Inc. Kudos and Livestream cease to exist. The agreement between Kudos and Livestream that sets out the capital structure and other features of MedOnline a. amends the articles of Kudos and Livestream. b. disappears once the combination is complete. c. combines with the articles of Kudos and Livestream. d. takes the place of the articles of Kudos and Livestream. 67. Lumber Company owns more than 90 percent of the shares of Mill Corporation. A plan for a merger of Lumber and Mill must be approved by the directors of a. both corporations. b. Lumber only. c. Mill only. d. neither corporation. 68. Outlook Inc. merges with Pinnacle Inc. Only Pinnacle remains. Outlook owed money to Quest Bank and other creditors. With respect to these debts, in the merger Pinnacle assumes a. none. b. only those incurred after the merger was proposed. c. an amount equal to the ratio of the firms’ pre-merger market values. d. all. 69. Cloud Inc. merges with Data Corporation. Cloud, the surviving corporation, issues shares or pays fair consideration to a. Cloud’s shareholders. b. Data’s shareholders. c. the state. d. no one.

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Chap 41_15e 70. Code Company combines its assets and liabilities with those of Design Corporation to form Engineer Inc. Code and Design cease to exist. With respect to the assets of Code and Design, Engineer Inc. acquires a. none. b. only those acquired after the combination was proposed. c. an amount equal to the ratio of the firms’ pre-merger market values. d. all. 71. Natural Food Corporation proposes to combine with Organic Produce Inc., and asks Natural Food shareholders to vote on the proposal. Pi, a Natural Food shareholder, votes against it, but is outvoted by the other shareholders. Is there an action that Pi can take to avoid being forced to go along with the transaction? If so, what can he do? After the combination, Organic Produce ceases to exist. Natural Food is the surviving firm. What type of combination is this?

72. Alys and Bern pool their money and talents to form Cutting Edge Corporation, a precision tooling company. They are the firm’s only shareholders, directors, and officers. After five years of declining home prices, they decide to cease business. Can they simply dissolve their corporation at will? If so, what are the steps in the process?

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Chap 41_15e Answer Key 1. True 2. True 3. False 4. False 5. False 6. False 7. True 8. True 9. False 10. False 11. False 12. True 13. True 14. True 15. False 16. True 17. True 18. False 19. True 20. True 21. False 22. False 23. False 24. False 25. False 26. True

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Chap 41_15e 27. True 28. False 29. False 30. True 31. False 32. False 33. False 34. False 35. False 36. b 37. d 38. a 39. d 40. a 41. a 42. c 43. d 44. a 45. c 46. d 47. c 48. c 49. b 50. b 51. c 52. b 53. a 54. a Copyright Cengage Learning. Powered by Cognero.

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Chap 41_15e 55. d 56. a 57. d 58. a 59. a 60. d 61. b 62. c 63. c 64. b 65. c 66. d 67. b 68. d 69. b 70. d 71. Pi, and any other shareholder who disapproves of a merger (or a consolidation), may seek, and may be entitled to be paid, fair value for his or her shares. This right to seek fair value is known as appraisal rights. It constitutes the exclusive remedy for shareholders that are dissatisfied with the price that they received for their stock in the circumstances in this problem, and exists only in those states that specifically provide for it. The procedure for asserting this right varies. Generally, the corporation must notify the shareholders of the right’s availability, and the dissenting shareholders must file a notice of intent to demand payment with the corporation before the shareholders vote on the transaction. The corporation must make a written offer to buy the shares, accompanying the offer with a current balance sheet and income statement. The “fair value” is normally the value on the day before the date on which the shareholders’ vote is taken. If the parties do not agree on “fair value,” however, a court may determine it. These rights will be lost if they are not adhered to strictly. The combination between Natural Food and Organic Produce is a merger, in which one of the previously existing corporations (Natural Food) absorbed the other and the absorbed corporation (Organic Produce) ceased to exist.

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Chap 41_15e 72. Alys and Bern can dissolve their corporation at will acting as directors or, in some states, as shareholders. The process will include notifying the state and the firm’s creditors, liquidating the firm’s assets, and making distributions. Procedures for voluntary dissolution vary in different states. Generally, the directors can vote to submit a proposal of dissolution to the shareholders for a vote at a shareholders’ meeting, or in some states shareholders acting unanimously can vote to initiate dissolution proceedings for a corporation. The corporation must file articles of dissolution with the state and notify its creditors of the dissolution. The directors act as trustees of the corporate assets in winding up the firm’s affairs for the benefit of the creditors and shareholders. In the facts of this question, the directors and shareholders are the same persons, but they may be held accountable for any breach of a trustee’s fiduciary duty to the creditors. The corporation’s assets will be liquidated (converted into cash) and distributed among its creditors and shareholders according to the applicable rules of preference.

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Chap 42_15e Indicate whether the statement is true or false. 1. A Ponzi scheme is a fraudulent investment that pays returns from new capital invested with the fraudsters instead of from a legitimate investment. a. True b. False 2. While the Securities and Exchange Commission reviews a registration statement for completeness, the securities can be offered for sale but not sold. a. True b. False 3. Exemptions from federal securities laws are also exemptions from state securities laws. a. True b. False 4. Insider trading is prohibited because trading on the basis of inside information can give the trader an unfair advantage over the investing public. a. True b. False 5. To avoid sanctions under the Securities Exchange Act of 1934, whoever solicits a proxy must accurately disclose all facts pertinent to the matter on which shareholders are to vote. a. True b. False 6. Providing investors with more information helps them make buying and selling decisions about securities. a. True b. False 7. The Securities Exchange Act of 1934 provides for continuous periodic disclosures by certain publicly held companies. a. True b. False 8. Most securities cannot be resold without registration. a. True b. False 9. Under the Sarbanes-Oxley Act of 2002, chief financial officers must certify the accuracy of information in corporate financial statements. a. True b. False

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Chap 42_15e 10. Corporate “outsiders” may be held liable for insider trading under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. a. True b. False 11. To avoid sanctions under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, scienter must exist. a. True b. False 12. While the Securities and Exchange Commission reviews a registration statement for completeness, most issuers can distribute a free-writing prospectus. a. True b. False 13. A well-known seasoned investor has less flexibility in filing registration statements and using free-writing prospectuses than other issuers. a. True b. False 14. Most private, small-business, noninvestment company offers of securities are exempt from the registration requirements. a. True b. False 15. Issuers of securities offerings must comply with either federal or state securities laws, but not both concurrently. a. True b. False 16. Small-business issues can use a securities registration and reporting system that requires simpler forms than the full registration system. a. True b. False 17. Forward-looking forecasts that turn out to be wrong can be protected against liability for securities fraud if they include “meaningful cautionary statements.” a. True b. False 18. An investment contract in a franchise does not qualify as a security. a. True b. False

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Chap 42_15e 19. The key to liability under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 is whether information omitted or misrepresented in connection with the purchase or sale of a security is material. a. True b. False 20. Most private, midsize-business, noninvestment company offers of securities are exempt from the registration requirements. a. True b. False 21. Misrepresenting facts in a registration statement or prospectus is known as puffery and does not violate the Securities Act of 1933. a. True b. False 22. Securities must be registered under the Securities Act of 1933 for the Securities Exchange Act of 1934 to apply. a. True b. False 23. State securities laws apply mainly to intrastate transactions. a. True b. False 24. Only the Securities and Exchange Commission can sue violators of Section 10(b) and Rule 10b-5. a. True b. False 25. The definition of security in the Securities Act of 1933 includes interests that involve the right to buy a security on a national security exchange. a. True b. False 26. Crowdfunding can be exempt from the registration requirements of the Securities Act of 1933 if shares are offered directly to investors. a. True b. False 27. The purpose of the Securities Act of 1933 is to regulate a security’s investment price. a. True b. False 28. To avoid a conviction in a criminal prosecution under the securities laws, there must be at least a reasonable doubt that the defendant knew he or she was acting wrongfully. a. True b. False

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Chap 42_15e 29. An insider must use inside information in connection with the purchase and sale of securities to violate Section 16(b) of the Securities Exchange Act of 1934. a. True b. False 30. The Securities and Exchange Commission is the main independent regulatory agency that interprets the federal securities laws. a. True b. False 31. Anyone who has access to or receives inside information of a nonpublic nature and trades on it for personal gain can be liable under SEC Rule 10b-5. a. True b. False 32. The Sarbanes-Oxley Act of 2002 attempts to increase corporate accountability by imposing strict disclosure requirements and harsh penalties for securities laws. a. True b. False 33. Securities can be sold before the effective date of the registration statement without restrictions. a. True b. False 34. The Securities Exchange Act of 1934 applies to all cases involving the trading of securities, except in private transactions. a. True b. False 35. Under the Sarbanes-Oxley Act of 2002, all members of a publicly traded corporation’s audit committee must be outside directors. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. Household Products Corporation wants to make an offering of securities to the public. The offering is not exempt from registration under the Securities Act of 1933. Before the firm sells its securities, it must provide investors with a. a forward-looking financial forecast. b. an investment contract. c. a prospectus. d. a statement that the securities for sale are worth the price.

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Chap 42_15e 37. Mars Mission Inc. is a regulated publicly held corporation. Under the Securities Act of 1934, Mars is required to a. contribute to the operations of national stock exchanges. b. disclose information about its organization and financial situation. c. engage in market surveillance to deter undesirable practices. d. all of the choices. 38. Home Stuff Corporation is poised to issue securities that, under the Securities Act of 1933, are exempt. This means that the securities can be sold a. only after being registered. b. on the basis of nonpublic information. c. within any six-month period by certain insiders. d. without being registered. 39. Luan, a programmer for Monetized Nation Inc., a business modeling service, learns of undisclosed company plans to distribute a new app. Luan reveals the company plans to a friend, Ono, who buys 5,000 shares of the firm’s stock. Under the Securities Exchange Act of 1934, Ono is most likely a. liable for insider trading. b. not liable because Ono did not prevent others from profiting. c. not liable because Ono did not solicit information from Luan. d. not liable because Ono does not work for the firm. 40. Movie Time Corporation files a registration statement and delivers a prospectus to the appropriate parties. These items are intended to enable the evaluation of certain financial risks by a. market professionals to explain to all investors. b. government regulators to disclose to the general public. c. sophisticated investors only. d. unsophisticated investors. 41. Meat Packers Inc. offers its securities for sale only in a single state. The law in this state is like the law in most states. Thus, the company’s offer is subject to the state’s securities statutes, which are likely to include a. antifraud provisions. b. registration provisions. c. disclosure requirements. d. all of the choices. 42. As part of a stock offering for Design Media Corporation, the firm’s accountant Eve intentionally misrepresents material facts in the prospectus. Fred buys the stock unaware of the misrepresentation and suffers a loss. Eve may be subject to a. none of the choices. b. job termination but no other sanctions, penalties, or liability. c. a fine, imprisonment, and damages. d. professional censure but no criminal sanctions or civil liability.

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Chap 42_15e 43. Dez is the chief financial officer of Elements Corporation, which is required to file certain financial statements with the Securities and Exchange Commission (SEC). Under the Sarbanes-Oxley Act of 2002, Dez must personally a. certify that the statements are accurate. b. delegate the responsibility for preparing the statements. c. deliver the statements to the appropriate SEC officer. d. prepare the statements. 44. Corporate Financial Inc., and its officers, directors, employees, and shareholders, buy and sell securities on behalf of themselves and their clients. SEC Rule 10b-5 applies to the purchase or sale of a. a security by the corporation only. b. a security involving a corporate insider only. c. a security involving short-swing profits only. d. any security. 45. Eli, an officer for Food Stores Inc., buys 10,000 shares of its stock. One week later, the company announces that it will merge with a competitor, Grocery Mart Corporation, and the price of Food Stores’ stock increases. One month later, Eli sells his shares for a profit. Under Section 16(b) of the Securities Exchange Act of 1934, Eli would not be liable if, after buying the stock, he had waited a. less than fourteen days to sell it. b. more than six months to sell it. c. ninety days to sell it. d. two months to sell it. 46. Fresh Fruit Company has assets of less than $10 million and fewer than fifty shareholders. Gourmand Pastries Inc. has assets of more than $50 million and more than five hundred shareholders. The Securities Exchange Act of 1934 applies to a. Fresh Fruit and Gourmand Pastries. b. Fresh Fruit only. c. Gourmand Pastries only. d. neither Fresh Fruit nor Gourmand Pastries. 47. Orbital Flights Inc. is required to register its securities under Section 12 of the Securities Exchange Act of 1934. This means that, with respect to Orbital, Section 16(b) of the act covers a. the declaration of dividends by Orbital’s board of directors. b. the later re-registration of Orbital’s securities. c. the short-swing activities of Orbital’s insiders. d. the solicitation of proxies from Orbital’s shareholders.

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Chap 42_15e 48. Debt Equity Inc., and its officers, directors, and employees, buy and sell securities based on financial research and analysis. Section 16(b) of the Securities Exchange Act of 1934 covers purchases and sales of securities involving a. corporate insiders, such as officers, directors, and employees. b. misappropriation of material, nonpublic information. c. short-swing profits. d. tippers and tippees. 49. Jazz Inc. makes and markets music. The company wants to make an initial public offering of securities via the Internet. Most likely, this offering a. can avoid high costs and complicated procedures. b. is an attempt to deceive and manipulate investors. c. is a way for investors to fairly break the rules. d. will result in higher expenses and extended oversight. 50. Market Data Corporation is required to file a registration statement with the Securities and Exchange Commission. This statement must contain a. a copy of prospectuses to be provided to investors. b. a description of securities being offered for sale. c. a record of pre-registration sales in securities. d. a statement that securities being offered for sale are worth the price. 51. To raise $120 million to expand operations, Primo Inc. makes a stock offering directly to sixty accredited investors and twenty sophisticated, but unaccredited investors. The firm plans to notify the SEC of sales. Under the Securities Act of 1933, this issue may qualify as an exempt transaction a. as is. b. if all of the investors are also given material information about the firm. c. if the offering is also made to the general public. d. under no circumstances. 52. Equity Corporation, and its officers, directors, employees, and shareholders, buy and sell securities. Section 10(b) of the Securities Exchange Act of 1934 applies to the trading of securities a. only by investment companies on organized exchanges. b. only involving short-swing profits obtained in over-the-counter markets. c. only involving tippers and tippees in private transactions. d. in almost any circumstances. 53. Bev is the chief executive officer of Chef Cafés Inc., which is required to file certain financial reports with the Securities and Exchange Commission (SEC). Under the Sarbanes-Oxley Act of 2002, Bev must a. certify that the reports are complete and accurate. b. designate a corporate official to assume liability for inaccuracies. c. do nothing. d. read the reports and be prepared to answer questions about them.

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Chap 42_15e 54. Industrial Corporation is a public company whose shares are traded in the public securities markets. Under the Securities Act of 1933, Industrial is required to a. contribute to the operations of national security exchanges. b. disclose all essential information about the issuance of its securities. c. engage in market surveillance to deter undesirable practices. d. meet investors’ reasonable expectations to make a profit. 55. Furnaces & Filters Inc. is a public company whose shares are traded in the public securities markets. Under the Sarbanes-Oxley Act of 2002, to ensure that the firm’s financial results are accurate and timely, its senior officers must set up and maintain a. internal “disclosure controls and procedures.” b. external “release and reveal timetables.” c. personal “peruse and review liability policies.” d. public “information and discussion forums.” 56. The goal of securities regulation is to a. contribute to the operations of national security exchanges. b. prohibit deceptive and manipulative practices in the securities markets. c. prescribe ways and means for investors to fairly break the rules. d. none of the choices. 57. Reno, an engineer for Shale Corporation, learns that the firm will increase the dividend it pays to shareholders. Reno buys 10,000 shares of company stock. When the dividend is announced to the public and the price of the stock increases, he sells the shares for a profit. He would not be liable for insider trading if the information about the dividend was a. material when he sold the stock. b. available to the public after he bought the stock. c. available to the public before he bought the stock. d. forward-looking when he bought the stock. 58. Spectrum Paints Inc. is a public company whose shares are traded in the public securities markets. Under the Sarbanes-Oxley Act of 2002, the firm is subject to the direct corporate governance requirements of a. any other public company with which the firm exchanges shares. b. any state in which the firm does business. c. the federal government. d. the state in which the firm incorporated. 59. United Delivery Corporation is a public company whose shares are traded in the public securities markets. Under the Securities Act of 1933, United Delivery is required to a. buy or sell its securities only on a national security exchange. b. register its securities transactions unless they qualify for an exemption. c. invest its own managerial or entrepreneurial efforts. d. issue instruments representing corporate ownership or debt.

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Chap 42_15e 60. Under the Securities Act of 1933, securities include a. any instrument representing corporate ownership or debt. b. a common enterprise reasonably expected to make a profit. c. an investment in one’s own personal entrepreneurial effort. d. whatever a corporation represents to the public as profitable. 61. Cam, an accountant for Discount Inc., learns that the company’s soon-to-be-announced quarterly sales figures exceed analysts’ expectations. Cam tells Ed, who tells Frye, who buys 100 shares of the company’s stock. Frye knows that Ed got the information from Cam. When Discount publicly announces the figures, Frye sells the stock for a profit. Under the Securities Exchange Act of 1934, Ed is most likely a. liable for insider trading. b. not liable because Ed did not prevent others from profiting. c. not liable because Ed did not misappropriate any information. d. not liable because Ed does not work for Discount. 62. Ross, a sales executive with Steel Mill Inc., learns of undisclosed company plans to produce a new type of steel. Ross tells Tim, who tells Uri, who buys 100 shares of Steel Mill stock. Uri knows that Tim got the information from Ross. When the firm publicly announces its new product, Uri sells the stock for a profit. Under the Securities Exchange Act of 1934, Uri is most likely a. liable for insider trading. b. not liable because Uri is only a tippee, not a tipper. c. not liable because Uri is too far removed from the initial disclosure. d. not liable because Uri traded on the basis of a material fact. 63. Ewan, the chief executive officer of Furniture Inc., intentionally understates the amount of the firm’s debts in information provided to investors as part of an issue of stock. Gary buys the stock and suffers a loss. Ewan may be subject to a. government prosecution and a private investor’s suit. b. negative publicity but no criminal prosecution or civil suit. c. only government prosecution. d. only a private investor’s suit. 64. Pharma Corporation is a public company whose shares are traded in the public securities markets. With respect to financial and other significant information concerning its securities, the Securities Act of 1933 a. imposes increased responsibility on corporate executives. b. prevents insiders from trading among themselves. c. requires disclosure. d. creates a safe harbor for forward-looking statements.

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Chap 42_15e 65. Grain Mills Corporation is required to register its securities under Section 12 of the Securities Exchange Act of 1934. Section 14(a) of the act regulates a. the declaration of dividends by the firm’s board of directors. b. the later re-registration of the firm’s securities. c. the short-swing activities of the firm’s insiders. d. the solicitation of proxies from the firm’s shareholders. 66. Dairy Stores Inc. owns and operates convenience stores. The firm wants to make an initial public offering of securities. If Dairy qualifies for an exemption from the federal registration requirement, the firm is a. exempt from any state registration requirement. b. not subject to any state securities laws. c. not necessarily exempt from a state registration requirement. d. subject to all state registration requirements. 67. Space Flight Inc. files a registration statement with the SEC before making an offering to the general public. The registration contains false, immaterial statements of which the investors are unaware. The firm is charged with violating the Securities Act of 1933. Its best defense is a. the investors were not aware of the misrepresentations. b. the issuer reasonably believed the misstatements were true. c. the offering was made available to the general public. d. the untrue statements were not material. 68. Components Assembly Corporation is a public company that is poised to issue securities that do not qualify for an exemption from registration. This means that the company must a. file a registration statement with the SEC. b. issue the securities through an online registration site. c. refrain from issuing the securities to unregistered investors. d. register the securities with a national securities exchange. 69. Fleet Trucking Corporation is a public company with a market capitalization of less than $75 million. Fleet is poised to issue securities in a transaction that, under the Securities Act of 1933, is exempt. This enables Fleet to a. reduce the compliance costs by not requiring an auditor report. b. buy and sell the securities without liability for recaptured profit. c. make forward-looking financial forecasts without liability. d. withhold inside information from accredited investors. 70. Chris, a coder for Drones Inc., learns of undisclosed company plans to market a new, smart drone. Chris buys 10,000 shares of the firm’s stock. If Chris is liable under the Securities Exchange Act of 1934, it will be because the information on which he based his purchase of the stock was a. a forward-looking forecast. b. not material. c. not yet public. d. not yet true.

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Chap 42_15e 71. Ridley is an officer of Sun Watts, Inc. Ridley knows that a Sun Watts engineer recently developed a new, inexpensive method for collecting, storing, and converting solar power into fuel. Ridley takes advantage of this information to buy Sun Watts stock from Taylor and, after the discovery is announced, to sell the stock to Ulrich at a profit. Taylor claims that this is a violation of federal law. Is Taylor correct? If so, what federal law has Ridley violated, and what are its possible penalties?

72. Medico Corporation is a public company whose shares are traded in public securities markets. Medico’s officers want to set up and maintain a system of “good corporate governance.” What is “corporate governance”? What is its practical significance? What, at a minimum, should a “good” system of corporate governance include?

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Chap 42_15e Answer Key 1. True 2. True 3. False 4. True 5. True 6. True 7. True 8. False 9. True 10. True 11. False 12. True 13. False 14. True 15. False 16. True 17. True 18. False 19. True 20. True 21. False 22. False 23. True 24. False 25. True 26. False

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Chap 42_15e 27. False 28. True 29. False 30. True 31. True 32. True 33. False 34. False 35. True 36. c 37. b 38. d 39. a 40. d 41. d 42. c 43. a 44. d 45. b 46. c 47. c 48. c 49. a 50. b 51. b 52. d 53. a 54. b Copyright Cengage Learning. Powered by Cognero.

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Chap 42_15e 55. a 56. b 57. c 58. c 59. b 60. a 61. a 62. a 63. a 64. c 65. d 66. c 67. d 68. a 69. a 70. c 71. Yes, assuming that Taylor did not know about the new method before it became public Analyze, Taylor is correct. Ridley has violated the Securities Exchange Act of 1934. The Securities Exchange Act of 1934 extends liability to officers and directors in their personal transactions for taking advantage of inside information when they know it is unavailable to the persons with whom they are dealing. In this problem, Ridley used the undisclosed information about the new collection, storage, and conversion method to buy Sun Watts stock from Taylor, who apparently was not aware of the development at the time of the deal with Ridley, and then sell it at a profit to Ulrich when the method was revealed to the public. There are both criminal and civil penalties for violations of this act. Criminal punishment includes fines up to $5 million, imprisonment up to twenty-five years, or both. Civil sanctions include triple the profits gained or the loss avoided, and rescission of the contract to buy securities.

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Chap 42_15e 72. Corporate governance is the relationship between a corporation and its shareholders: the system by which business corporations are directed and controlled. Corporate governance is the essential purpose of corporation law, which sets out the structure of a corporation. A “good” system of corporate governance involves, at a minimum, (1) the audited reporting of financial progress at the firm, so that its managers can be evaluated and (2) legal protection for shareholders, so that parties who violate the law to take advantage of shareholders can be punished for their misconduct and their victims can recover damages. Practically, good corporate governance in the form of accountability to investors provides the opportunity to enhance corporate wealth, because firms with expanded shareholder rights—a hallmark of good corporate governance—have been shown to have increased profits, sales growth, company value, and other economic advantages.

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Chap 43_15e Indicate whether the statement is true or false. 1. Under the Administrative Procedure act, a party seeking judicial review of an agency decision must first exhaust all administrative remedies. a. True b. False 2. An informal agency action can be important because it warns regulated entities that the agency may engage in formal rulemaking if its informal policy is ignored. a. True b. False 3. A meeting of a federal agency must be open to public observation if the meeting involves matters relating to future litigation or rulemaking. a. True b. False 4. Administrative agencies lack the time, the resources, and the expertise to make the detailed decisions required for regulation. a. True b. False 5. Information is relevant to an administrative investigation if it assures the agency that the law is not being violated. a. True b. False 6. Final rules do not have binding legal effect until the courts confirm them. a. True b. False 7. Under a law addressing public concern over power exercised by federal agencies, the government must disclose certain records to any person on request. a. True b. False 8. Legislatures create statutory law and administrative law. a. True b. False 9. An administrative law judge does not have the power to rule on questions of evidence or to make determinations of fact. a. True b. False

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Chap 43_15e 10. The president can limit the power of an administrative agency through the power to appoint its officers. a. True b. False 11. Preventing agencies from abusing their powers without hindering the agencies as they carry out their duties is not a governmental concern. a. True b. False 12. By delegating some authority to make and implement laws to an administrative agency, Congress gives up its ability to monitor a particular area. a. True b. False 13. An administrative law judge’s decision on a dispute over an administrative action is the final order of the agency —no appeal is possible. a. True b. False 14. An agency must conduct a regulatory flexibility analysis whenever a new regulation will significantly impact a substantial number of small businesses. a. True b. False 15. Normally, a business firm complies with an agency request to inspect facilities because it is in the firm’s interest to maintain good relations with the agency. a. True b. False 16. The purpose of negotiated settlements in disputes over administrative actions is to obtain funds to defray the agency’s operating costs. a. True b. False 17. Because the Administrative Procedure Act imposes requirements that all federal agencies must follow, it is an integral part of the administrative process. a. True b. False 18. For an agency’s interpretation of the law to be accorded deference by a court, it must meet the formal standards for notice-and-comment rulemaking. a. True b. False

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Chap 43_15e 19. Congress can review new federal regulations only after they take effect. a. True b. False 20. According to the United States Supreme Court, courts should not defer to an administrative agency’s interpretation of the law. a. True b. False 21. On review of an agency’s interpretation of the law, a court is likely to defer to the agency’s view, unless the court would have interpreted the law differently. a. True b. False 22. Although executive agencies exist within the cabinet departments of the executive branch, they are not subject to the authority of the president. a. True b. False 23. In the absence of a challenge, an agency action may be “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law.” a. True b. False 24. An agency’s interpretation of the law will not be upheld by a court unless it is supported by specific evidence—a reasonable explanation is not enough. a. True b. False 25. New administrative agencies are rarely created in response to a crisis. a. True b. False 26. Notice-and-comment rulemaking involves regulators noticing a situation that lacks a rule, commenting on it, and then issuing a rule. a. True b. False 27. Congress can exercise authority over the power of an administrative agency by revising its funding, changing its responsibilities, or abolishing it altogether. a. True b. False

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Chap 43_15e 28. After final rules are issued, administrative agencies no longer conduct investigations of the entities that they regulate. a. True b. False 29. If a business firm refuses to comply with an agency request to inspect facilities or business records, the agency may resort to the use of a subpoena. a. True b. False 30. Interested parties are not given the opportunity to express their views on a proposed rule because their efforts might influence agency policy. a. True b. False 31. There is no single federal office directed to receive comments from small businesses about their dealings with federal agencies. a. True b. False 32. As the economy has grown more complex, the size of the government has also increased, and so has the number of administrative agencies. a. True b. False 33. Administrative agencies at various levels of government can work together and share the responsibility of creating and enforcing regulations. a. True b. False 34. Because federal agency rules have a binding effect, and their violators may be punished, certain established procedures must be followed in creating them. a. True b. False 35. Administrative regulations have benefits, but the benefits can entail considerable costs for business. a. True b. False

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Chap 43_15e Indicate the answer choice that best completes the statement or answers the question. 36. The Federal Trade Commission (FTC) orders General Sales Company to reveal certain information. The firm complains to a court, arguing that the order is an abuse of the FTC’s discretion. Like other agencies, the FTC can use a subpoena to a. compel a party to testify, but not to obtain documents. b. obtain any information except what a party refuses to reveal. c. harass an uncooperative business or individual. d. reveal regulatory violations. 37. The rules of administrative agencies can be a. as binding as laws passed by Congress. b. only as persuasive as experts’ opinions. c. merely as suggestive as media commentary. d. no more influential than promotional puffery. 38. Media Report seeks information about well-known businesspersons under the Freedom of Information Act. To obtain the information, Media Report must a. agree not to reveal any trade secrets. b. reasonably describe the information. c. get a court order. d. obtain the businesspersons’ consent. 39. Notice-and-comment rulemaking involves a period during which a. judges, legislators, and the president are asked about a proposed rule. b. potential violators of a proposed rule are notified and publicized. c. the administrators “notice” a problem and “comment” on it. d. the public is asked to comment on a proposed rule. 40. The executive branch of the government can exercise control over an administrative agency through a. the president’s veto powers. b. legislation that takes away the agency’s power. c. judicial review of agency actions and decisions. d. none of the choices. 41. Data Inc. pays income and other taxes collected by the Internal Revenue Service (IRS). Like other federal administrative agencies, the IRS was created by a. Congress, through enabling legislation. b. a court, through the adjudicatory process. c. an administrative agency, through administrative regulations. d. the president, through an executive order.

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Chap 43_15e 42. Bath & Kitchen Inc. is subject to a decision by the Consumer Product Safety Commission. Opposed to the decision, the firm wants a court to review it. First, however, the firm must a. refuse to comply with the agency decision. b. petition other interested parties to oppose the decision. c. exhaust all possible administrative remedies. d. publish its opposition in the Federal Register. 43. Organic Frozen Foods Corporation is subject to regulations issued by the Food and Drug Administration, which is a federal agency. These regulations are part of the body of a. administrative law. b. legislative law. c. executive law. d. judicial law. 44. The Environmental Protection Agency (EPA) discovers that Fish Farm Inc. has violated an EPA regulation. If no settlement is reached, the EPA can a. issue a formal complaint. b. do nothing. c. take the matter to the U.S. Supreme Court. d. immediately impose sanctions. 45. The procedures used by administrative agencies in fulfilling their basic functions is known as a. the procedural process. b. the legislative process. c. the administrative process. d. the executive process. 46. When a state administrative regulation conflicts with a federal administrative regulation a. the federal regulation takes precedence. b. the state regulation takes precedence. c. a cost-benefit analysis is applied to determine which takes precedence. d. the regulations are equally valid within their jurisdictions. 47. During an administrative hearing, the parties may a. give testimony. b. present evidence. c. cross-examine witnesses. d. all of the choices.

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Chap 43_15e 48. The Food and Drug Administration (FDA) is investigating reports that Caplets Corporation is putting potentially harmful additives in Doze, a new pain-relief medication. The FDA’s demands for particular documents from Caplets a. must be specific and adequately describe the material being sought. b. must not be specific or an incriminating item might be overlooked. c. must be general so as to force an uncooperative party’s compliance. d. may, but need not, be specific because this is only an investigation. 49. The Federal Emergency Management Agency (FEMA) discovers that Rescue Inc. is violating a FEMA regulation. If this situation is resolved like most such disputes, the outcome will be a. a negotiated settlement. b. a trial and a fine. c. a trial and an appeal to a higher authority. d. a trial and the dissolution of the business. 50. The Financial Stability Oversight Council was created in response to a financial crisis to a. identify and respond to emerging risks in the financial system. b. protect consumers from abusive practices by financial institutions. c. issue rules to cover almost every aspect of a business’s operation. d. reduce the number and authority of business financial regulations. 51. Administrative agencies can conduct searches without warrants in a. all industries. b. highly regulated industries. c. no industries. d. newly regulated industries only. 52. After a final rule is issued, an administrative agency conducts investigations to monitor a. consumer satisfaction with the rule. b. affected businesses’ satisfaction with the rule. c. compliance with the rule. d. the impact of the rule on other administrative agencies. 53. A final rule issued through a notice-and-comment rulemaking procedure has binding legal effect a. after a court affirms it. b. until the issuing agency rescinds it. c. once Congress approves it. d. unless a court overturns it.

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Chap 43_15e 54. Persons who favor the creation of a federal agency to regulate the production of genetically modified agricultural products should concentrate their lobbying efforts on a. Congress. b. administrative agencies that oversee agricultural products. c. the United States Supreme Court. d. the president of the United States. 55. A failure of the Federal Bureau of Investigation to comply with a request under the Freedom of Information Act (FOIA) may be challenged in a. a federal district court. b. a hearing before the U.S. Freedom of Information Agency. c. a meeting with Congress’s FOIA subcommittee. d. a special conference with the president of the United States. 56. The Securities and Exchange Commission decides to create a new rule relating to the dissemination of material nonpublic information through social media. The first step is a. compile the rule with others in the Code of Federal Regulations. b. draft the rule. c. publish a notice of the proposed rulemaking. d. solicit public comment. 57. To notify the public of a proposed rule, the Federal Emergency Management Agency, like other federal agencies, publishes the proposal a. through a broadcast on a public television station. b. in a trade journal available to members of the industry. c. in the Federal Register. d. on its website. 58. Independent regulatory agencies such as the Federal Communications Commission are a. not part of the government’s executive branch. b. outside the federal executive departments. c. subagencies within the cabinet departments. d. cabinet departments within the executive branch. 59. To be assured that a court will defer to an administrative agency’s interpretation of the law, the agency must a. meet the formal legal standards for notice-and-comment rulemaking. b. exhaust all administrative remedies. c. make its records available online and in other electronic formats. d. open every portion of every meeting to public observation.

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Chap 43_15e 60. The Food and Drug Administration (FDA) is an executive agency. As an executive agency, the FDA is subject to the authority of a. no government official or entity. b. the president. c. state legislatures. d. the U.S. Attorney General 61. A proceeding in which an administrative law judge hears and decides issues that arise when an agency charges a person or a firm with an agency violation is a. adjudication. b. declaration. c. rulemaking. d. investigation. 62. The U.S. Small Business Administration issues a new regulation that will have a significant impact on a substantial number of small businesses. Under the Regulatory Flexibility Act, the agency must do all of the following except a. measure the cost that the rule will impose on small businesses. b. consider less burdensome alternatives. c. alert small businesses about forthcoming regulations. d. adjust the rule to the satisfaction of the regulated businesses. 63. Delta Water Company is subject to a decision by the Environmental Protection Agency. Delta appeals the decision, arguing that it is arbitrary and capricious. This could mean that the decision a. changed the agency’s prior policy without justification. b. followed a consideration of all legally appropriate factors. c. was accompanied by a rational explanation. d. was plainly warranted by the evidence. 64. The Food and Drug Administration (FDA) wants Pharma Inc. to produce certain records for review. Pharma need not reveal a. incriminating information. b. files that are not otherwise required by law. c. facts that could be used against the firm in a court. d. trade secrets. 65. The Federal Trade Commission Act granted the Federal Trade Commission the power to a. oversee the nation’s stock exchanges. b. regulate specific areas of business and industry. c. prevent businesses from engaging in unfair trade practices. d. work to eliminate discrimination in skilled occupations.

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Chap 43_15e 66. The Environmental Protection Agency (EPA) wants Waste Disposal Company to produce certain records for review. The EPA can gain access to the records through a. an order for specific performance. b. a rule for parol evidence. c. a formal complaint. d. a subpoena. 67. Retail Stores Inc. pays taxes collected by the appropriate state agencies. Like other state administrative agencies, these agencies were created by a. a state legislature, through an enabling act. b. a state court, through the adjudicatory process. c. a federal administrative agency, through administrative regulations. d. the state governor, through an executive order. 68. Tia is a witness in a controversy involving the U.S. Bureau of Tobacco and Firearms. Tia can be compelled to appear before an administrative law judge if she is served with a. an order for specific performance. b. an executive order. c. a subpoena. d. a search warrant. 69. The Securities and Exchange Commission (SEC) wants to review certain documents of Trade Funds Inc. Whether it is permissible for the SEC to request or review the documents depends on whether the documents are a. incriminating. b. relevant. c. technical. d. valuable. 70. Closed meetings of the U.S. Bureau of Land Management, a federal administrative agency, are permitted when a. the subject of the meeting concerns accusing a person of a crime. b. open meetings would frustrate the implementation of future actions. c. the subject of the meeting involves matters relating to future rulemaking. d. all of the choices. 71. Omega Company operates a computer chip production plant. Paola is the president of Omega. Rico, a representative of the Occupational Safety and Health Administration, inspects the plant and, citing a certain regulation, orders Omega to take specified steps immediately to improve sanitation at the plant. Paola believes that Rico is either exceeding his authority or that the regulation Rico claims to be enforcing is excessive. Can Omega ask a court for an order to stop enforcement of the regulation? If not, what can Omega do?

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Chap 43_15e 72. Guitar Gear Inc. makes guitars. The Occupational Safety and Health Administration (OSHA) proposes a safety rule governing the handling of wood and its dust in the workplace, including the woods that Guitar Gear uses in its operations. Guitar Gear contends that the rule will involve substantial compliance costs without significantly increasing workplace safety. The firm sends a letter to OSHA indicating its objections to the proposed rule and enclosing research reports and other data supporting those objections. Does OSHA have any obligation to consider these objections? What procedures must OSHA follow when it makes new rules, such as this one?

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Chap 43_15e Answer Key 1. True 2. True 3. False 4. False 5. True 6. False 7. True 8. False 9. False 10. True 11. False 12. False 13. False 14. True 15. True 16. False 17. True 18. True 19. False 20. False 21. False 22. False 23. True 24. False 25. False 26. False

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Chap 43_15e 27. True 28. False 29. True 30. False 31. False 32. True 33. True 34. True 35. True 36. d 37. a 38. b 39. d 40. a 41. a 42. c 43. a 44. a 45. c 46. a 47. d 48. a 49. a 50. a 51. b 52. c 53. d 54. a Copyright Cengage Learning. Powered by Cognero.

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Chap 43_15e 55. a 56. c 57. c 58. b 59. a 60. b 61. a 62. d 63. a 64. d 65. c 66. d 67. a 68. c 69. b 70. d 71. Omega cannot ask a court for an injunction to stop the enforcement of the regulation until it has exhausted its administrative remedies. Omega’s first step would be to appeal the OSHA representative’s order to the agency. After investigating, the agency might negotiate a settlement with Omega. If a settlement cannot be reached, and the agency still considers Omega in violation of the rule, the agency might issue a complaint against the firm. This would be an attempt to bring the plant into compliance and may be accompanied by a press release. Omega can respond by filing an answer to the charge, and may also respond with its own press release. If there is no settlement, there may be a hearing before an administrative law judge (ALJ). After the hearing, the ALJ will issue an initial order. If Omega is still dissatisfied, the firm can appeal to the commission that governs the agency. If Omega is dissatisfied with the commission’s decision, it may appeal to a federal court of appeals. If there is no appeal, or if the commission and the court refuse to review the case, the ALJ’s order becomes final. Ultimately, Omega may appeal adverse rulings to the United States Supreme Court.

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Chap 43_15e 72. In formulating new rules, a federal administrative agency has to follow specific rulemaking procedures. The most commonly used procedure is notice-and-comment rulemaking, which consists of three steps—notice of the proposed rulemaking, a comment period, and the final rule. The notice of the proposed rulemaking proceeding is published in the Federal Register. The notice states where and when the proceedings will be held, the agency’s legal authority for making the rule, and the terms or subject matter of the proposed rule. Following publication of the notice, the agency must allow time for persons to comment in writing on the proposed rule. (If a hearing is held, the comments may be oral.) The agency need not respond to all comments, but it must respond to any significant comments that bear directly on the proposed rule. Thus, if Guitar Gear’s comments are significant, OSHA must take them into consideration. OSHA can respond by either modifying its final rule or explaining, in a statement accompanying the rule, why it did not make any changes. After the agency reviews the comments, it drafts the final rule and publishes it in the Federal Register. Later, the rule is compiled with those rules of other federal agencies in the Code of Federal Regulations.

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Chap 44_15e Indicate whether the statement is true or false. 1. A consumer may recover under a state consumer-fraud statute, even if he or she has not suffered actual damages proximately caused by a deceptive act. a. True b. False 2. A deceptive ad for a product involving wrongful charges to consumers may result in an award of damages of a defendant’s unjust gains and consumers’ losses. a. True b. False 3. Bait-and-switch advertising occurs if the seller fails to have reasonably adequate quantities of the advertised item available. a. True b. False 4. The manufacture and sale of any product that poses an unreasonable risk to consumers can be banned. a. True b. False 5. An obviously exaggerated advertising claim will be considered deceptive even if a reasonable consumer would not believe it to be true. a. True b. False 6. Shipping times promised in ads are estimates—merchants are not required to notify consumers when orders cannot be shipped as timely as promised. a. True b. False 7. Half-truths—information that is true but incomplete—are not deceptive because such statements are at least half true. a. True b. False 8. The Federal Food, Drug, and Cosmetic Act protects consumers against contaminated and misbranded food and drugs. a. True b. False 9. Labels must be accurate and use words easily understood by the ordinary consumer. a. True b. False

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Chap 44_15e 10. Creditors that use information from credit-reporting agencies cannot be held liable for violations of the Fair Credit Reporting Act. a. True b. False 11. Advertising will be deemed deceptive if it includes a claim that omits a material fact about a product. a. True b. False 12. The Telemarketing Sales Rule applies to any offer—domestic or foreign—made to consumers in the United States. a. True b. False 13. Regulation Z was issued by the Federal Reserve Board of Governors to implement the disclosure requirements of the Truth-in-Lending Act. a. True b. False 14. The quality and safety of food may be important to consumers, but food labels that provide standard nutrition facts are a seller’s option, not a requirement. a. True b. False 15. There is a significant distinction between regulating the information dispensed about a product and regulating the product’s actual content. a. True b. False 16. Importers of food do not have to verify that the imported food meets U.S. safety standards. a. True b. False 17. A false statement or unjustified claim about a competitor’s products can result in liability for deceptive advertising. a. True b. False 18. Credit can be denied solely on the basis of national origin. a. True b. False 19. Generally, online ads—unlike other ads—can be less than truthful and not every claim must be substantiated. a. True b. False

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Chap 44_15e 20. The Truth-in-Lending Act applies to a loan between two consumers because in that transaction, the lender is a person who in the ordinary course of business is extending credit. a. True b. False 21. Under the Fair Credit Reporting Act, a consumer can request the identity of anyone who has received a credit agency’s report on the consumer. a. True b. False 22. Federal law does not require food product labels to identify the product. a. True b. False 23. With respect to tainted foods, the focus of federal regulators has shifted from responding to incidents of contamination to preventing them. a. True b. False 24. Deceptive advertising occurs if a reasonable consumer believes an advertising claim. a. True b. False 25. A debt-collection agency can always contact a debtor at his or her place of employment. a. True b. False 26. The Federal Trade Commission actively monitors online advertising. a. True b. False 27. The Lanham Act protects against the deceptive use of trademarks but does not cover false advertising claims. a. True b. False 28. Federal law regulates the use of such terms as low fat on food labels. a. True b. False 29. The government cannot remove a product from the market simply because it is considered imminently hazardous. a. True b. False 30. A creditor can always require the signature of a cosigner on a credit application. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 44_15e 31. Because consumers may not read an entire web page, an online disclosure should be placed as close as possible to any claim being qualified. a. True b. False 32. The Federal Commerce Commission is charged with the goal of preventing unfair and deceptive trade practices. a. True b. False 33. A business that cannot provide scientific evidence to support its marketing claims may be held liable for deceptive advertising. a. True b. False 34. An ad is more likely to be considered fair if its benefit to consumers or the competition outweighs any injury it might cause to the interests of consumers. a. True b. False 35. If an advertisement is proven to be deceptive, it may be subject to a cease-and-desist order. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. Bee borrows funds from Credit Union to repair her home and to buy a car. She buys a laptop from Discount Store in a transaction financed by the seller. If these parties are subject to the Truth-in-Lending Act, Regulation Z applies to a. the car loan only. b. the home repair loan only. c. the retail installment sale only. d. the car loan, the home repair loan, and the retail installment sale. 37. An ad for Running Shoes Inc. states that its footwear is “The Winner’s Choice.” Because of this ad, the Federal Trade Commission is most likely to issue a. a cease-and-desist order. b. a counteradvertising order. c. a settlement. d. none of the choices.

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Chap 44_15e 38. Mai receives an unsolicited credit card in the mail and tosses it on her desk. Without Mai’s permission, her roommate Nan uses the card to buy a new laptop for $1,800. Mai is liable for a. $1,800. b. $500. c. $50. d. none of the choices. 39. Leo’s application to Metro Bank for a credit card is denied on the basis of what Leo believes is an inaccurate credit report. Leo should a. immediately apply for a credit card with a different financial institution. b. appeal the denial to the appropriate federal or state agency. c. obtain his credit report and notify the reporting agency of inaccuracies. d. file a suit against the bank, alleging a violation of federal credit laws. 40. Quik Mart sells groceries. Rite Price sells groceries and fills prescriptions. The party with the chief responsibility to prevent unsafe food and drugs from being sold is a. Quik Mart and Rite Price. b. the Consumer Product Safety Commission. c. the Federal Trade Commission. d. the Food and Drug Administration. 41. Tia takes out a loan from Urban Bank. When she fails to make the scheduled payments, the lender advises her of further action that it will take. This violates a. no federal law. b. the Fair and Accurate Credit Transactions Act. c. the Fair Debt Collection Practices Act. d. the Truth-in-Lending Act. 42. Lawnscape Company and Mowers Inc. make yard tools. Both companies use only steel produced in the United States. Lawnscape’s ad claims, “We use only U.S. steel, while our competitor uses inferior foreign steel!” Under the advertising standards of the Federal Trade Commission Act, this statement is most likely a. an obvious exaggeration. b. puffery. c. a false claim about a competitor’s product. d. a half-truth. 43. The credit department of Mega-Mart often calls Nora at work about an overdue bill over the objection of Nora’s employer. This is a violation of a. no federal law. b. the Fair and Accurate Credit Transactions Act. c. the Fair Debt Collection Practices Act. d. the Truth-in-Lending Act.

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Chap 44_15e 44. Whole Grains Company wants to make and market new processed bread and cereal products. On each product’s label, standard nutrition facts are a. prohibited. b. required. c. voluntary. d. discretionary. 45. Consumer Finance Corporation (CFC) extends credit to consumers. CFC applies several criteria to decide customers’ “suitability” for credit. Under the Equal Credit Opportunity Act, CFC cannot base its decision on a customer’s a. intelligence. b. education. c. culture. d. race. 46. EZ Workout Inc. advertises Fit Step, an exercise machine, online. In its ads, EZ claims that the use of Fit Step measurably enhances the attainability of fitness and weight loss goals, and will contribute significantly to the length of its users’ lives. In this context, the company’s ads and claims must be a. hyperlinked. b. avoidable. c. substantiated. d. all of the choices. 47. Home Made Inc. advertises a variety of household products online. In this context, the company’s ads must be a. truthful. b. forceful. c. colorful. d. all of the choices. 48. Creamery Inc. makes and sells dairy products. Creamery’s product packages must include a. the company owner’s identity. b. the contents’ net quantity. c. the restaurants and stores in which the product is sold. d. the type of consumer most likely interested in the product. 49. Consumer Staples Inc. includes in its advertising obvious exaggerations, vague generalities, and puffery about its products. The firm may be subject to sanctions for a. obvious exaggerations. b. vague generalities. c. puffery. d. none of the choices.

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Chap 44_15e 50. Faux Products Inc., in its ads, makes false claims about its own products and about the products of its competitors. The firm may be subject to sanctions for the false claims about a. its products only. b. its competitors’ products only. c. its products and its competitors’ products. d. none of the choices. 51. Direct Sales Corporation sells products to consumers over the phone, through the mail, and online. Under the Federal Trade Commission’s Mail or Telephone Order Merchandise Rule, the firm may be liable for failing to a. ship orders within the time promised in its ads. b. notify consumers when orders are shipped. c. provide a cooling-off period of three days before shipping. d. all of the choices. 52. Mattress Company advertises a special sale—all bedding, half price. The ad does not state that the sale price does not include delivery or shipping costs. To avoid claims of deceptive advertising, Mattress should a. clearly and conspicuously disclose the shipping cost in its ads. b. display the shipping cost in small print on ads displayed in stores. c. include the shipping cost in small print on its receipts. d. not reveal the shipping cost. 53. An ad for Bagels Inc. attracts buyers who would otherwise have made purchases from Croissant Company. To bring a successful claim against Bagels under the federal Lanham Act for false advertising, Croissant must establish that a. the ad was false or deceptive. b. the buyers were deceived by the ad. c. the ad directly caused Croissant to lose sales. d. all of the choices. 54. Rollo has a credit card from Shopping Cards Inc. To change the terms, Shopping Cards must a. impose double-cycle billing. b. give Rollo advance notice. c. send monthly bills twenty-one days before the change. d. increase the interest rate only retroactively. 55. Credit Agency Corporation issues consumer credit reports. The company generally does not delete unverifiable or erroneous information from the reports. Under the Fair Credit Reporting Act, this firm may be subject to a. finance charges. b. damages. c. a cease-and-desist order. d. no sanctions.

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Chap 44_15e 56. Value Loan Company extends credit to consumers. Value Loan applies a variety of requirements to determine applicants’ qualifications for credit, the amount, the interest rate, and other terms. Under the Equal Credit Opportunity Act, the lender cannot base its credit decisions on an applicant’s a. credibility. b. financial awareness. c. occupation. d. gender. 57. Lu’s application to Metro Bank for a credit card is denied. Lu can obtain information on his credit history in a credit agency’s files under a. no federal law. b. the Equal Credit Opportunity Act. c. the Fair Credit Reporting Act. d. the Fair Debt Collection Practices Act. 58. The federal agency that oversees the practices of banks, mortgage lenders, and credit-card companies is a. Regulation Z. b. the Federal Reserve Board. c. the Consumer Product Safety Commission. d. the Consumer Financial Protection Bureau 59. Greg signs an installment contract with Home Appliance Store to finance the purchase of new kitchen appliances. This transaction is subject to a. no federal law. b. the Fair Credit Reporting Act. c. the Telecommunications Act. d. the Truth-in-Lending Act. 60. Pro Motor Company makes cars. Federal law requires Pro to attach a label that includes the Environmental Protection Agency’s fuel economy estimate for a vehicle to a. every new car. b. no car—compliance with the law is voluntary. c. select old and new cars. d. every car. 61. Auto & Life Insurance Company fails to notify its new customers when they are charged higher premium rates as a result of their credit scores. This is a willful violation of a. the Equal Credit Opportunity Act. b. the Fair Credit Reporting Act. c. state law, but no federal law. d. the Fair Debt Collection Practices Act.

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Chap 44_15e 62. QT Collection Agency calls Rob several times a day, and in the middle of the night, about an overdue bill that Standard Credit Company turned over to QT for collection. This is a violation of a. no federal law. b. the Fair and Accurate Credit Transactions Act. c. the Fair Debt Collection Practices Act. d. the Truth-in-Lending Act. 63. Federal and state laws are aimed at protecting consumers from all of the following except a. unfair trade practices. b. unsafe products. c. unreasonable credit requirements. d. unwise purchases. 64. ChemCo Inc. makes and sells products containing ingredients potentially hazardous to consumers. The government agency that has the authority to order ChemCo to remove a product from the market is a. the Consumer Product Safety Commission. b. none of the choices. c. the Federal Trade Commission. d. the Food and Drug Administration. 65. Hearth & Home Furniture store advertises bedroom suites at a “Special Low Price of $599.” When Ilene tries to buy one of the suites, Jill, the salesperson, tells her that they are all sold and no more are obtainable. Jill adds that Hearth & Home has other bedroom suites available for as low as $2,599. This is a. a cease-and-desist order. b. bait-and-switch advertising. c. counteradvertising. d. puffery. 66. Teri borrows $10,000 from USA Bank to remodel a room in her home. This transaction is subject to a. no federal law. b. the Consumer Leasing Act. c. the Consumer Product Safety Act. d. the Truth-in-Lending Act. 67. The Federal Trade Commission (FTC) receives numerous complaints that a Renewal Subscriptions Inc. ad is deceptive. The FTC’s first step is to a. draft a formal complaint. b. investigate. c. issue a cease-and-desist order. d. refer the complaints to the U.S. Department of Justice.

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Chap 44_15e 68. Kip opens an account at Lotsa Goodies, and buys a digital music player and other items, but makes no payments on the account. To collect the debt, a Lotsa Goodies representative contacts Kip’s parents. This violates a. no federal law. b. the Fair and Accurate Credit Transactions Act. c. the Fair Debt Collection Practices Act. d. the Truth-in-Lending Act. 69. Spicy Salsa Inc. complains to the Federal Trade Commission (FTC) about an ad broadcast by Tangy Taco Sauce Company, Spicy’s competitor. The FTC investigates and concludes that the ad is deceptive. The FTC’s next step is to a. conduct negotiations between the competitors. b. draft a formal complaint. c. issue a cease-and-desist order. d. permit Spicy to broadcast similarly deceptive counteradvertising. 70. Credit Loan Company extends credit in the ordinary course of its business. Under the Truth-in-Lending Act, Credit Loan must inform potential borrowers of a. credit terms offered by other lenders. b. comparative prices for goods to be bought with the borrowed funds. c. Credit Loan’s credit terms. d. the borrowers’ credit scores. 71. Sugar Treats Company wants to sell its candy in a normal-sized package labeled “Gigantic Size.” Tony Fabrics Inc. wants to advertise its sweaters as having “That Wool Feel,” but does not want to specify on labels that the sweaters are 100 percent polyester. Can these firms market products as they would like? If not, why not?

72. Owen buys a restored 1969 Dodge Charger from Prime Restorations Inc. on credit but makes no payments on the account. Quentin, the owner of Prime Restorations, calls Owen at home on a Monday morning at three A.M. Quentin represents himself as RiteNow Collection Agency and demands payment “or else.” The next day, Quentin sends Owen notice that he has thirty days to request verification of the debt, during which its payment will be suspended, but that if he does not pay the full amount due within five business days, Quentin will arrange for the “destruction of Owen’s good credit rating.” Which laws has Quentin violated, if any, and in what ways?

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Chap 44_15e Answer Key 1. False 2. True 3. True 4. True 5. False 6. False 7. False 8. True 9. True 10. False 11. True 12. True 13. True 14. False 15. True 16. False 17. True 18. False 19. False 20. False 21. True 22. False 23. True 24. False 25. False 26. True

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Chap 44_15e 27. False 28. True 29. False 30. False 31. True 32. False 33. True 34. True 35. True 36. d 37. d 38. d 39. c 40. d 41. a 42. c 43. c 44. b 45. d 46. c 47. a 48. b 49. d 50. c 51. a 52. a 53. d 54. b Copyright Cengage Learning. Powered by Cognero.

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Chap 44_15e 55. b 56. d 57. c 58. d 59. d 60. a 61. b 62. c 63. d 64. a 65. b 66. d 67. b 68. a 69. b 70. c 71. There are a number of federal laws that deal specifically with information given on labels and packages, including the Fair Packaging and Labeling Act. In general, the information on such labels must be truthful and complete (not a halftruth that would lead a consumer to a false conclusion). The information must be accurate and be conveyed in words that are understood by the ordinary consumer. Possible dangers from the products’ use or misuse must also be included. There are other federal laws that prohibit unfair and deceptive advertising, including labels. These laws include the Federal Trade Commission Act. Deceptive advertising occurs if a reasonable consumer would be misled by the advertising claims. The Federal Trade Commission (FTC) can investigate a complaint, and if, after the investigation, it believes that a seller has engaged in deceptive advertising, it can send a formal complaint to the alleged offender. If the seller does not agree to a settlement, the FTC can conduct a hearing before an administrative law judge. If the FTC succeeds in proving that a seller’s labels or packaging (or other ads) are deceptive, it can issue a cease-anddesist order. The agency might also impose a counteradvertising sanction, requiring a seller to issue ads—in print, on radio, and on television—to inform the public about the misinformation. Other sanctions are possible.

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Chap 44_15e 72. Quentin, the owner of Prime Restorations, is in violation of the Fair Debt Collection Practices Act (FDCPA). Quentin can attempt to collect the debt to Prime Restorations without being subject to the provisions of the FDCPA, which applies only to debt-collection agencies that regularly attempt to collect debts on someone else’s behalf. But by misrepresenting that he is acting on behalf of a collection agency, Quentin has fallen under an exception in the FDCPA. Causing Owen, or any other consumer, to believe that Quentin is a representative of a collection agency subjects Quentin to the law. The FDCPA prohibits contacting a debtor during an inconvenient or unusual time, which Quentin has done in this problem with the early morning call. If the “or else” phrase is construed as harassment or intimidation—as a threat of potential violence, for example—Quentin will be in further violation of the FDCPA. Also, the statement in the notice that Owen has thirty days to request verification of the debt but only five business days to pay it violates the FDCPA. The five-day demand is misleading and nullifies the thirty-day suspension.

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Chap 45_15e Indicate whether the statement is true or false. 1. Under the nuisance doctrine, a person may be held liable for complaining about another’s use of his or her property. a. True b. False 2. An individual injured by pollution may be denied injunctive relief if the injunction would impose greater hardships on the polluter and the community than the harm suffered by the plaintiff. a. True b. False 3. The Environmental Protection Agency can require a manufacturer planning to use a new chemical compound to first determine its effect on human health. a. True b. False 4. Each supplier of drinking water is required to send an annual statement describing the source to every household it supplies. a. True b. False 5. New sources of water pollutants must install pollution-control equipment with all deliberate speed after beginning operations. a. True b. False 6. The federal act that provides the basis for issuing regulations to control multistate air pollution covers only mobile sources. a. True b. False 7. Because point-source water pollution control is based on a permit system, the permits are the key to enforcement. a. True b. False 8. One of the main goals of the Clean Water Act is to make water safe for the discharge of pollutants. a. True b. False 9. Many point sources emitting pollutants into water do not need a permit. a. True b. False

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Chap 45_15e 10. Cities and counties may impose rules regulating methods of wastes removal. a. True b. False 11. Suppliers of drinking water are required to notify the public of any problems with the water they supply, such as when the water fails to meet established standards. a. True b. False 12. Selling a site where hazardous wastes were disposed of relieves the seller—and the buyer—of liability for the clean up, as does merging with or buying a corporation that has not violated Superfund. a. True b. False 13. Smelting and other industrial processes may emit substances classified as hazardous, but house painting and other small business activities do not. a. True b. False 14. Special requirements must be met to discharge toxic chemicals into surface waters. a. True b. False 15. To obtain relief under the nuisance doctrine, a property owner may have to identify a distinct harm separate from that affecting the general public. a. True b. False 16. Violators of the Clean Water Act may be liable for various penalties, but they cannot be required to clean up their pollution or pay the cost of doing so. a. True b. False 17. The Environmental Protection Agency is required to set maximum levels for pollutants in public water systems. a. True b. False 18. A federal agency must file an environmental impact statement for an action even if, according to the agency, the action will have no significant effect on the environment. a. True b. False 19. The Environmental Protection Agency is required to determine which forms of solid waste should be considered hazardous. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 45_15e 20. A business that believes a federal agency’s action threatens the environment can use an environmental impact statement as a means to challenge it. a. True b. False 21. To minimize potential liability under Superfund, a business can conduct its own regular environmental compliance audits of tis operations. a. True b. False 22. Wetlands may be filled or dredged without a permit from the U.S. Army Corps of Engineers. a. True b. False 23. A citizen can sue to enforce an environmental regulation, or to obtain the regulation of a pollutant, if the government fails to act. a. True b. False 24. Employees might sue an employer whose failure to use pollution controls contaminated the air and caused the employees to suffer respiratory illnesses. a. True b. False 25. A business that engages in the transportation of radioactive materials is strictly liable for any injuries the activities cause only if the injured party proves that the business failed to exercise reasonable care. a. True b. False 26. Those who knowingly violate the Clean Air Act may be subject to civil penalties but not criminal penalties. a. True b. False 27. Because the government knows CO2 pollution causes climate change, plaintiffs might succeed in a suit alleging that by failing to address this cause the government is violating their constitutional rights. a. True b. False 28. The federal Clean Air Act does not establish specific emissions standards for each air hazardous pollutant. a. True b. False 29. Persons who provide information about violators of the Clean Air Act may be paid up to $10,000. a. True b. False

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Chap 45_15e 30. The primary responsibility for implementing air-quality standard for stationary sources rests with the federal government. a. True b. False 31. National effluent (pollution) standards are set by each affected industry. a. True b. False 32. The National Pollutant Discharge Elimination System focuses mainly on industrial wastewater and has never been expanded to cover storm water discharges. a. True b. False 33. Liability under CERCLA does not extend to businesses that merge with or buy corporations that have violated the statute. a. True b. False 34. The Environmental Protection Agency can prohibit altogether a toxic substance that poses an imminent hazard. a. True b. False 35. An environmental impact statement includes a formal analysis of the impact of any major federal action that will significantly affect the environment. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. Riverside Glass Company operates a manufacturing plant on Spawn River. Discharging pollutants from the plant into the river can result in a. civil penalties and criminal penalties. b. civil penalties only. c. criminal penalties only. d. no penalties. 37. Clean Wash Inc. operates a chain of car washes throughout the United States. The government entity that is most likely to be involved in regulating the chain’s environmental impact is a. Congress. b. federal and state regulatory agencies. c. local chambers of commerce. d. local police departments.

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Chap 45_15e 38. Ski Resorts Inc. wants to add a new run to its facility in a national park on federal land. For this action, an environmental impact statement is a. prohibited. b. required. c. unnecessary. d. voluntary. 39. Congress enacts a new air quality statute. The enforcement of this and other federal environmental legislation relies on a. all levels of government and private citizens. b. federal agencies only. c. state and local governments only. d. voluntary compliance. 40. The state of California passes a law to restrict emissions form motor vehicles. Thee emissions may also be regulated by a. other states and the federal government. b. no other government. c. the federal government only . d. other states only. 41. The National Park Service hires Outdoor Play Inc. to replace outdated playground equipment in a handful of national parks. For this action, an environmental impact statement is most likely a. prohibited because the action does not affect the environment. b. required because the action is “federal.” c. unnecessary because the action is not “major.” d. voluntary because the action does not affect the environment. 42. Hi-Yield, Inc., makes a herbicide with a risk to people of developing cancer from exposure. This substance must be a. disposed of before anyone develops cancer. b. registered before it is sold. c. taken off the market and placed in temporary storage. d. used only in a way that avoids exposure to people. 43. The main goals of the Clean Water Act include a. making water safe for swimming. b. protecting fish and wildlife. c. eliminating the discharge of pollutants into water. d. all of the choices.

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Chap 45_15e 44. An environmental impact statement must analyze the impact that the action will have on a. the economy. b. the environment. c. the marketplace. d. all of the choices. 45. County Water District operates a public water supply system. The district must send to every household that it supplies with water an annual statement describing a. the district’s financial situation and material facts that might affect it. b. other operations, such as irrigation and water conservation, in which the district is involved and to what extent. c. parties who might be held liable if pollution problems arise. d. the source of the water, and any contaminants and health concerns. 46. Regulations governing air pollution cover mobile and stationary sources. Those who may be subject to penalties for violations of the Clean Air Act include a. corporate officers who knowingly violate the act. b. persons who provide information about violators but otherwise fail to act. c. private citizens who fail to sue violators. d. none of the choices. 47. Those responsible for operations that create dirt, smoke, noxious odors, noise, or toxic substances can be held liable under the common law theory of a. environmental impact. b. nuisance. c. pollution. d. hazardous substance. 48. Bread Brands LLC operates a dough making and packaging plant—a “major source”—that emits hazardous air pollutants for which the Environmental Protection Agency (EPA) has set maximum levels of emission. The plant does not use equipment to reduce its emissions. Under the Clean Air Act, this is most likely a. a violation. b. not a violation because dough is not considered a pollutant. c. not a violation because packaging is not regulated by the EPA. d. not a violation because the plant is not attempting to reduce emissions. 49. The Environmental Protection Agency (EPA) did not regulate carbon dioxide (CO2) emissions from motor vehicles until after the United States Supreme Court ruled that the EPA had the authority to do so because a. the Clean Air Act does not mention CO2 emissions. b. scientists do not all agree that CO2 contributes to climate change. c. climate change has widespread effects, not particularized harms. d. CO2 emissions constitute a public danger.

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Chap 45_15e 50. Creosote Inc. operates a plant—a “major source”—that emits hazardous air pollutants for which the Environmental Protection Agency has set maximum levels of emission. The plant does not use equipment to reduce its emissions. Under the Clean Air Act, this is most likely a. a violation. b. not a violation because a “major source” is exempt. c. not a violation because the plant does not use any equipment. d. not a violation because the plant is not a mobile source. 51. Using funds obtained through taxes on certain businesses, Superfund a. pays for the clean up of hazardous waste disposal sites. b. reimburses polluters who correct environmental violations. c. conducts environmental compliance audits of government operations. d. all of the choices. 52. Retail Properties Inc. wants to build a parking ramp to connect to its Shoppers Mall, both of which are on private land. For this action, an environmental impact statement is a. prohibited. b. required. c. unnecessary. d. voluntary. 53. Noxious Inc. makes and sells pesticides. If a substance is identified as harmful and the harm is imminent, the Environmental Protection Agency can a. conduct an inspection of the maker’s plant. b. declare the substance to be unregulated and allow its production. c. ignore the risk if the benefit outweighs the harm. d. order the substance to be sold in an adulterated form. 54. Industrial Solvents Inc. averages $15,000 profit per day before deciding to ignore air pollution standards, after which the average is $30,000. Industrial Solvents is subject to a fine of a. $0. b. $15,000 per day. c. $30,000 per day. d. $30,000 total. 55. Fire Retardants Inc. operates without required pollution control technology, causing a discharge of chemical waste into Green River. This can result in a. a fine. b. an injunction. c. imprisonment. d. all of the choices.

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Chap 45_15e 56. Midpoint City operates its own municipal public drinking water system for which the Environmental Protection Agency has set maximum levels of pollutants. The city does not use any equipment to meet these standards. With regard to any contamination of the water, under the Safe Drinking Water Act, this is most likely a. a violation. b. not a violation because the city does not set the standards. c. not a violation because water is not a stationary source. d. not a violation because the city does not use any equipment. 57. Without a permit, Timberline Plywood Company discharges its untreated wastewater into Urban City’s storm drainage pipes, which empty into Valley Creek. Under the Clean Water Act, this discharge is most likely a. a violation. b. not a violation because the company does not have a permit. c. not a violation because water is not a stationary source. d. not a violation because a storm drainage pipe is not a point source. 58. Rural Electric Company submits a bid to build a dam on federal land as part of a federal project. For this action, an environmental impact statement is most likely a. prohibited. b. required. c. unnecessary. d. voluntary. 59. Disposal Company operates a hazardous waste storage facility. Concerned that there may be a release of chemicals from the site, the company sells the property to Eager Developers Inc. If there is a release, the seller is most likely a. liable. b. not liable because the site was sold before the release. c. not liable because the company was concerned about the release. d. not liable because the company no longer operates the facility. 60. Before being transported, hazardous waste generated by Tire Maker Inc. must be properly labeled and packaged under the Resource Conservation and Recovery Act by a. the federal Environmental Protection Agency. b. the local Resource Conservation and Recovery Committee. c. the state Environmental Regulatory Commission. d. Tire Maker, Inc. 61. Fried Food Inc. operates a commercial frying plant, discharging pollutants into the air. Greta reports the violations to the Environmental Protection Agency. Greta a. is not entitled to a payment. b. may be paid up to any amount. c. may be paid up to $1,000. d. may be paid up to $10,000.

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Chap 45_15e 62. BioChem Corporation operates a hazardous waste storage facility. ChemCo Inc. buys BioChem before it is discovered that the firm’s disposal practices violated CERCLA. With respect to these violations, Superfund is likely to impose on ChemCo a. strict liability. b. liability under the nuisance doctrine. c. liability on a negligence theory. d. no liability. 63. Solar Power Company wants to erect an array of solar panels on private land, for which a federal permit is required. For this action, an environmental impact statement is a. prohibited. b. required. c. unnecessary. d. voluntary. 64. Water Power Corporation wants to begin operations that include the discharge of waste into navigable waters. Under the Clean Water Act, the company must install certain equipment a. with all deliberate speed after beginning operations. b. before beginning operations. c. only on a voluntary basis. d. only if a regulatory agency challenges the discharge. 65. Without a permit from the U.S. Army Corps of Engineers, Condos Corporation fills a wetlands area that it owns in preparation for the construction of a housing complex. Under the Clean Water Act, this is most likely a. a violation. b. not a violation because a permit is not needed to fill wetlands. c. not a violation because the area was filled before construction. d. not a violation because there was no discharge of pollution. 66. A cruise ship owned by Ocean Tours Inc. discharges some of the oil used in its engines into Puget Sound and onto the shore. Under the Oil Pollution Act, this is most likely a. a violation. b. not a violation because this type of discharge is not pollution. c. not a violation because a cruise ship is not a stationary source. d. not a violation because a ship’s engine is not a point source. 67. Regional Disposal Center operates a recycling plant. Adjacent property owners file a suit, alleging injuries from hazardous waste discharged into the environment by the plant. To succeed, the plaintiffs must show that the defendant failed to use reasonable care if the suit is based on a. a negligence theory. b. a nuisance theory. c. any theory. d. a strict liability theory.

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Chap 45_15e 68. Ultrahazard Corporation transports radioactive materials. Vince, an Ultrahazard employee, is diagnosed with radiation sickness after exposure to the materials. Vince’s suit against Ultrahazard to recover for the injury is a. an environmental impact statement. b. a nuisance. c. a toxic tort. d. a hazardous substance response. 69. Deep Earth Extraction Inc. operates a facility near Estuary Bay. Discharging waste from the facility into the bay can result in a. penalties and damages. b. penalties only. c. damages only. d. none of the choices. 70. A constant tension between the desire for profits and productivity and the desire to protect the environment exists because a. environmental pollution causes many premature deaths each year. b. environmental regulations affect domestic and foreign corporations. c. the traditional focus has been on the growth of industries. d. the costs of complying with environmental regulations are high. 71. Metal Foundry Inc.’s complex spews smoke and odors. The site features its own rail system, and trucks enter and exit the complex night and day. Neal and other residents of an adjacent neighborhood can feel the vibrations of the trains and trucks, and suffer other effects from the operations. Neal and others file a suit against Metal Foundry. Why might the court rule in favor of the defendant?

72. ChemMix Company is a subsidiary of Diversified Industries Inc. ChemMix operates a hazardous waste disposal site. Electrical Supply Corporation is one of many parties who generate waste disposed of at the site. ChemMix borrows money from First State Bank, which takes over the site when ChemMix goes bankrupt. The Environmental Protection Agency discovers a leak at the site. Can any of these private parties be forced to pay for the clean up? If so, who?

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Chap 45_15e Answer Key 1. False 2. True 3. True 4. True 5. False 6. False 7. True 8. False 9. False 10. True 11. True 12. False 13. False 14. True 15. True 16. False 17. True 18. False 19. True 20. True 21. True 22. False 23. True 24. True 25. False 26. False

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Chap 45_15e 27. True 28. True 29. True 30. False 31. False 32. False 33. False 34. True 35. True 36. a 37. b 38. b 39. a 40. a 41. c 42. b 43. d 44. b 45. d 46. a 47. b 48. a 49. a 50. a 51. a 52. c 53. a 54. c Copyright Cengage Learning. Powered by Cognero.

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Chap 45_15e 55. d 56. a 57. a 58. b 59. a 60. d 61. d 62. a 63. b 64. b 65. a 66. a 67. a 68. c 69. a 70. d 71. The court might rule in favor of Metal Foundry, or at least decline to enjoin its operations, on the ground that the hardships to be imposed on Metal Foundry and on the community are greater than the hardships suffered by Neal and the other residents of the nearby neighborhood, despite the pollution and noise. The court might deny an injunction if the Metal Foundry plant is the heart of the local economy, for example, and award the residents only damages.

72. Any of the private parties mentioned in the question can be required to pay the entire cost for the clean up of the site. Under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), potentially responsible parties on whom such costs may be imposed include persons who generated wastes disposed of at the site (Electrical Supply) and persons who owned or operated the site at the time of the disposal (ChemMix). ChemMix’s parent Diversified Industries may also be liable, as may First State Bank and any other lender who actually participates in managing a hazardous waste disposal site that requires a clean up.

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Chap 46_15e Indicate whether the statement is true or false. 1. Under the Clayton Act, a business firm cannot merge with another unless the effect is to substantially lessen competition. a. True b. False 2. Any agreement that results in enhanced market power violates the antitrust laws. a. True b. False 3. Establishing the relevant product market is a key issue in monopolization cases because the way a market is defined can determine whether a firm has monopoly power. a. True b. False 4. Blu-ray producers cannot jointly lobby Congress to change the copyright laws without being held liable for attempting to restrain trade. a. True b. False 5. Proving an antitrust violation requires showing a misuse of market power. a. True b. False 6. A firm may be deemed a monopolist, even though it is not the only seller in a market, because what matters is size in relation to the market. a. True b. False 7. Antitrust legislation is based on a belief that competition leads to lower prices, better products, a wider selection of goods, and more product information. a. True b. False 8. Competition is not necessarily diminished solely as a result of market concentration. a. True b. False 9. Because a single seller is free to deal with whomever it wishes, the seller’s unilateral refusal to deal cannot violate Section 2 of the Sherman Act. a. True b. False

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Chap 46_15e 10. The rule of reason represents a more flexible economic analysis of agreements among competitors than the rigid application of a per se standard. a. True b. False 11. Restraints of trade are laws that regulate economic competition. a. True b. False 12. To reduce marketing costs and raise prices, competitors can divide up marketing territories or customers without violating antirust law. a. True b. False 13. Price-fixing agreements are considered violations of the Sherman Act because of their real and potential adverse effects on open and free competition. a. True b. False 14. Any conspiracy that has a substantial effect on U.S. commerce is within the scope of the Sherman Act, unless it occurs outside the United States. a. True b. False 15. Under the Clayton Act, a seller can condition the sale of a product on the buyer’s promise not to deal in the goods of the seller’s competitors. a. True b. False 16. Predatory pricing is not an antitrust violation because the tactic can eliminate a firm’s competitors, enabling it to increase prices and earn higher profits to benefit its owners and employees. a. True b. False 17. A market in which there is a single seller or a very limited number of sellers is a monopoly. a. True b. False 18. Only the Federal Trade Commission can enforce the Clayton Act. a. True b. False 19. If the legitimate benefits outweigh the anticompetitive effects of a resale price maintenance agreement, the agreement may be held lawful. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 46_15e 20. Section 2 of the Sherman Act essentially condemns the act of monopolizing, not the possession of monopoly power. a. True b. False 21. Any contract, combination in the form of a trust, or conspiracy to restrain trade and commerce can be declared illegal under the antitrust laws. a. True b. False 22. To deem an agreement a per se violation of antitrust law, a court must determine whether the agreement actually constitutes a restraint on trade. a. True b. False 23. Even if a firm possesses monopoly power and engaged in anticompetitive conduct, it cannot be inferred that the firm acted with the intent to monopolize. a. True b. False 24. It is in society’s interest to condemn every acquisition of monopoly power as an antitrust violation even though a dominant market share may be the result of business acumen. a. True b. False 25. A price-fixing agreement or other anticompetitive agreement to control a portion of U.S. markets cannot be held to be a per se violation of the antitrust laws if the agreement involves a foreign firm. a. True b. False 26. Because market power arises from access to consumer data, collecting such information is an antitrust violation. a. True b. False 27. Any agreement among competitors to artificially fix prices or restrict output is a per se violation of Section 1 of the Sherman Act. a. True b. False 28. Only the U.S. Department of Justice can prosecute violations of the Sherman Act. a. True b. False

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Chap 46_15e 29. Because commerce operates more efficiently when competitors cooperate, Section 1 of the Sherman Act permits rivals to consolidate market power. a. True b. False 30. A business, but not an individual person, can be deemed liable for monopolizing or attempting to monopolize trade or commerce in violation of the antitrust laws. a. True b. False 31. Requiring users of a social media site to agree to certain terms and conditions to use the site is most likely an antitrust violation. a. True b. False 32. Fixing prices, controlling production, and establishing exclusive geographic markets can reduce or eliminate economic competition. a. True b. False 33. The legality of a tying arrangement depends in part on the agreement’s likely effect on competition in the relevant markets. a. True b. False 34. Every threat of monopolization is condemned as a violation of antitrust law even fi the alleged offender does not possess some degree of market power. a. True b. False 35. The power to control the market price of a product is market power. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. Every agreement concerned with trade, and every regulation of trade, restrains. The test of legality under the antitrust laws, according to the rule of reason, is whether the restraint a. is blatantly, inherently anticompetitive. b. has a substantial effect on interstate commerce. c. merely regulates and thereby promotes competition. d. suppresses or destroys competition.

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Chap 46_15e 37. Best View Corporation offers to sell LED screens to Computer & Video, Inc., only if the buyer also agrees to buy the seller’s servicing of its products. This is a. an exclusive-dealing contract. b. a tying arrangement. c. price discrimination. d. business acumen. 38. Ranch Supplies Company believes that its chief competitor Stock & Equipment Inc. engages in anticompetitive behavior in an attempt to drive Ranch Supplies out of the market. Under the Clayton Act, Ranch Supplies can sue Stock & Equipment for a violation of a. none of the choices. b. the Clayton Act only. c. any of the federal antirust laws. d. the Sherman Act only. 39. Power Inc. and QualGas Corporation refine and sell natural gas. To limit the supply on the market and thereby raise prices, Power and QualGas agree to buy “excess” supplies from dealers and “dispose” of it. This is a. a deal that neither restrains trade or harms competition. b. not within the scope of the Sherman Act. c. a per se violation of the Sherman Act. d. subject to analysis under the rule of reason. 40. Components Inc., a maker of vehicle parts, refuses to sell to DIY Repair Inc., a national vehicle service firm. The maker convinces Engine Parts Company, a competitor, to do the same. This is a. a group boycott. b. a tying arrangement. c. a trade association. d. a market division. 41. Mountain Crest Inc. makes and distributes its branded products to authorized dealers. To prevent price-cutting by dealers in direct competition, the firm imposes limits on where each dealer can sell the products. This is a. a territorial restriction. b. a trade association. c. smart marketing. d. a price-fixing agreement. 42. Oil Industries Inc. and Petro Corporation are competing refineries situated on the Gulf coast. The two firms cooperate to obtain federal funds to build a levee that could protect their facilities from rising sea levels. With respect to antitrust law, this effort is a. a violation because it is “objectively baseless.” b. a violation because funds will be spent for an anticompetitive purpose. c. a violation because it involves a conspiracy to affect market power. d. exempt from antitrust enforcement.

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Chap 46_15e 43. Dairy Cream Inc. makes and sells ice cream. Dairy Cream wants to merge with EZ Freeze Inc., its main competitor and a maker of ice cream and other frozen desserts. In a challenge to the deal on a charge of monopolization, the relevant product market includes ice cream and a. no other products. b. products that are related, such as cake. c. products that have identical attributes, such as frozen yogurt. d. products that must be kept cold, such as frozen fruit. 44. Fertile Acres Inc., Growers Farm Co-op, and Harvest Orchards agree to exchange information, conduct an advertising campaign, and set certain regulatory standards to govern their operations. This association is a. a deal that neither restrains trade nor harms competition. b. not within the scope of the Sherman Act. c. a per se violation of antitrust law. d. subject to analysis under the rule of reason. 45. The Medical Device Makers Association does not include all manufacturers of medical and surgical instruments. The association refuses to deal with any parties who do not carry the products of its members. This is a. a situation that neither restrains trade nor harms competition. b. not within the scope of the Sherman Act. c. a per se violation of antitrust law. d. subject to analysis under the rule of reason. 46. Four grocery stores account for 80 percent of the retail food sales in Metro City. Two of the stores want to merge. In determining whether the merger violates the Clayton Act, the most crucial factor is a. the market shares of the firms in their market. b. the market value of the firms’ shares in the stock market. c. the comparative value of each store in a market for their sale. d. the total value of the market in relation to the stock for sale in the stores. 47. Antirust legislation is based on society’s desire to a. increase prices. b. foster competition. c. consolidate market power. d. encourage restraints of trade. 48. Say It Inc. and Text Talk Inc. are social media companies. They compete for employees, users, and advertisers. The two firms work together on security threats, however. With respect to antitrust law, this cooperation is most likely a. a violation because it is not possible to completely thwart such fraud. b. a violation because it concerns sharing confidential information. c. a violation because it involves setting aside competitive differences. d. not a violation because it is not anticompetitive.

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Chap 46_15e 49. Baby Goods Inc. buys Child Shops Inc. in an attempt to gain monopoly power. Remedies that a court might impose in a suit against Baby Goods for a violation of the antitrust laws include a. divesting itself of the control or ownership of Child Shops. b. funding new entries to the relevant market. c. all of the choices. d. using its market power to encourage increased competition. 50. With respect to anticompetitive behavior, the Federal Trade Commission Act prohibits a. civil violations of the Sherman Act. b. criminal violations of the Clayton Act. c. all forms not covered under other federal antitrust laws. d. only forms covered under other federal antitrust laws. 51. When applying the rule of reason to an activity that allegedly violates the antitrust laws, a court will not consider a. the purpose of the agreement. b. the parties’ market ability to implement the agreement. c. whether the agreement is a per se violation. d. the potential effect of the agreement on competition. 52. An antitrust action is brought against Carrier Freight Company, alleging that a certain act constitutes the offense of attempted monopolization. To qualify, the act must a. be likely to succeed. b. be unlikely to succeed. c. succeed. d. fail. 53. With respect to antitrust violations, the Federal Trade Commission does not enforce a. the Federal Trade Commission Act. b. the Clayton Act. c. the Sherman Act. d. any of the federal antitrust laws. 54. Bio Med Corporation makes and sells Curative, the most prescribed name-brand pain-relief medication. Drugs Inc. has the potential to make a generic version of the same drug. Bio Med agrees to pay Drugs not to make or sell the generic. This agreement is most likely a. a deal that neither restrains trade or harms competition. b. not within the scope of the Sherman Act. c. a per se violation of the Sherman Act. d. subject to analysis under the rule of reason.

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Chap 46_15e 55. Pump Makers Inc. makes pumps for fire trucks and conditions shipments of its products to Quality Motors Corporation—a maker of fire trucks—on Quality’s agreement to buy additional pumps only from Pump Makers. This is a. an exclusive-dealing contract. b. a tying arrangement. c. price discrimination. d. a unilateral refusal to deal. 56. Road Tires Inc. conditions the sale of its products to Service Stores on the buyer’s agreement to buy Road’s tirerepair kits. Under the Clayton Act, this deal is a. a per se violation. b. a violation, unless the seller’s competitors make similar deals. c. a violation, depending on its purpose and the effect on competition. d. not a violation. 57. Under a contract, Oil Shale Corporation forbids Petro Inc., a wholesale buyer of Oil Shale’s products, to purchase products from the seller’s competitors. This is prohibited a. under any circumstances. b. if its effect is to stabilize the relevant market. c. if its effect is to substantially lessen competition. d. if tis purpose is to create a monopoly. 58. American Oil Company joins a cartel that includes foreign participants to set the price of oil. The cartel has a substantial effect on U.S. commerce. With respect to the foreign participants, under U.S. antitrust laws, this is most likely a. a per se violation. b. a violation, depending on the price. c. a violation, depending on the effect in foreign markets. d. not a violation. 59. Expressly exempt from antitrust laws because it is not interstate commerce, according to the United Supreme Court, is a. digital streaming. b. video production. c. professional football. d. professional baseball. 60. To drive its competitors out of a certain geographic segment of its market, Drones Inc. sets the prices of its products below cost for the buyers in that area. This is a. price-fixing. b. smart marketing. c. predatory pricing. d. price discrimination.

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Chap 46_15e 61. Fish Purveyors Corporation and Gill Netters Inc. are the principal suppliers of crustaceans in their market. They agree that Fish Purveyors will sell exclusively to retailers and Gill Netters will sell exclusively to wholesalers. This is most likely a. a situation that neither restrains trade nor harms competition. b. not within the scope of the Sherman Act. c. a per se violation of antitrust law. d. subject to analysis under the rule of reason. 62. Edibles Inc. and Food Stuff Corporation are competitors. Each firm has capital, surplus, and undivided profits in excess of $40 million and competitive sales of more than $5 million. Gina and Hal serve as directors on both firms’ boards. Under the Clayton Act’s restriction concerning interlocking directorates, Gina and Hal are a. liable for failing to comply. b. not liable because the firms are likely to continue to compete. c. not liable because the firms’ officers conduct the competitive activities. d. not liable because the firms’ shareholders can affect company policies. 63. Battery Corporation’s production, distribution, and marketing methods are unique. Its capital value and size are greater than its competitors. A suit is filed against the firm, alleging the offense of monopolization. To determine whether Battery has monopoly power requires looking at a. the price of a share of the firm’s stock. b. the corporation’s size alone. c. the business’s production methods and marketing techniques. d. the relevant market. 64. The chief executive officers of the major U.S. steel makers would most likely be prosecuted under the antitrust laws if they a. met to review developments in the domestic market for steel. b. agreed to work together to control the price of domestic steel. c. conferred on resource, supply, and distribution issues. d. promised to reveal to each other their positions on trade and tariffs. 65. Two Chinese firms, Wong Ltd. and Xiang Ltd., engage in a conspiracy to control the distribution of certain goods in global markets. This may violate U.S. antitrust laws a. under no circumstances. b. if the conspiracy has a substantial effect on U.S. or foreign commerce. c. if the conspiracy has a substantial effect on U.S. and foreign commerce. d. if the conspiracy has a substantial effect on U.S. commerce only. 66. The federal agencies that enforce the antitrust laws include a. the U.S. Department of Justice. b. the Securities and Exchange Commission. c. the Consumer Financial Protection Bureau. d. all of the choices.

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Chap 46_15e 67. Snowboards Inc. refuses to sell its products to Timber Winter Sports Stores, Inc., a retail snowboard dealership. This violates Section 2 of the Sherman Act if Snowboards has monopoly power and a. none of the choices. b. Timber has or is likely to acquire monopoly power. c. the refusal is unilateral. d. the refusal has an anticompetitive effect on the market. 68. Dig Inc. is the major wholesale distributor of heavy equipment in six states. Dig’s closest competitor is Excavator Company. The two firms agree that Dig will operate in four of the states and Excavator in the other two. This is a. a group boycott. b. a market division. c. a price-fixing agreement. d. a trade association. 69. Online Media Inc. bundles its products so that consumers are forced to pay for access to some sites that they do not want in order to obtain access to sites that they do want. A court will likely rule that the bundling does not violate the rule of reason if it a. is the most restrictive means for the firm to achieve its purpose. b. is fully within the firm’s ability to achieve. c. does not injure competition. d. suppresses or destroys competition. 70. Cosmétique Inc. makes and sells cosmetics and related products. By selling its goods at prices substantially below the normal cost of production, the firm hopes to drive its competitors from the market. This is a. market power pricing. b. predatory pricing. c. price discrimination. d. price-fixing. 71. Under what circumstances would Quality Market, a small store in Rustic, an isolated town, be considered a monopoly? If Quality Market is a monopoly, is it in violation of antitrust law?

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Chap 46_15e 72. Linking Cogs Corporation and Meshed Gears Inc. are competitors selling certain machine parts that are otherwise generally unattainable in their geographic market. This market includes the states of Minnesota, North Dakota, and South Dakota. Linking Cogs and Meshed Gears agree that Linking Cogs will no longer sell in Minnesota and that Meshed Gears will no longer sell in North and South Dakota. Have Linking Cogs and Meshed Gears violated any antitrust law? If so, which one? Explain. If they had divided their market by type of customer rather than geographic are, would the result be the same? Why or why not?

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Chap 46_15e Answer Key 1. False 2. False 3. True 4. False 5. True 6. True 7. True 8. True 9. False 10. True 11. False 12. False 13. True 14. False 15. False 16. False 17. True 18. False 19. True 20. True 21. True 22. False 23. False 24. False 25. False 26. False

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Chap 46_15e 27. True 28. True 29. False 30. False 31. False 32. True 33. True 34. False 35. True 36. c 37. b 38. c 39. c 40. a 41. a 42. d 43. c 44. d 45. c 46. a 47. b 48. d 49. a 50. c 51. c 52. a 53. c 54. c Copyright Cengage Learning. Powered by Cognero.

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Chap 46_15e 55. a 56. c 57. c 58. a 59. d 60. d 61. c 62. a 63. d 64. b 65. d 66. a 67. d 68. b 69. c 70. b 71. The elements of the offense of monopolization under the Sherman Act include monopoly power and its willful acquisition. Market domination that results from legitimate competitive behavior (such as foresight, innovation, skill, good management, or, as in this problem, isolation) is not a violation. Also, size alone does not determine whether a firm is a monopoly—size in relation to the market is what matters. A small store like Quality Market in an isolated town like Rustic has a monopoly if it is the only store serving that market. Monopoly involves the power to affect prices and output. If a firm has sufficient market power to control prices and exclude competition, that firm has monopoly power. Monopoly power in itself is not a violation of the Sherman Act. The offense also requires an intent to acquire or maintain that power through anticompetitive means. 72. Linking Cogs and Meshed Gears have violated antitrust law. The major antitrust law they have violated is the Sherman Act, Section 1. Linking Cogs and Meshed Gears are engaged in interstate commerce, and the agreement to divide marketing territories between them is a market division—a contract in restraint of trade. This sort of concerted action reduces the costs to the competitors and allows each of them to increase the prices of the parts sold in their respective territories. The U.S. Department of Justice (DOJ) could seek criminal penalties against each corporation, including fines and imprisonment. In addition, the DOJ could institute civil proceedings to restrain this conduct. If these competitors had divided their market by type of customers—retailers and wholesalers, or manufacturers and distributors, for example—the result would most likely be the same. Copyright Cengage Learning. Powered by Cognero.

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Chap 47_15e Indicate whether the statement is true or false. 1. Penalties for aiding or assisting in the preparation of false tax returns are limited to one penalty per taxpayer per tax year. a. True b. False 2. Once an attorney-client relationship arises, to encourage frankness, all communications between the parties are privileged. a. True b. False 3. An accounting firm can lawfully perform both auditing and non-auditing services for the same company at the same time because the firm could otherwise be exposed to potentially massive liability. a. True b. False 4. In some states, a party can recover from an accountant for negligence only outside an accountant-client relationship. a. True b. False 5. A professional can be held liable for constructive fraud whether or not he or she acted with fraudulent intent. a. True b. False 6. In some states, an accountant is potentially liable to any user who relies on the professional’s statement or report whether or not the reliance was foreseeable. a. True b. False 7. Because working papers are the property of an accountant, a client for whom the documents were used and developed has no right of access to them. a. True b. False 8. In general, professionals should discharge their professional responsibilities to the best of their ability. a. True b. False 9. To hold a professional liable for negligence, a plaintiff must show that a duty of care existed and it was breached —proof of an injury is not required. a. True b. False

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Chap 47_15e 10. To avoid liability for securities violations, an accountant must use due diligence in preparing a financial statement included in a registration statement—merely asking questions of a corporate officer or director meets this standard. a. True b. False 11. An attorney’s commission of a crime constitutes professional misconduct even absent proof that it reflects adversely on the person’s fitness as a lawyer. a. True b. False 12. An attorney who becomes aware that a client has violated securities laws must report the violation to the Securities Exchange Commission—which creates a potential conflict with the attorney-client privilege. a. True b. False 13. Despite a professional’s breach of contract, the non-breaching client cannot obtain, as damages, the cost of penalties for failing to meet deadlines. a. True b. False 14. An accountant who fails to perform for a client as agreed has breached their contract, and the client has the right to pursue a claim for damages. a. True b. False 15. In view of the reliance of numerous parties on the opinions of auditors, many courts have ceased to hold accountants liable to third parties for negligence. a. True b. False 16. An accountant should destroy working papers on the completion of an audit to avoid the possibility of having to provide evidence in a suit in which the accountant’s competence is challenged. a. True b. False 17. An auditor who agrees to examine a client’s records for fraud and then fails to detect it is not liable because a normal audit is not intended to uncover fraud. a. True b. False 18. A professional who is sanctioned by a court for fraudulent conduct cannot also be penalized by a state board of professional ethics. a. True b. False

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Chap 47_15e 19. An accountant is liable for any omission in a registration statement to a person who suffers a loss on the securities described in the statement. a. True b. False 20. An accountant who conforms to generally accepted auditing standards and acts in good faith will most likely not be liable to a client for incorrect judgment. a. True b. False 21. Because of the potential for significant losses to sellers and buyers, under both of the federal securities acts liability is imposed on accountants for all acts of negligence, including “mere” negligence. a. True b. False 22. The importance of abiding by the standards of a profession is highlighted whenever a professional fails to adhere to those standards. a. True b. False 23. In some states, in the absence of privity, or a similarly close relationship, a party cannot recover from an accountant for negligence. a. True b. False 24. An accountant who fails to discover every impropriety in a client’s books is liable to the client on a negligence theory for any resulting loss. a. True b. False 25. Professionals are faced with a decreasing threat of liability as the public becomes more aware that professionals must deliver competent services. a. True b. False 26. Negligence cases against professionals often focus on the standard of care exercised by the professional. a. True b. False 27. In performing professional services, an accountant is subject to the standard of the ordinarily prudent person. a. True b. False

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Chap 47_15e 28. The Public Company Accounting Oversight Board oversees the audit of public companies subject to securities laws in order to protect public investors. a. True b. False 29. It is a felony for anyone—not just accountants—to willfully make false statements in a tax return or to willfully assist others in preparing a false return. a. True b. False 30. An accountant who uncovers suspicious financial dealings in a client’s books and fails to investigate or to inform the client is liable for any resulting loss. a. True b. False 31. An auditor who accepts a client’s explanation regarding financial irregularities, despite contradictory evidence, could be considered grossly negligent. a. True b. False 32. Under rules of professional conduct that proscribe fraud, state authorities can discipline professionals for engaging in such misconduct. a. True b. False 33. In most states, accountants are subject to liability for negligence not only to their clients but also to foreseen or known users of the accountants’ reports. a. True b. False 34. In most states, an attorney may be liable for negligence to a non-client who the attorney knows or reasonably should know will rely on the attorney’s opinion. a. True b. False 35. Under the Private Securities Litigation Reform Act, an accountant who participates in, but is unaware of, illegal conduct may be liable for proportionately less than the entire loss. a. True b. False

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Chap 47_15e Indicate the answer choice that best completes the statement or answers the question. 36. Cliff is an attorney whose clients include Data Inc. Unless Data has violated securities law, the contents of Cliff’s file on the firm may be disclosed to a third party a. under no circumstances. b. only under a court order (with or without Data’s consent). c. only with Data’s consent. d. at Cliff’s discretion. 37. Del, an accountant, prepares for Econo Inc. a financial statement that omits a material fact. The statement is included in Econo’s registration statement filed with the Securities and Exchange Commission. Fran, who relies the statement, and Gib, who does not, each buy Econo stock. Under Section 11 of the Securities Act of 1933, Del may be liable to a. no one. b. Fran only. c. Fran and Gib. d. Gib only. 38. Sims, an accountant, prepares for Taco Corporation a financial statement that omits a material fact. The financial statement is included in Taco’s registration statement, which Uri reads. Uri buys Taco stock. Under Section 11 of the Securities Act of 1933, for Sims to be liable for the omission, Uri must show that he a. relied on the omission. b. suffered a loss on the stock. c. knew about the omission before making the purchase. d. is a sophisticated investor. 39. Ben is an accountant whose clients include Capital Inc. Under the Ultramares rule, if Ben is negligent in his work for Capital, he could be liable to the client and a. any third party. b. no third party with whom the accountant is not in privity or “near privity.” c. third parties who are foreseen users of the work. d. third parties who are reasonably foreseeable users of the work. 40. Reliant Inc. files a suit against Saul, an accountant, under the antifraud provisions of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission. To succeed, Reliant must show that Saul a. acted with scienter. b. bought or sold a security. c. is incompetent. d. knows nothing about securities.

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Chap 47_15e 41. Haji is an accountant charged with negligence by Infrastructure Service Inc., a client. Haji may successfully defend against the claim if he can show a. scienter was lacking. b. compliance with all International Financial Reporting Standards. c. the accountant was not negligent. d. any negligence on the accountant’s part was only contributory. 42. Carbon Company’s liabilities exceed its assets. The firm hires Dobie, an accountant, to certify a balance sheet showing a positive net worth. Equity Bank relies on the balance sheet to make a loan to Carbon. The firm defaults. Under the Ultramares rule, Dobie is most likely not liable because he a. did not owe a duty of care to any third party. b. is not responsible for his client’s finances. c. finished his work before the loan and default. d. was not in privity with the bank. 43. Commerce Bank files a suit against Drake, its former accountant, alleging constructive fraud. Drake may be held liable a. if Commerce Bank cannot prove actual fraud. b. if Drake was grossly negligent in the performance of his duties. c. only if Drake acted with fraudulent intent. d. only if Drake impersonated someone who could be liable for fraud. 44. Ezra, an accountant, intentionally misstates a material fact to mislead Fruit Packing Inc., a client. Fruit Packing justifiably relies on the misstatement to its detriment. Ezra is most likely liable for a. actual fraud. b. constructive fraud. c. destructive fraud. d. virtual fraud. 45. Ty is an accountant whose clients include United Corporation. Working papers that Ty develops when preparing financial reports for United are owned by a. Ty. b. United. c. the Securities and Exchange Commission. d. no one—the papers should be destroyed immediately after use. 46. An accountant is least likely to be held liable for accounting fraud if he or she a. uncovers suspicious financial transactions but does not inform the client. b. fails to discover every impropriety in a client’s books. c. reports fictitious revenues in a client’s financial statement. d. conceals liabilities or debts, or artificially inflates assets, for a client.

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Chap 47_15e 47. Bell, an accountant, enters into a contract to provide services to Consumer Staples Inc. Bell fails to meet a regulatory deadline for the work. Required to pay a fine, the company files a suit against Bell. Most likely, the court will order a. Bell to pay the amount of the fine as damages to the firm. b. Bell to meet the next deadline but not to pay damages. c. Consumer Staples to drop its suit and pay its fine. d. Consumer Staples to secure another professional to finish the work. 48. Bee is an accountant whose clients include Concessions Inc. If Bee is negligent in her work for Concessions, most courts would hold her liable to the client and a. any third party. b. no third party with whom the accountant is not in privity or “near privity.” c. third parties who are foreseen users of the work. d. third parties who are reasonably foreseeable users of the work. 49. Auto Company’s liabilities exceed its assets. The firm hires Bass, an accountant, to prepare a balance sheet. Through negligent omissions, the sheet shows a net worth. Credit Bank relies on the document to make a loan to Auto. When the firm defaults, the bank files a suit against Bass. Under the Restatement (Third) of Torts, Bass is most likely a. liable because the accountant owed a duty to the client. b. liable because the accountant owed a duty to any foreseeable user. c. liable if the accountant knew the bank would rely on the balance sheet. d. not liable because accountant and the bank were not in privity. 50. Frye, an accountant, intentionally misstates a material fact to mislead Global Industries Inc., a client. Global justifiably relies on the misstatement to its detriment. Frye is most likely liable for a. fraud. b. malpractice. c. negligence. d. none of the choices. 51. Reed prepares federal corporate income tax returns for Shopping Mall Inc. and other firms. Under the Internal Revenue Code, with respect to an understatement of a client’s tax liability, Reed may be liable for a. negligent or willful misconduct. b. no misconduct. c. only negligent misconduct. d. only willful misconduct. 52. Silva prepares federal corporate income tax returns for Trade Stores Inc., and other firms. Under the Internal Revenue Code, with respect to an understatement of a client’s tax liability, Silva may be liable for a. negligent or willful misconduct. b. none of the choices. c. only negligent misconduct. d. only willful misconduct. Copyright Cengage Learning. Powered by Cognero.

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Chap 47_15e 53. An attorney’s conduct is governed by rules of professional conduct established by the state in which he or she is licensed, and the Model Rules of Professional Conduct of a. the Securities and Exchange Commission. b. the American Bar Association. c. the American Law Institute. d. the International Professional Standards Board. 54. Rand, an accountant, includes a false statement in a report for Social Media Inc. that is filed with the Securities and Exchange Commission. When Teo buys stock in Social Media and loses money on the investment, he files a suit against Rand, alleging fraud under the 1934 Securities Exchange Act. To avoid liability, Rand can show that he a. intended to defraud Social Media, not Teo. b. intended to profit on stock trades generally, not only Teo’s. c. is an otherwise competent accountant. d. had no knowledge that the statement was false. 55. Rico, an accountant, contracts to conduct an audit for Sushi Restaurants. In performing the audit, Rico fails to detect a Sushi employee’s obvious theft of funds from the firm. Rico is most likely a. liable if a normal audit would have revealed the theft. b. liable if the accountant failed to issue a qualified opinion with the audit. c. not liable because a normal audit is not intended to discover fraud. d. not liable if the theft was due to Sushi’s negligence. 56. “A reasonably competent general practitioner of ordinary skill, experience, and capacity” is the normal standard of performance expected of a. none of the choices. b. an accountant. c. an attorney. d. a client. 57. Gen & Hetty is a Registered Public Accounting Firm. The firm performs auditing services for Healthcare Company. Under the Sarbanes-Oxley Act, at the same time, for the same company, Gen & Hetty can also perform a. bookkeeping. b. none of the choices. c. appraisal services. d. financial systems design. 58. Enya is an attorney whose clients include Finance Company. If Enya is negligent in her work for Finance, under the Restatement (Third) of Torts, she may be liable to the client and a. any third party. b. no third party. c. third parties who are foreseen users of the work. d. third parties who are reasonably foreseeable users of the work. Copyright Cengage Learning. Powered by Cognero.

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Chap 47_15e 59. Cath is an accountant with Discount Corporation. Efrem buys Discount stock and loses money on the investment. To recover from Cath under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, Efrem must prove a. only the purchase and sale of a security. b. fraud, reliance, materiality, and lack of knowledge about securities. c. fraud, reliance, materiality, and incompetence. d. fraud, reliance, materiality, causation, and scienter. 60. Hoki, an accountant, accumulates working papers while performing an audit for Insurance Corporation. After the audit, these documents belong to a. the accountant, with the client having a right of access to the papers. b. the client, with the accountant having a right of access to the papers. c. the Public Company Accounting Oversight Board. d. no one—the papers should be destroyed immediately after use. 61. Marco is an accountant who prepares his clients’ tax returns. Nell is not an accountant, but she also prepares tax returns for clients. Under the Internal Revenue Code, liability for preparing a false return may be imposed on a. Marco and Nell. b. Marco only. c. Nell only. d. none of the choices. 62. Lou, an attorney, allows a statute of limitations to lapse on a claim by Metal Fabrication Company, a client. Lou a. can be held liable for malpractice. b. has violated an ethical standard but cannot be held liable. c. is subject to criminal penalties under the statute of limitations. d. will be automatically disbarred. 63. Dena, an accountant, contracts to perform services for Equipment Maker Inc. Dena acts in good faith and conforms to generally accepted accounting principles but makes an incorrect judgment. Dena is most likely a. liable for negligence. b. liable for breach of contract. c. liable for a violation of state professional ethical standards. d. not liable. 64. Norm is an accountant. With respect to an allegation of negligence by Online Retail Inc., one of Norm’s clients, Norm’s violation of generally accepted accounting principles and generally accepted auditing standards a. does not indicate that Norm was negligent. b. is prima facie evidence that Norman was negligent. c. precludes Norm from raising any defense against a negligence claim. d. relieves Norm of any legal liability but not professional ethics sanctions.

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Chap 47_15e 65. Galen prepares a financial statement for Hobby Inc. before a public offering of its stock. The Securities and Exchange Commission orders a revision of the statement. During the subsequent delay of the offering, the stock price drops. Hobby files a suit against Galen for negligence. Galen’s best defense is a. even if the accountant was negligent, this was not the proximate cause of the drop in the stock price. b. the firm suffered no injury. c. the accountant did not breach any duty of care that it owed to the firm. d. the accountant owed no duty of care to the firm. 66. Herb, an accountant, helps Industrial Company prepare and file a false federal corporate income tax return. Under the Internal Revenue Code, this is a. a felony punishable by a fine and imprisonment. b. no violation. c. a misdemeanor punishable only by a fine. d. a civil violation subject to a liability suit but not a crime. 67. Manufacturing Inc. hires Neri, an accountant, to maintain the company’s financial records. Neri does not act negligently or fail to perform any duty but fails to discover that Ollie, the firm’s chief finance officer, is embezzling funds from the firm. With respect to the corporation’s losses, the accountant is a. not liable. b. liable for the entire amount. c. liable only for the amount that occurred after the accountant was hired. d. liable only for the amount that cannot be recovered from the embezzler. 68. Digital Systems Corporation files a suit against Ethan, its former accountant, alleging constructive fraud. Digital Systems need not prove a. misstatement of a material fact. b. intent to deceive. c. justifiable reliance. d. an injury. 69. Regarding a professional, malpractice is a. competence. b. repetition. c. preparation. d. negligence. 70. Leisure Inc.’s accountant is Mel and the firm’s attorney is Nola. All states protect, as privileged information, Leisure’s communications with a. Mel and Nola. b. Mel only. c. Nola only. d. none of the choices.

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Chap 47_15e 71. Finola, a certified public accountant, provides accounting services to Global Trade Corporation. The services include preparing Global Trade’s financial reports and issuing opinion letters based on the reports. In 2014, Global Trade falls into serious financial trouble, but neither Finola’s reports nor her opinion letters indicate this situation. Relying on Finola’s portrayal of Global Trade’s financial situation, the firm borrows a large sum of money to build a new shipping facility. In lending Global Trade the money, Harbor City Bank relies on Finola’s opinion letter. Finola is aware of this reliance. If Finola did not engage in intentional fraud but was negligent, what is her potential liability?

72. Miriam is an accountant. Natalie is an attorney. Which professional is most restricted from disclosing her or his client’s communication?

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Chap 47_15e Answer Key 1. True 2. True 3. False 4. False 5. True 6. False 7. False 8. True 9. False 10. False 11. False 12. True 13. False 14. True 15. False 16. False 17. False 18. False 19. False 20. True 21. False 22. True 23. True 24. False 25. False 26. True

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Chap 47_15e 27. False 28. True 29. True 30. True 31. True 32. True 33. True 34. True 35. True 36. c 37. c 38. b 39. b 40. a 41. c 42. d 43. b 44. a 45. a 46. b 47. a 48. c 49. c 50. a 51. a 52. a 53. b 54. d Copyright Cengage Learning. Powered by Cognero.

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Chap 47_15e 55. a 56. c 57. b 58. c 59. d 60. a 61. a 62. a 63. d 64. b 65. a 66. a 67. a 68. b 69. d 70. c 71. Regarding the accountant’s potential liability to the bank, most courts would hold her liable for negligence, but the standard for imposing this liability varies. There are three different views. The traditional rule (the Ultramares rule) states that accountants owe a duty of care only to those persons for whose primary benefit the accountant prepares reports or issues opinion letters. In the absence of privity, a party could not recover from an accountant. Under that rule, the accountant in this problem would not be held liable to the bank. Under a slight modification of this rule, some courts hold that if a third party has a sufficiently close relationship or nexus (link or connection) with an accountant, then the privity requirement may be satisfied without establishing an accountant-client relationship. Under this modification, the accountant would be held liable because he knew that the bank relied on her letter. The majority of courts have adopted the position taken by the Restatement (Third) of Torts, under which an accountant’s liability extends to foreseen or known users—persons for whose benefit the accountant intends to supply the information or knows that the recipient intends to supply it and to those persons whom the accountant intends the information to influence or knows that the recipient so intends. Under this rule, the accountant will be held liable to the bank for negligent misstatements or omissions, because he knew that the bank was relying on her work product when deciding whether to make the loan. A few other courts hold accountants liable to any users whose reliance on an accountant’s statements or reports is reasonably foreseeable. Of course, under this standard the accountant in the hypothetical would clearly be held liable.

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Chap 47_15e 72. Most professionals are restrained by the ethical tenets of their professions from disclosing communications with their clients. In some instances, professional-client communications are even privileged under state and federal law. Of the two professionals named in this question, the attorney is the most restricted professional. Without a client’s permission, an attorney cannot disclose the client’s communication. Disclosure is prohibited under federal law, state law, and the ethical tenets of the legal profession. In a few states, accountant-client communications may not be revealed even in court without the client’s permission. But these communications are not protected—and state-provided rights are not recognized—under federal law. In cases involving federal law, in response to a court order, an accountant must provide the information sought.

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Chap 48_15e Indicate whether the statement is true or false. 1. Sometimes, a person can become an owner of personal property merely by possessing it. a. True b. False 2. Failure to give up possession at the time the bailment ends could result in an action for conversion or negligence. a. True b. False 3. A bailee has no right to limit his or her liability for loss or damage to the bailed goods because it would contravene public policy. a. True b. False 4. Either physical or constructive delivery can result in the bailee’s exclusive possession and control over bailed property. a. True b. False 5. When accession occurs with a property owner’s consent, there is not likely to be a dispute about who owns the property. a. True b. False 6. The distinction between real and personal property is important because how property is acquired is determined by its classification. a. True b. False 7. In many states, hotel operators are not liable for any loss or damage to their guests’ personal property, provided this limit is brought to the guests’ attention. a. True b. False 8. Many bailments do not include all of the elements of a contract. a. True b. False 9. A finder of mislaid property obtains title to the goods. a. True b. False 10. A bailment cannot arise without the bailor’s voluntary delivery of the property to the bailee. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 48_15e 11. The delivery of documents that represent the rights to property can be sufficient to transfer that property to the recipient. a. True b. False 12. Establishing ownership rights is more complicated for personal property than for real property. a. True b. False 13. The concept of personal property can expand to take account new types of ownership rights and interests. a. True b. False 14. With respect to bailed goods, common carriers are absolutely—strictly—liable. a. True b. False 15. Digital goods, including virtual goods, are personal property with real value. a. True b. False 16. If confusion of property occurs as a result of the act of some third party, the owners of the goods share ownership in order of seniority. a. True b. False 17. In a bailment for the sole benefit of the bailee, the bailee will be liable for even the slightest negligence in caring for the bailed property. a. True b. False 18. Ordinary bailments are distinguished according to which party receives a benefit from the bailment. a. True b. False 19. In a bailment for the sole benefit of the bailor, the bailee need not exercise even a slight degree of care in preserving the bailed property. a. True b. False 20. A bailee has a right to the reimbursement of costs incurred in keeping the bailed property, even in a gratuitous bailment. a. True b. False

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Chap 48_15e 21. A finder of mislaid property has no obligation to return the property to the true owner. a. True b. False 22. A transfer of personal property without an agreement for its return or disposal is not a bailment. a. True b. False 23. Although a written agreement is not required for a bailment of less than a year, because the Statute of Frauds does not apply, it is a good idea to have one. a. True b. False 24. If the bailed property has been lost, a court will presume that the bailee was negligent, which he or she can rebut by showing an exercise of due care. a. True b. False 25. Consideration is one of the necessary elements for an effective gift. a. True b. False 26. Accession occurs when someone acquires title to a valuable piece of personal property by assuming a position of power. a. True b. False 27. Simply finding property and holding onto it gives the finder all legal rights in it. a. True b. False 28. Estray statutes encourage the return of found property to its owner by making is possible for the finder to acquire title to it. a. True b. False 29. In a bailment for the mutual benefit of the bailee and the bailor, the bailee need not exercise reasonable care in storing items or holding property. a. True b. False 30. The gift of a large portion of a person’s assets can indicate fraud. a. True b. False

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Chap 48_15e 31. Because a warehouse company is a professional bailee, it is expected to exercise a high degree of care to preserve and protect bailed goods. a. True b. False 32. Personal property can be converted into real property by being permanently attached to it. a. True b. False 33. A promise to make a gift tomorrow or next year is a gift. a. True b. False 34. On the completion of a bailment, the bailee may dispose of the property at will. a. True b. False 35. The law defines a person’s rights and interests in anything with an ascertainable value that is subject to ownership. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. Norah owns a phone, a tablet, and a patent on an app. Norah’s intangible property includes a. the phone. b. the tablet. c. the patent. d. all of the choices. 37. Earth Farm arranges to have Fresh Express Inc., a common carrier, transport a load of almonds. Fresh Express will be liable for any loss or damage to the almonds a. under any circumstances. b. unless the carrier exercised reasonable care. c. unless the loss or damage is caused by a natural disaster. d. under no circumstances. 38. Earlene buys a fishing license and goes fishing. She catches a trout, cleans it, cooks it, and eats it. Earlene’s acquisition of the trout is by a. possession. b. accession. c. confusion. d. production.

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Chap 48_15e 39. The identify of the party who receives a benefit from an ordinary bailment dictates a. the rights and liabilities of both parties. b. the return or disposal of the bailed property at the end of the bailment. c. the extent of the bailment period. d. none of the choices. 40. Before going on a business trip, Gina leaves the key to her apartment with Henri. She checks her suitcase at the airport, and boards the plane. A bailment is created when Gina a. delivers the key to Henri. b. checks her suitcase. c. boards the plane. d. all of the choices. 41. Slim owns cattle, a pick-up truck, and stock in Range Corporation, which owns and operates the Big R Ranch. Capable of being involved in a bailment is a. the cattle, the truck, and the stock. b. the Big R Ranch. c. Slim. d. all of the choices. 42. Kay and Lease-Away Inc. enter into a bailment involving the delivery of a moving van to Kay for her use. Unless stated otherwise, the agreement assumes that Kay will a. return the van. b. return the van or its equivalent. c. retain the van. d. none of the choices. 43. Angie voluntarily transfers her prize-winning horse Beaux to Cady without consideration. Provided all of the requirements are met, this is acquisition of property by a. conversion. b. accession. c. possession. d. gift. 44. Ada owns Blueberry Farm. Ada’s only daughter Cherry owns the adjacent Delicious Apple Orchard. Ada makes a gift of the farm to Evert, a short-term employee. This gift may lack the required element of a. acceptance. b. delivery. c. donative intent. d. dominion.

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Chap 48_15e 45. One of the elements of a bailment is a. tangible, not intangible, items. b. non-exclusive possession of the bailed property by the bailee. c. an agreement for the return or disposal of the bailed property. d. conversion of the bailed property by the bailee. 46. A large sign at the entrance to Fitness Club states in bold red letters that “the club is not responsible for any loss due to theft.” Most likely, with respect to limiting the club’s liability, this sign is a. effective. b. not effective because it is against public policy. c. not effective because it is an exculpatory cause. d. not effective because an ordinary bailee cannot limit his or her liability. 47. Cartage Inc. agrees to pick up two truckloads of housewares for Discount Corporation and store the contents to be delivered later. After Cartage unloads the goods at its storage facility, some of them disappear from the loading dock. A court will presume that a. Cartage was negligent. b. Discount was negligent. c. the goods were stolen through no fault of Cartage. d. the warehouse is in a high-crime area. 48. The legally protected rights and interests that a person has in anything of established value subject to ownership is a. accession. b. commonwealth. c. property. d. a bailee’s lien. 49. Sheila finds Tim’s briefcase in her office after Tim leaves following their meeting. This is a. a physical bailment. b. a voluntary bailment. c. an involuntary bailment. d. not a bailment. 50. To become a bailment, a delivery of property from one person to another must a. involve personal property. b. include a transfer of title. c. follow an exchange of consideration. d. be subject to a written agreement.

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Chap 48_15e 51. While hiking on Mountain Trail, Ness’s camera falls from his pocket. He fails to notice its loss for a mile, and is then unable to find it. Ole finds the camera. Pau tries to take it from Ole. The party who can assert the best title to the camera is a. Ness. b. Ole. c. Pau. d. none of the choices. 52. Property would have little value if a. virtually all property were digital. b. the law did not define the rights of property owners. c. property could be delivered to another without a transfer of title. d. the preservation of property was the primary reason for government. 53. Repair Service Inc. agrees to fix a harvester for Soybean Acres. Repair tows the harvester to its storage yard, to be returned after the work is done. Repair’s obligation to deliver the equipment to Soybean is excused if the harvester is a. any of the choices. b. lost through no fault of Repair. c. stolen through no fault of Repair. d. claimed by a third party with a superior claim. 54. With respect to property, the law defines the right to a. sell or dispose of it, but not prevent trespass onto it. b. prevent trespass onto it, but not to sell or dispose of it. c. sell or dispose of it, and prevent trespass onto it. d. none of the choices. 55. Inadvertently, Brie loses her textbook during an afternoon in City Park. She eventually gives up any attempt to find it. The textbook will then most likely be considered a. abandoned property. b. converted property. c. lost property. d. mislaid property. 56. Sara owns a ring. She asks Tomas, a jeweler, to add a diamond to it. Adding the diamond will increase the value of the ring. This is a. accession. b. acquisition. c. conversion. d. validation.

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Chap 48_15e 57. On Demi’s authorization, Engine Work Inc. repairs her car. She refuses to pay for the job. Engine Work can a. keep the car and place a lien on it until Demi pays. b. undo the repair and keep the car. c. use the car for any purpose. d. all of the choices. 58. Buto buys a bus ticket at a window in the City Bus Depot before checking his backpack and boarding a bus. In this situation, the subject to a bailment is a. Buto. b. the backpack. c. a seat on the bus. d. none of the choices. 59. Fiji, an independent contractor and technical writer, has a computer in her office. She has a copyright on her most recent work, Guide to Coding. Her tangible personal property includes a. the computer. b. the copyright. c. the coding. d. all of the choices. 60. Robin stores her grain at a facility owned and operated by Silo Inc. At the end of the storage period, Silo must a. return the exact same grain originally stored. b. return the same grain or grain of the same type, grade, and quantity. c. retain the grain. d. none of the choices. 61. Mary goes hunting during elk season. While trespassing on Nate’s rural land, she shoots an elk. This elk is the property of a. Mary. b. Nate. c. the state. d. none of the choices. 62. In a bailment, in some circumstances, the dollar amount of liability for any loss or damage to bailed goods can be limited by a. common carriers. b. warehouse companies. c. ordinary bailees. d. all of the choices.

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Chap 48_15e 63. While moving to a new apartment, Vance discards a sofa near the entrance to his old residence, with no intention of recovering it. The sofa is a. abandoned property. b. converted property. c. lost property. d. mislaid property. 64. After shopping at a Cut-Price store, Dyan finds a fitness watch in her bag of purchases that she knows she did not pay for. If Dyan fails to return the watch to the store or to pay for it, she will have committed a. accession. b. confusion. c. conversion. d. production. 65. Before entering the dining room in Café Peru, Diego checks his coat in the lobby with a valet employed by the restaurant. In the coat’s pocket is an iPhone. A bailment may exist between the restaurant and its customer for a. the coat only. b. the phone only. c. the coat and the phone. d. neither the coat nor the phone. 66. Leo borrows Mae’s car to drive Nina to the airport. Considering the purpose of the bailment, Leo has the right to a. compensation from Nina. b. reimbursement from Mae for any parking costs. c. use the bailed property. d. none of the choices. 67. In a bailment, strictly liable for any loss or damage to bailed goods are a. common carriers. b. warehouse companies. c. ordinary bailees. d. all of the choices. 68. After agreeing to rent a car from Drive-Around Inc., Eden is given the keys to one of the agency’s cars by Fess, a Drive-Around employee. With respect to the bailed property, this is a. a physical delivery. b. a constructive delivery. c. an involuntary delivery. d. not a delivery.

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Chap 48_15e 69. A court may use the identity of the party who receives a benefit from an ordinary bailment to determine, with respect to the bailed property, the standard of a. negligence to be applied to the deal. b. proof required to show loss or damage. c. care required of the bailee. d. quality expected by the bailee. 70. Hotel operators can limit their liability for any loss or damage to their guests’ personal property a. in many states, by providing a safe for their guests’ valuables. b. under state statutes that limit the liability for articles not kept in a safe. c. in the absence of negligence. d. all of the choices. 71. Gene leaves her Honda Fit with In-Town Motors for routine maintenance. On its return, the interior of the car is greasy and the exterior is scratched and dented. Who suffers the loss and why?

72. Arnold wants to give Beth a pearl necklace that he has in his safe deposit box at Capital Bank. The bank is closed for a holiday. Arnold gives Beth a key to the box and tells her to go to the bank after the holiday and take the necklace. Beth does this. The next day, Arnold dies unexpectedly. His heirs want the necklace. Can Beth keep the necklace? Explain.

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Chap 48_15e Answer Key 1. True 2. True 3. False 4. True 5. True 6. True 7. True 8. True 9. False 10. False 11. True 12. False 13. True 14. True 15. True 16. False 17. True 18. True 19. False 20. True 21. False 22. True 23. True 24. True 25. False 26. False

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Chap 48_15e 27. False 28. True 29. False 30. True 31. True 32. True 33. False 34. False 35. True 36. c 37. c 38. a 39. a 40. b 41. a 42. a 43. d 44. c 45. c 46. a 47. a 48. c 49. c 50. a 51. d 52. b 53. a 54. c Copyright Cengage Learning. Powered by Cognero.

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Chap 48_15e 55. a 56. a 57. a 58. b 59. a 60. b 61. b 62. d 63. a 64. c 65. c 66. c 67. a 68. b 69. c 70. d 71. In-Town Motors is liable as an ordinary bailee, which owes a duty to take proper care of property left in its charge. In this question, of course, the property is the car. To recover from a party who does not fulfill a required duty of care, an injured party—Gene, here—must prove the lack of care in most cases. In this problem, In-Town Motors might contend that the car was in its present condition when left in the bailee’s care. Under the law of bailments, proof of damage or loss— here, “before” and “after” photos might be sufficient—raises a presumption that a bailee is guilty of negligence, and the bailee must prove that he or she exercised due care.

72. Personal property includes tangible items that are moveable. The transfer of the ownership of personal property can occur by the means of a gift. Yes, Beth can keep the necklace. The piece of jewelry has tangible, physical existence and it is moveable, although in the facts of this problem it could not be removed from a safety deposit box due to a bank holiday. As a transfer, the gift of the key to the box met all of the requirements for a valid gift of the necklace—donative intent on the part of the donor, delivery, and acceptance by the donee. Because the bank was closed, and the necklace could not be physically delivered, delivery of the key constituted constructive delivery of the necklace. The recipient of the gift is thus entitled to keep it.

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Chap 49_15e Indicate whether the statement is true or false. 1. If the leased premises are destroyed by fire or flood, and the tenant is forced to move out, the tenant must still continue to pay the rent until the lease ends. a. True b. False 2. A license is a personal privilege that cannot be withdrawn or revoked. a. True b. False 3. When one tenant in common dies, that party’s interest in the property automatically passes to the surviving owners. a. True b. False 4. Society’s interest in ensuring that real property remains in the stream of commerce is one of the reasons for the doctrine of adverse possession. a. True b. False 5. As long as zoning ordinances are rationally related to the health, safety, or welfare of the community, a municipal government has broad discretion to carry out zoning as it sees fit. a. True b. False 6. The most important factor in determining whether an item is a fixture is the perception of a disinterested third party. a. True b. False 7. A lease of property for a prohibited use is unenforceable. a. True b. False 8. The purpose of zoning is to prevent development altogether and to limit the government’s ability to adapt to changing circumstances. a. True b. False 9. When a joint tenant dies, his or her interest in the property passes to his or her chosen heirs. a. True b. False

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Chap 49_15e 10. Because no one can actually hold a piece of land, certain rights and duties are recognized to constitute the ownership interests in real property. a. True b. False 11. The condemnation power of the government to take land for a public use is known as the right of adverse possession. a. True b. False 12. The owner of a life estate has the same rights as a fee simple owner, including the right to sell the property or pass it to his or heirs. a. True b. False 13. To acquire property by adverse possession, the possession must be secret or clandestine. a. True b. False 14. The same restrictions that apply to an assignment of the tenant’s interest in leased property apply to a sublease. a. True b. False 15. There are no interests in land that do not include any rights to possess the property. a. True b. False 16. In both a tenancy in common, and a joint tenancy, each co-owner owns an undivided interest in the property. a. True b. False 17. Land includes the soil on the surface of the earth, but not the waters contained on it. a. True b. False 18. The covenant of quiet enjoyment guarantees that the buyer will not disturb the land or any of its neighbors. a. True b. False 19. The tenant’s use of the leased property must not injure the landlord’s interest. a. True b. False 20. With a tenancy at will, either party can terminate the tenancy without notice. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 49_15e 21. The owner of real property has relatively exclusive rights to the airspace above the land. a. True b. False 22. If a lease requires the landlord’s consent to an assignment, the landlord can nullify an assignment made without consent and evict the assignee. a. True b. False 23. Tile and carpeting permanently attached to the floor of a house are most likely intended to be fixtures. a. True b. False 24. If the assignee of a lease is required to pay rent, the original tenant is free of the obligation to pay the rent. a. True b. False 25. Real property consists of land, and does not include anything attached to it. a. True b. False 26. To be a fixture, an item of personal property must be physically attached to the land in some way. a. True b. False 27. A fee simple absolute is an estate or interest in land with no limits in terms of disposition or duration. a. True b. False 28. The rights of the owner to the subsurface of a piece of land would have little value if the owner could not use the surface to exercise those rights. a. True b. False 29. If the covenant of quiet enjoyment is breached, the tenant can terminate the lease and sue for damages. a. True b. False 30. An easement is the right to go onto land owned by another and take away some part of the land itself or some product of the land. a. True b. False 31. Rendering the leased premises unfit for occupancy is constructive eviction. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 49_15e 32. A valid deed must contain words indicating an intent to convey (transfer) the property. a. True b. False 33. An individual’s right to his or her property is absolute. a. True b. False 34. Under the takings clause of the Fifth Amendment to the U.S. Constitution, private property may be taken for public use without “just compensation.” a. True b. False 35. If the landlord sells the leased property, the tenant becomes the tenant of the new owner. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. Logging Corporation has a right to go onto Mountain Timber Company’s land and harvest select trees. Logging’s right is a. a license. b. an easement. c. a profit. d. a right to adverse possession. 37. Frank tells Giselle that she can camp on Frank’s beach and swim in his lake whenever she wants. With respect to the right to camp and swim, a. Frank can withdraw or revoke the right. b. Giselle can exercise the right for the duration of her life. c. Giselle can pass title to the right to her heirs. d. Giselle can use Frank’s property with impunity for perpetuity. 38. Aggie owns Buffalo Ranch. Aggie’s ownership rights include the right to sell or give away the property without restriction, and the right to use the property for whatever purpose she sees fit. Aggie’s ownership interest is a. a fee simple absolute. b. a license. c. a life estate. d. a profit.

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Chap 49_15e 39. Ellen conveys to Floyd an apartment with the right to possess and use the premises for a period of time specified in their express contract. This is a. a periodic tenancy. b. a fixed-term tenancy. c. a tenancy at will. d. a tenancy at sufferance. 40. Rita has a fixed-term tenancy for her apartment with Studio Apartments. If Rita abandons the premises before the lease expires a. Studio Apartments must make a reasonable attempt to evict Rita. b. Studio Apartments may be required to mitigate its damages. c. Rita may be required to mitigate her damages. d. Rita is no longer obligated to pay the rent. 41. Colleen owns a parcel of land. She tows a mobile home to the parcel and anchors it to the land near a stand of Douglas fir trees. Her real property consists of a. the land. b. the mobile home. c. the trees. d. all of the choices. 42. Rafe signs a one-year lease for an apartment owned by Suki. Rafe is a student and needs the apartment only for two semesters, at the end of which he plans to sublet it for the rest of the term. Rafe’s tenancy is a. a periodic tenancy. b. a tenancy at will. c. a tenancy at sufferance. d. a fixed-term tenancy. 43. Estes, the owner of Forest Mountain, and Gert, the tenant of a cabin on Estes’s mountain, may create a fixedterm tenancy by a. implied contract. b. express contract. c. any of the choices. d. sufferance. 44. Rosen is the life tenant of five hundred acres of land, on which is situated a previously existing mine. Rosen has the right to a. use the land, including the mine, for any purpose, without qualification. b. extract minerals from the mine, but not to dig a new mine. c. extract minerals from the mine and to dig new mines. d. none of the choices.

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Chap 49_15e 45. Brick & Mortar Stores Inc. signs a lease for a storefront owned by Commercial Properties Inc. The lease does not specify how long it is to last but does specify that rent is to be paid at certain intervals. This is a. a periodic tenancy. b. a fixed-term tenancy. c. a tenancy at will. d. a tenancy at sufferance. 46. Beck and Carli are married. Carli purchases a condominium near Downhill Ski Resort. Beck and Carli each technically own an undivided one-half interest in the condo. This is a. a joint tenancy. b. fee simple ownership. c. community property. d. illegal. 47. Gaye owns the surface rights for High Desert Ranch, which includes a house, a bunkhouse, and two barns. Industrial Mining Inc. owns the subsurface rights. When the company drills for and extracts the oil beneath the ranch, the surface subsides and the structures collapse. Most likely responsible for the damage is a. Industrial Mining. b. Gaye. c. Industrial Mining and Gaye in proportion to the value of their rights. d. no one. 48. Property Management Corporation (PMC) owns several apartment buildings in two states. Regarding standards for maintenance of the buildings, PMC should consult a. the applicable city ordinances and state statutes. b. the previous owners. c. the long-term tenants. d. the Uniform Landlord’s Maintenance Manual. 49. Bayside Inc. pays Coastal Marina to release its claim to a strip of waterfront property. Coastal gives Bayside a deed that conveys only whatever interest Coastal has in the strip. This deed is a. none of the choices. b. a quitclaim deed. c. a deed of quiet enjoyment. d. a warranty deed. 50. Seaside Vistas leases an apartment to Tori. During a severe storm, the premises are destroyed by flood. Under most state laws, liable for the rent for the rest of the lease term is a. no one. b. Seaside and Tori in proportionate amounts. c. Seaside only. d. Tori only.

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Chap 49_15e 51. Edna and Flavia buy a cottage in Gulfport, Mississippi. On the death of either owner, that owner’s interest in the dwelling passes to her heirs. This is a. a joint tenancy. b. community property. c. a tenancy in common. d. ownership in fee simple. 52. Richard owns Scholars Apartment House. His ownership rights include the right to sell or give away the property without restriction, as well as to use the property for whatever purpose he sees fit. His ownership interest is a. a fee simple absolute. b. a life estate. c. the right to adverse possession. d. the power of eminent domain. 53. Kristen signs a one-year lease for a mobile home owned by Lamont. If Kristen dies during the lease term, the lease interest a. returns to Lamont. b. automatically expires. c. automatically renews. d. passes to Kristen’s heirs as personal property. 54. Bebe wants to lease a duplex for two years from Country Living Inc. In most states, the lease agreement a. must be in writing. b. can be oral or written. c. must be oral. d. must be signed by a judge. 55. Italo owns one hundred acres of fertile bottomland. With respect to the land, Jana has an easement and Kessler has a profit. A right to possess the bottomland is owned by a. Italo. b. Jana. c. Kessler. d. all of the choices, in proportion to the value of their respective interests. 56. To obtain the title to land without delivery of a deed, one person must possess the property of another a. in an open, visible, and notorious manner. b. in secret. c. with or without interruption. d. with the other’s permission.

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Chap 49_15e 57. Bob owns twenty acres of land on the side of a mountain in Colorado. He files a suit against the Durango Flight School, claiming that its planes flying over his land violate his property rights. To succeed, his best argument is a. the planes fly over more than twice a day. b. there are other routes the planes could take. c. the flights are low and frequent, interfering with enjoyment of his land. d. the planes are effectively taking private property for private use. 58. To transfer the title to Olivia’s warehouse to Pete by deed requires a. Pete’s signature. b. Olivia’s signature. c. all of the choices. d. the signatures of the building’s tenants. 59. Sergio rents an apartment from Taylor for a stated period of one year. The lease does not include a provision for renewal or extension. At the end of the lease term, possession of the apartment most likely a. remains with Sergio absent notice by the tenant. b. remains with Sergio until notice by Taylor. c. remains with Sergio under an implied renewal or extension provision. d. returns to Taylor. 60. Town House Apartments fails to provide the utilities to its tenants’ apartments, making their use and enjoyment of the premises exceedingly difficult. This is most likely a. a tenancy at sufferance. b. an exercise of the landlord’s property rights. c. an assignment of the lease. d. a constructive eviction. 61. Ché has an easement that allows him to drive across Dale’s land to get to Ché’s house. With respect to Dale’s land, Ché’s right is a. a possessory interest. b. a nonpossessory interest. c. a right to adverse possession. d. the power of eminent domain. 62. Mike owns a beach house in North Carolina in fee simple. This ownership interest is a. potentially infinite in duration. b. limited to the period of Mike’s life. c. limited to the period of the lives of Mike and his immediate heir. d. subject to the withdrawal or recall of the previous owner.

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Chap 49_15e 63. Urban City wants to acquire undeveloped private land within the city limits to construct a public park. The city brings a condemnation proceeding to obtain title to the land. This is a. the right to adverse possession. b. an easement. c. a profit. d. the power of eminent domain. 64. Veda owns a house. In the house, on a tile floor is a throw rug and a heavy decorative urn. Most likely to meet the definition of a fixture is a. the urn. b. the throw rug. c. the tile floor. d. all of the choices. 65. Jade owns a loft that she leases to Keyes and Luc. If Jade sells the loft, Keyes and Luc a. become the tenants of the new owner. b. remain Jade’s tenants until the end of the lease term. c. must immediately vacate the premises. d. become the landlord. 66. Nancy owns Office Tower, a commercial building situated on an acre of land that she also owns in Peoria, Illinois. Subject to certain qualifications, the exterior boundaries of Nancy’s land extend to a. the size of a cubic acre. b. the limits of the current building market. c. infinity and beyond. d. the center of the earth and up to the sky. 67. Ghani owns Hillside Vineyard. Ghani conveys some of the land “to Iona for her life.” Ghani has given Iona a. a fee simple absolute. b. a license. c. a life estate. d. a profit. 68. Kim and Leola own a warehouse in which they operate Mini-Storage Corporation. On the death of either owner, that owner’s interest in the warehouse passes to the surviving owner. This is a. a joint tenancy. b. community property. c. a tenancy in common. d. ownership in fee simple.

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Chap 49_15e 69. Derek deeds a parcel of timberland to Elaine as a gift. Derek has given Elaine a. a fee simple absolute. b. a life estate. c. the right to adverse possession. d. the power of eminent domain. 70. Owen owns a farm in Pennsylvania. Owen’s brother Quentin owns the subsurface rights to the farm. Either brother can pass title to what he owns a. without the other’s consent. b. only with the other’s consent. c. only when the other also passes title to what he owns. d. only by first offering to buy out the other’s rights. 71. Larissa leases to Metal Fabrication Corporation a 10,000 square-foot building under a written lease with a twenty-year term, rent payable annually. The lease includes a clause stating that Metal Fabrication is responsible for making all necessary repairs, including rebuilding the structure after its destruction by any cause beyond Larissa’s control. The lease does not include a clause concerning its assignment. One day after the tenth rental payment, Metal Fabrication, without Larissa’s knowledge or consent, assigns its interest in the lease to National Steel, Inc. Meanwhile, Larissa dies and Olina inherits her interest in the building. Without the knowledge or consent of either Metal Fabrication or National Steel, Olina sells the building to Prime Properties, Inc. The next month, the building is destroyed in devastating storm. Metal Fabrication rebuilds it and files a suit against Prime Properties for the expense. The defendant responds that the lease has terminated. Is Prime Properties correct? If so, when did the lease terminate? If not, is Prime Properties liable for the cost of rebuilding the structure? Why or why not?

72. All-Mart Discount Stores Corporation contracts to buy ten acres from Suburban Enterprises, Inc., as a site for a new store. The contract calls for a “warranty deed.” According to a survey that All-Mart commissions, one corner of an adjacent, enclosed parking lot is on part of the property that Suburban is attempting to convey. Can All-Mart avoid the contract? If so, on what basis? If not, why not?

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Chap 49_15e Answer Key 1. False 2. False 3. False 4. True 5. True 6. False 7. True 8. False 9. False 10. True 11. False 12. False 13. False 14. True 15. False 16. True 17. False 18. False 19. True 20. True 21. True 22. True 23. True 24. False 25. False 26. False

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Chap 49_15e 27. True 28. True 29. True 30. False 31. True 32. True 33. False 34. False 35. True 36. c 37. a 38. a 39. b 40. b 41. d 42. d 43. b 44. b 45. a 46. c 47. a 48. a 49. b 50. a 51. c 52. a 53. d 54. a Copyright Cengage Learning. Powered by Cognero.

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Chap 49_15e 55. a 56. a 57. c 58. b 59. d 60. d 61. b 62. a 63. d 64. c 65. a 66. d 67. c 68. a 69. a 70. a 71. Prime Properties is not correct. The lease has not terminated. Absent a provision in the lease to the contrary, its assignment is not prohibited, even without the consent of the landlord. The death of a landlord does not terminate a lease, unlike some other contracts. The owner’s sale of leased premises to a third party does not terminate a lease, even without the consent of the tenant. Normally, the destruction of rental property would terminate a lease, but this commercial lease contained, as do many long-term commercial leases, a clause that required the tenant to rebuild the structure if it was destroyed by a cause beyond the landlord’s control, which includes a flood. Such clauses are legally binding. Thus, none of these events—Metal Fabrication’s assignment of the lease to National Steel, Larissa’s death, Olina’s sale of the property to Prime Properties, or the destruction of the building in a storm—terminated this lease. There may be a reduction in the amount of rent Metal Fabrication, who remains liable despite the assignment, must pay while the premises are being rebuilt. Prime Properties is not liable for the cost of rebuilding the structure. Again, the lease required the tenant to rebuild the destroyed structure at the tenant’s expense. 72. All-Mart can avoid the contract for the sale of Suburban’s property on the ground that Suburban has breached the warranty of title. According to this warranty, a seller of real estate warrants that he or she has title to, and the power to convey, the property, that the buyer will not be disturbed in his or her possession of the land, and that the transfer is made without any Analyze of the adverse claims of third parties. The parking lot on a part of the property to be conveyed indicates that its owner may have acquired that part by adverse possession, and this fact of course breaches Suburban’s warranty of title. Copyright Cengage Learning. Powered by Cognero.

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Chap 49_15e

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Chap 50_15e Indicate whether the statement is true or false. 1. If a statute requires that any limitations on coverage be stated in an insurance contract, an insurer can avoid liability by relying on an unexpressed restriction. a. True b. False 2. As a condition for recovery, a fire insurance policy may require an insured to file a proof of loss, but the insurer cannot avoid liability for a failure to comply. a. True b. False 3. Before a loss has occurred, a fire insurance policy is assignable without the consent of the insurer, because the policy is not regarded as a personal contract between the insurer and the insured. a. True b. False 4. Insurance is an arrangement for transferring and allocating risk. a. True b. False 5. An insurer can cancel, or refuse to renew, a policy for any reason, including a reason that would otherwise violate public policy. a. True b. False 6. In the absence of exclusion in a life insurance contract, a court is most likely to construe any cause of death to be one of the insurer’s risks. a. True b. False 7. A person can insure anything, even if he or she does not have an insurable interest in it. a. True b. False 8. An insurance company can raise as a defense against payment on a policy any of the defenses that would be valid in an ordinary action on a contract. a. True b. False 9. Liability coverage under a homeowner’s insurance policy normally does not apply to liability that arises from business or professional activities. a. True b. False

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Chap 50_15e 10. A life insurance contract determines only the extent of the insurer’s liability on the death of the insured. a. True b. False 11. A creditor generally can reach insurance proceeds payable under a life insurance policy if the payment of the premiums constituted a fraud on the creditor. a. True b. False 12. An insurable interest in property need not exist when a policy insuring against its damage or loss is purchased. a. True b. False 13. Courts interpret insurance policies as containing any provisions mandated by statute. a. True b. False 14. When it is unclear whether an insurance contract actually exists because a written policy has not been delivered, the uncertainty is normally resolved against the insured. a. True b. False 15. Life insurance requires that an insurable interest in the continued life of the insured exist when a policy is obtained. a. True b. False 16. For a business, comprehensive general liability insurance can protect against liability for physical injuries and for the loss of financial support suffered by a family due to the injuries. a. True b. False 17. Without an insurable interest, there can be no enforceable insurance contract. a. True b. False 18. By insuring property, its owners protect themselves. a. True b. False 19. Because an insurance contract is governed by the principles of contract law, for the contract to be binding, consideration must be given. a. True b. False

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Chap 50_15e 20. Insurance policies differ in relation to the interests that they protect because the types of losses that are expected vary with the nature of an activity. a. True b. False 21. Because an insurance agent is an agent of an applicant for insurance, not the insurance company, the agent owes fiduciary duties to the applicant. a. True b. False 22. Coverage can be procured under a comprehensive general liability policy to include payment for expenses to recall and replace a product that has proved to be defective. a. True b. False 23. Once an insurer has accepted a risk, and an event occurs that gives rise to a claim, the insurer has a duty to investigate to determine the facts. a. True b. False 24. If an insurer in bad faith denies coverage for a claim, the insured may sue, but can recover no more than the policy’s coverage limits. a. True b. False 25. To encourage an owner to insure his or her property for an amount as close to full value as possible, a fire insurance policy can include a coinsurance clause. a. True b. False 26. An insured with multiple insurance policies covering a loss can collect only each insurer’s proportionate share of the liability relative to the total amount of insurance. a. True b. False 27. With a binder, an applicant for insurance obtains temporary coverage before the insurance company accepts or rejects the application. a. True b. False 28. Insurance contracts are usually obtained through an agent, who works as an independent contractor. a. True b. False

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Chap 50_15e 29. Because types of losses that are expected and types that are foreseeable vary with the nature of an activity, insurance is classified according to the nature of the risk involved. a. True b. False 30. In most situations, state law determines the status of all parties writing or obtaining insurance. a. True b. False 31. Customarily, an insurance company offers to insure individuals and businesses by advertising for applicants, who can either accept or reject the offer. a. True b. False 32. An insured’s interest in a life insurance policy is not generally an asset that can be subject to the rights of a judgment creditor. a. True b. False 33. Courts interpret the words used in an insurance policy as if most people have the special training necessary to understand the intricate terminology. a. True b. False 34. Insurance is a contract in which the insurer promises to reimburse the insured or a beneficiary in the event of a loss. a. True b. False 35. Good faith requires the party who is applying for insurance to reveal everything necessary for the insurer to evaluate the risk of issuing a policy. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 36. Commerce Insurance Corporation promises to compensate Data Company on the death of Elko, a key Data executive. This contract is a. a statutory mandate. b. a binder. c. a wager. d. insurance.

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Chap 50_15e 37. Gus obtains an insurance policy from Health Insurance Inc. The policy includes an incontestability clause. Under this clause, after the policy has been in force for two or three years a. Gus cannot contest Health’s insurable interest. b. Gus cannot contest Health’s refusal to pay a claim under the policy. c. Health cannot contest Gus’s eligibility for continued coverage. d. Health cannot contest Gus’s statements in the application. 38. Fresco Inc. insures the life of Giotto, a key Fresco executive. Giotto leaves the firm to work for HVAC Company. Fresco continues to pay the premiums on the policy. Giotto subsequently dies. Benefits under the policy can be collected by a. Giotto’s estate. b. Fresco. c. HVAC. d. none of the choices. 39. Rena is the chief executive officer for Sales Inc., a successful market research firm. The company obtains insurance on Rena’s life from Tempo Insurance Company. This is a. key-person insurance. b. liability insurance. c. life insurance. d. none of the choices. 40. Anya obtains a liability insurance policy for her Bubble Tea Bistro from Choice Insurance LLC. In their dealings, the parties must a. act in good faith. b. attempt to deny or reduce any claim. c. prevent the other from asserting certain defenses. d. have an insurable interest. 41. Miles obtains a property insurance policy from Nova Insurance Company for Miles’s restored 1957 Chevy. Nova can cancel the policy if Miles a. fails to pay the premiums. b. files a claim under the policy. c. appears as a witness in a case brought against Nova. d. any of the choices. 42. Sid obtains a life insurance policy with no cash surrender value and names his daughter Teri as the beneficiary. This is a. whole life insurance. b. limited-payment life insurance. c. universal life insurance. d. term insurance.

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Chap 50_15e 43. Conflagration Insurance Corporation promises to compensate Dakota for property damage and personal injuries resulting from fire. This may be a. automobile insurance. b. fire insurance. c. homeowner’s insurance. d. any of the choices. 44. Quality Insurance Company issues a business liability policy to Rapid River Tours Inc. When an event occurs that gives rise to a claim, the insurer has a duty to a. investigate to determine the facts. b. file a suit against the insured so that a court can settle the claim. c. find a third party on whom to impose liability. d. refund any unearned amount of the premium. 45. Raj obtains an insurance policy from Secure Insurance Inc. The policy provides that on Raj’s death the insurer will pay $500,000 to Raj’s spouse. This is a. major medical insurance. b. key-person insurance. c. life insurance. d. all-risk insurance. 46. Bjorg applies for a life insurance policy to be issued by Credible Insurance Inc. If a dispute arises between the parties concerning the settlement of a claim, the insurer wants the dispute to be submitted to an impartial third party, not a court, for resolution. Under an arbitration clause, this would be a. permitted, but not required. b. required. c. prohibited. d. restricted, but not prohibited. 47. Energy Inc. obtains insurance policies with Fidelity Insurance Company and Good Insurance Inc. against the risk of loss of Energy’s property. Each policy includes a multiple insurance clause. A fire destroys one of Energy’s buildings. The insured can collect from either insurer a. all of the loss. b. half of the loss. c. its proportionate share of the loss to the total amount of insurance. d. none of the loss. 48. Signs Inc., a trade fixture installer, wishes to insure itself against injuries to employees and others on the premises during and after work hours. This business should obtain a. workers’ compensation insurance. b. general liability insurance. c. product liability insurance. d. professional malpractice insurance.

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Chap 50_15e 49. Rizzo obtains a fire insurance policy on his apartment building with Safe-wise Insurance Company. This policy is an arrangement for a. avoiding the assumption of responsibility. b. predicting a potential loss based on unknown factors. c. shifting the imposition of liability. d. transferring and allocating risk. 50. An insurance broker is most likely a. an employee of an insurance company. b. an independent contractor. c. an underwriter. d. a beneficiary. 51. Burgers & Brews Inc. applies for, and obtains, casualty insurance coverage from Corporate Insurance Company. The effective date of the policy is the date a. the application is submitted. b. the premium is accepted. c. the policy is issued. d. specified in the application as the effective date. 52. Jin, the insured under a life insurance policy, fails to pay the premium on its due date but makes the payment within the next thirty days. Ordinarily, under an antilapse clause, this policy would a. automatically lapse. b. not be canceled. c. be subject to arbitration concerning the propriety of the payment. d. be adjusted proportionate to the delay in the premium payment. 53. Quinn applies to Real Insurance Company for property insurance. Real issues a policy but later discovers that the application includes misstatements. The misstatements can void the policy if the insurer can show that a. the broker who obtained the policy did not know the true facts. b. Quinn would not have applied for a policy if he had foreseen avoidance. c. the agent who wrote the policy did not investigate the facts. d. Real would not have issued the policy if it had known the facts. 54. Chik is injured in an accident caused by Dylan’s negligence. Chik files a claim to recover for the injury under Dylan’s homeowners’ policy. Liability coverage under this policy normally applies to liability that arises from a. business or professional activities. b. the operation of a motor vehicle. c. intentional misconduct. d. none of the choices.

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Chap 50_15e 55. Architecture P.A. obtains an insurance policy that protects its professionals against negligence claims by their clients. This is a. product liability insurance. b. general liability insurance. c. professional malpractice insurance. d. workers’ compensation insurance. 56. Neon Signs LLC wants to insure the equipment and supplies that it uses to create its products. To obtain insurance, Neon must have an insurable interest in the property a. at the time a premium is paid. b. at the time a loss occurs. c. at the time a policy is obtained. d. continuously from the time a policy is obtained to the time a loss occurs. 57. Cutting Edge Corporation makes and sells knives, scissors, garden shears, and other cutting devices. To cover injuries to consumers if the products prove defective, Cutting Edge should obtain a. malpractice insurance. b. key-person insurance. c. liability insurance. d. life insurance. 58. Greta applies for a homeowners’ policy with Home Insurance Company through Ivy, an insurance agent. As a general rule, Home is bound by a. Ivy’s acts. b. Greta’s acts. c. the acts of both Greta and Ivy. d. the acts of neither Greta nor Ivy. 59. Riverside Storage obtains a fire insurance policy from Security Insurance Inc., on a $400,000 warehouse. The policy includes an 80-percent coinsurance clause. Riverside insures the property for $320,000. In a fire, the warehouse suffers $200,000 in damage. The insured can recover a. $400,000. b. $320,000. c. $200,000. d. $80,000. 60. Red obtains a fire insurance policy on his vacation cabin near Smoky Mountain from Torchlight Insurance Company. The cabin is lost in a fire, but the parties dispute the amount of Torchlight’s liability under an ambiguous clause in the policy. A court would most likely a. interpret the clause against Red. b. interpret the clause against Torchlight. c. rewrite the clause and apply it as rewritten. d. strike the clause from the policy.

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Chap 50_15e 61. Mia applies for an insurance policy with National Insurance Company through a broker. Mia pays the initial premium, but the broker fails to procure the policy. Mia is a. covered until the due date of the subsequent premium. b. protected until National accepts or rejects the application. c. protected from the time of the application until the end of the policy. d. not insured. 62. Salvage Yard obtains an insurance policy to protect against losses incurred by the firm as a result of being held liable for personal injuries or property damage sustained by others. This is a. casualty insurance. b. fire insurance. c. major medical insurance. d. malpractice insurance. 63. Eden Orchards, the insured under a policy with Farm Insurance LLC, files a claim for a covered loss. The parties cannot agree on the amount of the loss. Under an appraisal clause, a. the loss will be shared proportionately by the insurer and the insured. b. an estimate by an impartial, qualified third party can be demanded. c. the dispute will be submitted to an impartial third party for resolution. d. the loss will be appraised to the difference between the disputed values. 64. Verity Insurance Inc. promises to pay, for a certain period of time, a portion of the monthly wages of the employees of Wood Products Company whose illnesses or injuries cause disability. This is a. ability insurance. b. capability insurance. c. disability insurance. d. liability insurance. 65. Dash Delivery wants to procure an insurance policy that protects it against liability for property damage resulting from the operation of its vehicle. This would be a. unobtainable. b. liability insurance. c. malpractice insurance. d. automobile insurance. 66. Because the types of losses that are expected and the types that are foreseeable or unforeseeable vary with the nature of an activity, insurance is classified according to a. the targeted market of the insurer. b. the identity of a policy’s beneficiary. c. the nature of the risk involved. d. the personal interest of the insured.

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Chap 50_15e 67. Actuarial Insurance Inc. collects and analyzes data to estimate the frequency and costs of the claims of its insured. A prediction concerning potential loss based on known and unknown factors is a. business management. b. a binding forecast. c. a wager on liability. d. risk. 68. Commerce Insurance Inc. has a valid reason to cancel a policy issued to DIY Auto Parts LLC. In most states, the insurer could cancel the policy on a. advance oral or written notice. b. oral or written notice but only after arbitration. c. no notice. d. advance written—not oral—notice. 69. Seasonal Resort Company applies for an insurance policy with Trustworthy Insurance Inc. through an agent who works for the insurer. The applicant pays the initial premium. The agent writes a binder, which a. acknowledges the application and promises to consider it. b. attests to the truth of each statement in the application c. evidences receipt of the payment of the initial premium. d. indicates that a policy is pending and states its essential terms. 70. Quia obtains a fire insurance policy on her house from Residential Insurance Company. Later, after she moves out and the house is empty, a fire destroys the structure. Most fire insurance policies require that at the time of a loss, the insured premises be a. vacant and uninhabitable. b. occupied. c. unoccupied but habitable. d. empty. 71. Rob applies to Standard Insurance Company for a life insurance policy. On the application, Rob understates his age. Rob obtains the policy, but for a lower premium than he would have had to pay had he disclosed his actual age. The policy includes an incontestability clause. Five years later, Rob dies. Can Standard refuse payment on the policy?

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Chap 50_15e 72. Estimable Credit Company loans funds to Farmland Granaries LLC to buy a silo. Estimable obtains an insurance policy from Grangers Insurance Inc. to cover the silo. Farmland also obtains a policy from Grangers to cover the silo. Later, Farmland sells the silo to Hi-Yield Harvest Company but keeps the policy. Hi-Yield also obtains a policy from Grangers to cover the silo. Estimable agrees to finance Hi-Yield’s purchase of the property. A fire totally destroys the silo. Who can recover for the loss?

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Chap 50_15e Answer Key 1. False 2. False 3. False 4. True 5. False 6. True 7. False 8. True 9. True 10. False 11. True 12. True 13. True 14. False 15. True 16. True 17. True 18. True 19. True 20. True 21. False 22. True 23. True 24. False 25. True 26. True

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Chap 50_15e 27. True 28. False 29. True 30. True 31. False 32. False 33. False 34. True 35. True 36. d 37. d 38. b 39. a 40. a 41. a 42. d 43. d 44. a 45. c 46. b 47. c 48. b 49. d 50. b 51. d 52. b 53. d 54. d Copyright Cengage Learning. Powered by Cognero.

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Chap 50_15e 55. c 56. b 57. c 58. a 59. c 60. b 61. d 62. a 63. b 64. c 65. d 66. c 67. d 68. d 69. d 70. b 71. Probably not. An incorrect statement as to the age of an insured is a misrepresentation, although not a material error sufficient to allow the insurer to void the policy. Had it been caught earlier, the insurer could adjust the premium payments and/or benefits accordingly. Under an incontestability clause, however, after a policy has been in force for a certain time (usually two or three years), the insurer cannot cancel the policy or avoid a claim on the basis of statements made in the application.

72. Estimable has an insurable interest in the silo. To have an insurable interest, one must be in a position to suffer a loss from its destruction. A lender can have an insurable interest in the property that serves as the security for the loan, because the lender can suffer a loss if the property is destroyed. With an insurable interest, there can be an enforceable insurance contract. Thus, Estimable can recover for the loss of the silo up to the amount of its loan. Hi-Yield can also recover for the loss up to the amount of its interest in the silo. Because an insured must have an insurable interest in property at the time that the loss occurs, Farmland cannot recover for the loss of the silo, even though it retained the insurance policy after selling the property. Farmland’s insurable interest terminated when it sold the property.

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Chap 51_15e Indicate whether the statement is true or false. 1. With a resulting trust, assets held in the trust can pass to the heirs after going through probate. a. True b. False 2. A testator can revoke a will by having someone else tear it up in the testator’s presence and at his or her direction. a. True b. False 3. A spendthrift trust provides for a beneficiary by giving him or her sufficient funds to maintain an extravagant lifestyle and still meet his or her obligations. a. True b. False 4. A valid will is one that represents the maker’s intent to transfer and distribute his or her property. a. True b. False 5. A durable power of attorney authorizes an individual to act on behalf of another only if he or she is not incapacitated—which is why the power is called durable. a. True b. False 6. Because a general bequest or devise does not single out any particular item of property to be transferred by will, a testator does not have to know the nature and extent of his or her property to create a valid will. a. True b. False 7. Under intestacy laws, if no heirs exist, then the state assumes ownership of the property of an estate. a. True b. False 8. An owner can transfer property outside the probate process by making gifts of property while the owner is still living. a. True b. False 9. A living will is a will in the usual sense that it disposes of property. a. True b. False

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Chap 51_15e 10. Because estate planning involves difficult decisions about the future, powers of attorney and living wills are often executed in conjunction with a will or trust. a. True b. False 11. Once a will is admitted to probate, the decedent’s family members can agree among themselves how to distribute the estate, and no court order is needed to clear title to the assets. a. True b. False 12. If a trustee fails to comply with the terms of the trust or the governing statute, he or she is personally liable for any loss. a. True b. False 13. Because the rules of descent are uniform among the states, it is necessary to refer only to the language of any state’s statute when addressing intestacy distribution. a. True b. False 14. A trust can be created to take effect during a person’s lifetime but not after a person’s death because the grantor must remain in control of the trust assets. a. True b. False 15. A divorce occurring after a will has been written does not revoke dispositions of property made under the will to the former spouse. a. True b. False 16. Under intestacy laws, a surviving spouse receives the decedent’s entire estate. a. True b. False 17. If a will does not provide how an estate will be distributed to grandchildren, under the per capita method of distribution, an heir takes the share that his or her deceased parent would have been entitled to inherit. a. True b. False 18. Because no state limits how property and obligations are transferred on death, a person can freely direct the passage by any means and many methods. a. True b. False

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Chap 51_15e 19. A trust is a popular estate-planning option because at the grantor’s death, assets held in a living trust revert to the decedent’s estate. a. True b. False 20. A trust must be express because the essential elements of a trust include a writing. a. True b. False 21. For a will to be valid, the testator’s signature must appear on it, generally at the end. a. True b. False 22. The trustee’s duty of loyalty requires that he or she act in the exclusive interest of the grantor or settlor. a. True b. False 23. In an irrevocable living trust, legal title to the trust property passes to the beneficiary. a. True b. False 24. With a constructive trust, a court declares a property owner to be a trustee for parties who are, in fairness, entitled to the benefits that flow from the property. a. True b. False 25. As a final declaration of how a person desires to have property disposed of after death, a will can serve no purpose other than distribution of the property. a. True b. False 26. If a will does not provide how an estate will be distributed to grandchildren, under the per stirpes method of distribution, all heirs in a certain class inherit equally. a. True b. False 27. The elements of a trust include actual delivery by the grantor to the beneficiary with the intent of passing title. a. True b. False 28. Intestacy laws determine the distribution of property of one who dies without a valid will, and attempt to carry out the likely intent and wishes of the decedent. a. True b. False

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Chap 51_15e 29. A testator must be able to remember the persons who would naturally be heirs to the estate, as the testator is required to give the estate to the natural heirs. a. True b. False 30. Health-care powers of attorney have grown in importance as medical technology has enabled physicians and hospitals to keep people alive for ever-increasing periods of time. a. True b. False 31. One way to transfer property outside the probate process, and thereby avoid the costs, is to own property in joint tenancy. a. True b. False 32. The formalities of a will are intended to ensure that the testator understood his or her actions at the time a will was made and to help prevent fraud. a. True b. False 33. The laws governing how property is transferred on the death of its owner are a corollary to the concept of the private ownership of property. a. True b. False 34. In most states, the testator’s marriage after the execution of a will may affect the distribution of the estate. a. True b. False 35. If a legatee dies before the testator or before a legacy is payable, an abatement results, which means that the legatee’s heirs receive reduced benefits. a. True b. False 36. The costs of long-term improvements to the assets of a trust and the proceeds from a sale of the assets are allocated to the principal’s beneficiary. a. True b. False

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Chap 51_15e Indicate the answer choice that best completes the statement or answers the question. 37. A will must comply with statutory formalities to ensure that the testator understood his or her actions at the making of the will. These formalities are intended to a. raise revenue. b. support probate courts, attorneys, and other professionals. c. prevent fraud. d. all of the choices. 38. A party can be given the authority to write checks, collect insurance proceeds, and otherwise manage the affairs of a person who is incapacitated through a. a living will. b. a durable power of attorney. c. a health-care power of attorney. d. a constructive trust. 39. Leif executes a will in which he leaves everything to his spouse, Marta, and in which he appoints Nora to administer the estate. The will must be signed by a. Leif only. b. Leif and Marta only. c. Leif, Marta, and Nora. d. a probate judge. 40. Jason does not execute a will before he dies. With respect his estate, the assets are distributed first to a. pay his debts. b. support his surviving spouse and children. c. benefit his collateral heirs. d. satisfy gifts to his lineal heirs. 41. Under intestacy laws, if Darlene has no heirs, then the property of her estate a. passes to a person designated by a probate court. b. is transferred to the state. c. devolves to a preselected charity. d. is held in trust for future beneficiaries. 42. Kit has two children, Lea and Merl, both of whom predecease Kit. Lea is survived by her son Nat. Merl is survived by her daughters Opal and Pearl. On Kit’s death, if the distribution of the estate is per capita, Pearl will receive a. everything. b. nothing. c. one-half. d. one-third.

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Chap 51_15e 43. Miki establishes a trust for the benefit of Nan, naming Obi as the trustee. The terms of the trust instrument do not expressly state the event on which Miki wishes it to terminate. The trust will end a. when the trust’s purpose is fulfilled, or becomes impossible or illegal. b. any of the choices—whichever occurs first. c. on the death of Nan. d. on the death of Obi. 44. Grover does not execute a will before he dies. His survivors include his spouse Helene and their two children, Irene and Johann. With respect to Grover’s estate, under intestacy laws, Helene will probably receive a. everything. b. nothing. c. one-half. d. one-third. 45. Marie is asked to serve as a witness to Nicki’s will. To qualify, Marie must be a. a U.S. citizen. b. all of the choices. c. at least eighteen years old. d. mentally competent. 46. Faye executes a will in which Gail is appointed to administer the will. After Faye dies, Gail lacks the capacity to serve, and a court appoints Hedy to handle the probate of Faye’s estate. In this situation, the administrator is a. Faye. b. Gail. c. Hedy. d. the court. 47. Finn does not execute a will before he dies, with no surviving spouse or child. His survivors include his grandson Gage and his niece Hailey. In most states, his estate would pass to a. Gage only. b. Hailey only. c. Gage and Hailey in equal measure. d. the state. 48. Leda executes a separate written instrument to revoke her prior will. This separate document is a. a residuary clause. b. a codicil. c. none of the choices. d. a type of trust.

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Chap 51_15e 49. The conduct of Edie and Floyd indicate an intention to create a trust. The circumstances raise an inference that Edie is holding legal title to property for Floyd’s benefit. This is a. not a trust. b. a living trust. c. a resulting trust. d. a constructive trust. 50. Patty executes a will, leaving her estate to her spouse Quentin. They have a daughter Rita. Later, Patty and Quentin divorce. Patty does not execute a new will before she dies. With respect to Patty’s estate, Quentin is entitled to a. everything. b. nothing. c. one-half. d. one-third. 51. Carl dies without a will, survived by his granddaughter Doral and her brother Elton. The grandchildren are Carl’s a. collateral heirs. b. decedents. c. trustees. d. lineal heirs. 52. Nadia does not execute a will before she dies. The distribution of her estate is regulated by a. the comprehension of the natural objects of her bounty. b. the decisions of a trustee appointed by a probate court. c. the state’s intestacy statutes. d. the terms of a different decedent’s will disposing of a similar estate. 53. According to the terms of Kim’s will, specific gifts are made, and taxes and other estate debts are paid. The assets of the estate that remain are most likely to be distributed through a. a codicil. b. a type of trust. c. none of the choices. d. a residuary clause. 54. A party can be given the power to choose what type of and how much medical treatment a person who is unable to make such decisions will receive through a. a living will. b. a durable power of attorney. c. a health-care power of attorney. d. a constructive trust.

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Chap 51_15e 55. Diego executes a will that clearly states his brother Enrique is to receive none of Diego’s estate, which is to be distributed entirely to Diego’s friend Frieda. At the time of Diego’s death, Frieda has died, leaving no heirs, and Diego’s only surviving natural heir is Enrique. Most likely, the estate will be distributed to a. no one. b. Frieda in abatement. c. Enrique. d. the state. 56. Molly is not married and has no children. She executes a will, disposing of her estate to her sister Nina. Later, Molly marries Owen. They have no children. Molly does not execute a new will before she dies. With respect to Molly’s estate, Owen is entitled to a. everything. b. nothing. c. one-half. d. one-third. 57. Idina executes a deed conveying ownership of her home to a trust for the benefit of her son Jem. The trust designates Idina as the trustee. When she dies, the house will pass without going through probate to a. Jem. b. Idina’s estate. c. the trust. d. the state. 58. Kai establishes a trust, naming Loo as the trustee and giving him discretionary investment power. A state statute confines trustees to investments in conservative debt securities. In investing the trust assets, Loo does not follow the statute, but generally exercises the degree of care that a prudent person would exercise in his personal affairs. In this situation, Loo is liable for a. not complying with the purposes of the trust. b. none of the choices c. failing to follow the statute. d. exercising the same degree of the care as he would in his own affairs. 59. Determining in advance how one’s property and obligations should be transferred on death is the process of a. risk management. b. intestacy law. c. debt maintenance. d. estate planning. 60. Sally handwrites her will on a sheet of blank paper. This will is a. invalid. b. holographic. c. nuncupative. d. residuary.

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Chap 51_15e 61. Rollo opens an account for $250,000 at Savers Bank. The account provides that the funds are held in trust for Thea, Rollo’s daughter. This is a. a constructive trust. b. a living trust. c. a resulting trust. d. a testamentary trust. 62. Joe establishes a trust for the benefit of his grandchildren. The trust will fail if a. the trust fails to name a trustee. b. none of the choices c. the named trustee will not serve. d. the named trustee can not serve. 63. Under a certain state’s law, the legal age for executing a will is eighteen. In that state, Mocha writes a will when she is diagnosed with a life-threatening illness at age sixteen. Mocha dies at age twenty-one. Her will is a. valid because of her diagnosis. b. valid because she was of sound mind. c. valid because of her age at death. d. invalid. 64. In her will, Delia makes a gift of $10,000 to Esteban. This is a. a bequest. b. a devise. c. a legacy. d. residuary. 65. In his will, Rowan makes a gift of a rare Shakespeare folio to his sister Tiffany. Tiffany dies before her brother, survived by her daughter Uma. On Rowan’s death, the gift of the folio a. fails. b. lapses. c. is made to Uma. d. escheats. 66. An advance health directive that allows a person to control what medical treatment he or she may receive after a serious accident or illness is a. a living will. b. a durable power of attorney. c. a health-care power of attorney. d. a constructive trust.

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Chap 51_15e 67. Selena decides to create a trust for the benefit of her children. She deeds her property to the entity that she creates but retains the power to amend, alter, or revoke the arrangement. She also continues to hold the property and receive the income that it earns. This is a. not a trust. b. a revocable living trust. c. an irrevocable living trust. d. a constructive trust. 68. Emmett has two children, Franklin and Genevieve, both of whom predecease Emmett. Franklin is survived by his daughter Hermione. Genevieve is survived by her sons Ishmael and Joshua. On Emmett’s death, if the distribution of his estate is per stirpes, Hermione will receive a. everything. b. nothing. c. one-half. d. one-third. 69. Flem owns shares of stock in Gas & Oil Inc. To create a trust with the stock for the benefit of his spouse Hana, Flem must convey the shares to a. a grantor. b. a settlor. c. a trustee. d. a court. 70. A party should always check the succession and inheritance laws of the state most likely to be involved in the resolution of a conflict related to the settling of an estate because a. the Uniform Probate Code codified principles covering such disputes. b. the requirements for a will and its probate are uniform among the states. c. those laws vary widely among the states. d. almost half of the states have enacted some part of the UPC. 71. On the death of the owner, property can be transferred through a will, a trust, or a state law prescribing its distribution. This indicates our laws require that, on death, title to property must be a. dissociated from a decedent’s estate. b. disposed of by a trustee. c. dissolved in favor of a beneficiary. d. delivered in full somewhere.

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Chap 51_15e 72. Wanda, an elderly woman, is diagnosed with cancer. The prognosis is that her condition will worsen and that eventually she will become too weak to breathe without the assistance of a respirator. She does not want to be kept alive in a “vegetative state.” What are Wanda’s options?

73. Aron owns a certificate of deposit with Beth, his sister, and an apartment building with Carl, his brother, in both cases as a joint tenant. Aron, a partner with Debra in Aron & Debra Accountants, obtains a life insurance policy with Debra as the designated beneficiary. Aron writes a will that gives particular items of personal property, as well as specific amounts of cash, to his children and his friends. The will leaves the residue of the estate to Eve, Aaron’s favorite cousin. Carl dies. Aron, on his deathbed, makes a gift to the United Way. Will the certificate of deposit, the apartment building, the proceeds from the life insurance policy, and the gift to the United Way become part of Aron’s estate and be distributed under the will? If not, how will these items be distributed and to whom?

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Chap 51_15e Answer Key 1. False 2. True 3. False 4. True 5. False 6. False 7. True 8. True 9. False 10. True 11. False 12. True 13. False 14. False 15. False 16. False 17. False 18. False 19. False 20. False 21. True 22. False 23. False 24. True 25. False 26. False

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Chap 51_15e 27. False 28. True 29. False 30. True 31. True 32. True 33. True 34. True 35. False 36. True 37. c 38. b 39. a 40. a 41. b 42. d 43. a 44. d 45. d 46. c 47. a 48. b 49. c 50. b 51. d 52. c 53. d 54. c Copyright Cengage Learning. Powered by Cognero.

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Chap 51_15e 55. d 56. a 57. a 58. b 59. d 60. b 61. b 62. b 63. d 64. c 65. c 66. a 67. b 68. c 69. c 70. c 71. d 72. Wanda has several options to control in advance what medical treatment may be used. She could give a health-care power of attorney to an adult child or some other person who understands her wishes and will see that they are carried out. Or, if her state allows it, she could create a living will, in which she can designate that she does not want certain lifesaving procedures to be undertaken in her case. These options are particularly attractive when the treatment would not result in a reasonable quality of life.

73. Of the items listed in the question, only the apartment building will become part of Aron’s estate and be distributed in accordance with his will. When property is owned in joint tenancy, each joint tenant has a right of survivorship, which means that if a joint tenant dies, the survivor becomes the sole owner of the property. Because Aron owned the apartment building in joint tenancy with his brother, and the brother predeceased him, Aron became the sole owner. As such, Aron could transfer the property in any way he wished. The apartment building passes under the will, because, unlike the other items in this question, no other disposition for it was made. The interest in the certificate of deposit, which Aron and his sister Beth held as joint tenants, passes to Beth, who survives Aron. The gift that Aron made to the United Way on his deathbed is effective and thus would not become part of Aron’s estate. The proceeds of the life insurance policy would pass to Debra, the beneficiary, without becoming part of the estate.

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Unit 01 Indicate the answer choice that best completes the statement or answers the question. CHAPTER 3—ETHICS TODAY: APPLYING THE IDDR FRAMEWORK 1. When making a business decision, those responsible for making it sometimes focus on short-run profit maximization in preference to ethical considerations. Subject to analysis according to the IDDR framework, this decision would most likely a. fulfill corporate and individual values without regard to ethics. b. find support under a duty-based ethical standard. c. withstand scrutiny under an outcome-based ethical standard. d. not survive under any ethical standard.

CHAPTER 3—DIGITAL UPDATE: SHOULD EMPLOYEES HAVE A “RIGHT OF DISCONNECTING”? 2. Regional Sales Company expects its sales staff to constantly check their e-mail for work-related messages outside normal working hours. Employees’ constant online connectivity with their work raises an issue about a. the definition of work. b. work-related stress. c. the quality of workers’ lives. d. overburdened company servers. CHAPTER 3—ETHICS TODAY: APPLYING THE IDDR FRAMEWORK 3. An important reason for applying the IDDR approach to a review of the ethical conflicts in a given business situation, and one of the difficulties in evaluating its consequences, is to a. see ethical lapses in retrospect. b. identify potential ethical problems in advance. c. overcome the moral scrutiny of profit motives. d. fulfill corporate and individual values without regard to ethics. UNIT ONE—APPLICATION AND ETHICS: “ARBITRATION, NO CLASS ACTIONS” 4. Lare applies for a job with Marketing Inc. Like most employers, Marketing informs Lare that “any claim relating to this application or employment shall be settled by a. arbitration.” b. class action.” c. collective decision making.” d. individual lawsuits, not class action.”

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Unit 01 5. Senta applies for credit with Truck Sales Inc. The company informs Senta that “any claim arising from this deal must be resolved through mandatory arbitration.” Through this clause, Truck Sales will most likely avoid all of the following except a. a lengthy resolution process. b. engaging in individual arbitration. c. responding to a class action. d. settling a groundless claim. CHAPTER 3—DIGITAL UPDATE: SHOULD EMPLOYEES HAVE A “RIGHT OF DISCONNECTING”? 6. Security Patrols Inc. requires its employees to respond to work-related text messages delivered via their company-issued smartphones while on duty in the workplace and while off duty elsewhere. Security’s employees might successfully sue their employer for a. ownership of the company’s smartphones. b. a decrease in the quality of life. c. a violation of the right to disconnect. d. unpaid overtime. UNIT ONE—APPLICATION AND ETHICS: “ARBITRATION, NO CLASS ACTIONS” 7. Fuel-Co Gas Stations LLC pads all of its customers’ bills with an unexpected fee, adding up to millions in profit for Fuel-Co at a small expense for each individual customer. The customers could most affordably fight this charge by a. bringing individual lawsuits. b. engaging in individual arbitration. c. filing a class action. d. taking their case to the state legislature. CHAPTER 1—ETHICS TODAY: STARE DECISIS VERSUS SPIDER MAN 8. Hosni patents a new type of running shoe. Hosni and Iconic Shoe Company enter into a contract that allows the firm to make and market the shoe in exchange for royalty payments to Hosni that decrease after the patent expires. In a previous case, a similar agreement was held to be invalid. According to the dissent in Kimble v. Marvel Entertainment, LLC, stare decisis a. means “sticking to some wrong decisions.” b. does not require retaining “baseless and damaging precedents.” c. promotes unpredictability and inconsistency in the business world. d. permits parties to negotiate a licensing agreement that reflects the true value of a patent.

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Unit 01 CHAPTER 5—DIGITAL UPDATE: USING SOCIAL MEDIA FOR SERVICE OF PROCESS 9. Suha wishes to file a suit in a state court against Theta. The state allows for service of process via social media if Suha can authenticate Theta’s social media account. Allowing service of process only by means of social media raises a question whether that service comports with a. due process. b. the Federal Rules of Civil Procedure. c. the freedom to contract. d. the rules of evidence. CHAPTER 2—DIGITAL UPDATE: DOES EVERYONE HAVE A CONSTITUTIONAL RIGHT TO USE SOCIAL MEDIA? 10. According to the United States Supreme Court, under the First Amendment, if speech is the means for the commission of a specific criminal act, a. the act is nevertheless not protected speech. b. the act is protected speech, despite its offensiveness. c. the statute declaring the crime violates the right to free speech. d. the act is not criminal unless the speech is offensive. CHAPTER 1—ETHICS TODAY: STARE DECISIS VERSUS SPIDER MAN 11. Bud patents a device that allows its user to pretend to imitate the ability of a superhero copyrighted by Comic Con Inc. Bud and Comic Con enter into a licensing agreement to make and sell the device as a toy to the public. Under the terms of the license, the licensee agrees to pay Bud royalties of 4 percent. Their contract does not specify an end date. According to a majority of the United States Supreme Court in Kimble v. Marvel Entertainment, LLC, Comic Con can legally stop the payments a. whenever Comic Con chooses. b. never. c. when the copyright expires. d. when the patent expires. CHAPTER 2—DIGITAL UPDATE: DOES EVERYONE HAVE A CONSTITUTIONAL RIGHT TO USE SOCIAL MEDIA? 12. In evaluating the reasonableness of a state statute prohibiting sex offenders from accessing all social media, a court must strike a balance between a. the government’s obligation to protect its citizens and uphold their rights. b. sex offenders’ expectations of privacy and the online environment. c. social media users’ speaking and listening in a modern public square. d. the vast realms of human thought and knowledge.

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Unit 01 UNIT ONE—APPLICATION AND ETHICS: “ARBITRATION, NO CLASS ACTIONS” 13. Smelting Company has in interest in staying in business. From this perspective, with respect to resolving disputes through arbitration, individual litigation, and class actions, Smelting is ethically required to a. curb a bad practice. b. engage in harmful conduct. c. exhaust its assets to litigate or settle a case. d. generate fees for lawyers. CHAPTER 5—DIGITAL UPDATE: USING SOCIAL MEDIA FOR SERVICE OF PROCESS 14. Bey, a process server, cannot locate Cate, the defendant in Demi v. Cate, to serve her with the summons. Bey’s legal and effective options for serving process include delivering the summons a. as an attachment in an e-mail to Demi. b. through a private message to Cate’s Facebook account. c. via any means over the Internet to Facebook. d. by posting it on any social media forum that Cate is known to visit.

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Unit 01 Answer Key 1. d 2. a 3. b 4. a 5. b 6. d 7. c 8. b 9. a 10. a 11. d 12. a 13. a 14. b

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Unit 02 Indicate the answer choice that best completes the statement or answers the question. CHAPTER 8—GLOBAL INSIGHT: ALEVE VERSUS FLANAX—SAME PAIN KILLER, BUT IN DIFFERENT COUNTRIES 1. Opiate Company markets a product using a trademark of Pharma Ltd. that is not registered in this country and has never otherwise been used here. Pharma did not authorize Opiate’s use. Under the Lanham Act, Pharma can a. bring an action against Opiate. b. use any non-U.S. trademark of Opiate to sell a product in this country. c. not use the mark because Opiate’s use takes precedence. d. none of the choices.

CHAPTER 10—DIGITAL UPDATE: USING TWITTER TO CAUSE SEIZURES—A CRIME? 2. The intentional use of electronic communications systems to place another in reasonable fear of death or serious bodily injury is a crime under a. federal cyberstalking law. b. states’ enactment of the Model Penal Code. c. local service provider rules. d. no U.S. law. UNIT TWO—APPLICATION AND ETHICS: ONE OF THE BIGGEST DATA BREACHES EVER 3. Hackers infiltrate the computer system of ChemCo Inc. and steal the company’s trade secrets. If the hackers can be identified, they can be a. charged with unauthorized access of protected computers. b. subject to civil sanctions, but no criminal penalties. c. subject to a suit by the Federal Trade Commission. d. included on a “watch list” but no other sanctions are currently possible. 4. Hackers infiltrate the computer system of Metro Bank and steal the personal information of Metro’s customers and employees. Individuals whose personal information is involved in the breach should be notified, as required by law in a. all states. b. forty-seven states. c. no state. d. one state—California.

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Unit 02 CHAPTER 9—DIGITAL UPDATE: RIOT GAMES, INC., PROTECTS ITS ONLINE VIDEO GAME COPYRIGHTS 5. Yun Ltd. circumvents the anti-cheating code of Zen LLC’s free online video game to learn how to automate gameplay to perform with enhanced accuracy. Yun’s site sells the knowledge to players who can then outplay less-informed players. Yun most likely violated the Digital Millennium Copyright Act by a. circumventing the anti-cheating code of Zen’s game. b. developing a technique for gaining a gameplay advantage. c. selling a technique for gaining a gameplay advantage. d. none of the choices—Zen’s online game is free. CHAPTER 10—DIGITAL UPDATE: USING TWITTER TO CAUSE SEIZURES—A CRIME? 6. Sending a strobe-light image within a tweet that induces a seizure in an epileptic recipient could subject its sender to arrest a. if the tweet was part of a legal duty to perform a certain act. b. if the sender acted with the specific intent to induce the seizure. c. if the recipient had not acted to motivate the sender to send the tweet. d. under no circumstances. UNIT TWO—APPLICATION AND ETHICS: ONE OF THE BIGGEST DATA BREACHES EVER 7. The existence of an ethical duty on the part of Commerce & Trade Company, and other businesses, to prevent an attack by hackers on business computer systems, and consequent theft of customers’ and employees’ personal data, is evidenced by a. a business’s offer of credit monitoring in the event of a breach. b. a business’s cyber security insurance. c. the individuals’ trust in the business to protect their data. d. a business’s stated “Privacy Policy.” CHAPTER 8—GLOBAL INSIGHT: ALEVE VERSUS FLANAX—SAME PAIN KILLER, BUT IN DIFFERENT COUNTRIES 8. When a registered trademark is infringed to sell a product, the owner of the mark can succeed in an action against the infringer on showing that the defendant’s use of the mark a. made it hard for consumers to distinguish between the parties’ products. b. was intentional. c. ran contrary to the terms of the owner’s registration of the mark. d. created no consumer confusion about the defendant’s products.

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Unit 02 CHAPTER 6—DIGITAL UPDATE: REVENGE PORN AND INVASION OF PRIVACY 9. Han and Ivy take photos of themselves in intimate moments. When their relationship ends, Han posts the photos online without Ivy’s consent in an attempt to humiliate her. This is a crime in a. a handful of states. b. all states. c. most states. d. no state. UNIT TWO—APPLICATION AND ETHICS: ONE OF THE BIGGEST DATA BREACHES EVER 10. USA Sales Company publishes a “Privacy Policy” to attract customers, but fails to invest adequate resources in cyber security. A lack of security that allows hackers to steal customers’ personal data from a business’s computer system can be a. the hackers’ defense to criminal charges. b. the ground for a suit by the Federal Trade Commission. c. the basis for USA’s recovery under a traditional insurance policy. d. a source of bad publicity, but there are no other consequences. CHAPTER 9—DIGITAL UPDATE: RIOT GAMES, INC., PROTECTS ITS ONLINE VIDEO GAME COPYRIGHTS 11. Without authorization, Wei LLC copies Xi Inc.’s free online video game—its champions, their abilities, the sound effects, and the icons—and markets the copy under different names. Xi copies its own game to produce and sell a version for mobile platforms. Copyright issues are most likely to arise with a. Wei’s copy of Xi’s characters, settings, stories, and sounds. b. the video gameplay of Wei’s copy of Xi’s game. c. Xi’s copy of its own free game to sell. d. none of the choices—Xi’s online game is free. CHAPTER 6—DIGITAL UPDATE: REVENGE PORN AND INVASION OF PRIVACY 12. Libby and Marco take photos of themselves in intimate moments. When their relationship ends, Marco posts the photos online without Libby’s consent in an attempt to humiliate her. Included with the photos are Libby’s name, Facebook page, address, workplace, and phone number. This could be a ground for a civil suit on the basis of a. defamation. b. false imprisonment. c. invasion of privacy. d. no traditional tort theory.

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Unit 02 Answer Key 1. a 2. a 3. a 4. b 5. a 6. b 7. a 8. a 9. a 10. b 11. a 12. c

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Unit 03 Indicate the answer choice that best completes the statement or answers the question. CHAPTER 15—DIGITAL UPDATE: “CATFISHING” AND FRAUDULENT MISREPRESENTATION 1. Rolf pretends to be “Svetlana” online, fooling Tor into believing that Svetlana is his friend. When Tor learns the truth, he is embarrassed and feels humiliated. But he cannot recover damages because he cannot prove an actual injury, which is a requirement for recovery in these circumstances on the ground of a. mistake. b. fraudulent misrepresentation. c. undue influence. d. unconscionability.

CHAPTER 18—ETHICS TODAY: WHEN IS IMPOSSIBILITY OF PERFORMANCE A VALID DEFENSE? 2. Rural Holdings LLC contracts with Sweetwater Homes to sell real property that, unknown to either party, has groundwater contaminated from adjacent land occupied several decades earlier by Toxic Products Inc. When this is discovered, Rural asserts the doctrine of commercial impracticability. This doctrine applies only when, with respect to an event that renders performance impossible, at the time the contract was formed the parties a. could not have reasonably foreseen the supervening event. b. could have reasonably foreseen the supervening event. c. should have foreseen the supervening event, reasonable or not. d. should not have foreseen any supervening events. UNIT THREE—APPLICATION AND ETHICS: NONDISCLOSURE AGREEMENTS 3. Shu Ltd. and Tech Inc. negotiate a joint venture to do business in Asia. The parties anticipate sharing intellectual property, including trade secrets, as part of the deal. To keep the information confidential, the parties should enter into a nondisclosure agreement that is a. bilateral. b. multilateral. c. unilateral. d. all of the choices. CHAPTER 15—DIGITAL UPDATE: “CATFISHING” AND FRAUDULENT MISREPRESENTATION 4. Foo pretends to be “Ghee” online, fooling Haruo into believing that Ghee is his friend. Haruo can recover damages from Foo for the hoax on the ground of fraudulent misrepresentation if a. Haruo can prove an actual injury. b. Ghee is not in fact a “real” person but a totally fake persona. c. Foo and Haruo’s online relationship is “purely personal.” d. Haruo sent gifts to “Ghee” totaling at least $10,000.

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Unit 03 UNIT THREE—APPLICATION AND ETHICS: NONDISCLOSURE AGREEMENTS 5. A court is most likely to enforce a nondisclosure agreement that a. requires the parties to keep silent about illegal activities. b. has no time or geographical limitations. c. has a problem with contractual capacity. d. none of the choices. CHAPTER 18—ETHICS TODAY: WHEN IS IMPOSSIBILITY OF PERFORMANCE A VALID DEFENSE? 6. Citrus Orchard contracts to deliver a crop of oranges to Dairy Mart. An unexpected freeze destroys the oranges in the orchard. Dairy insists that Citrus deliver by acquiring the oranges on the open market. Citrus claims that this is prohibitively expensive. The best argument against enforcing the contract is a. frustration of purpose. b. objective impossibility of performance. c. anticipatory repudiation. d. commercial impracticability. UNIT THREE—APPLICATION AND ETHICS: NONDISCLOSURE AGREEMENTS 7. A court is most likely to enforce a nondisclosure agreement that requires the parties to keep silent about settlements involving sexual harassment if a. the victim requested the agreement. b. the agreement was required as a condition of employment. c. the parties signed the agreement as part of the settlement. d. under no circumstances. 8. Data Company wants to prohibit its employees from disclosing the firm’s proprietary information except in the course of their employment and for the employer’s benefit. Data could attain this result with a. a unilateral nondisclosure agreement. b. a multilateral settlement agreement. c. a bilateral consortium agreement. d. none of the choices.

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Unit 03 CHAPTER 12—DIGITAL UPDATE: CAN YOUR E-MAILS OR INSTANT MESSAGES CREATE A VALID CONTRACT? 9. Event Marketing LLC and Family Restaurant Inc. engage in an instant-messaging conversation while discussing an existing contract. Event suggests a modification—an increase in fees. Family asks about an increase in service. Event replies, “No limits!” Family responds, “Great!” As a modification of the parties’ contract, this chat is most likely a. enforceable. b. not enforceable because any indication of an agreement is “accidental.” c. not enforceable because it is an instant-messaging conversation. d. not enforceable because the language is relatively “careless.” 10. Tran and Ubie exchange offers and counteroffers via e-mail. These exchanges can constitute a valid contract a. if the e-mails contain all of the necessary elements of a contract. b. unless only the receiving party believes that there is an agreement. c. unless the parties believe that the e-mails are only negotiations. d. under no circumstances.

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Unit 03 Answer Key 1. a 2. a 3. a 4. c 5. d 6. d 7. a 8. a 9. a 10. a

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Unit 04 Indicate the answer choice that best completes the statement or answers the question. CHAPTER 24—ETHICS TODAY: IS IT ETHICAL (AND LEGAL) TO BREW “IMPORTED” BEER BRANDS DOMESTICALLY? 1. The label on AmBeer Inc.’s beer reads, “U.S. quality” and, beneath that phrase in small print, “Made with Imported Hops.” Bruce and other consumers file a class action against the brewer in California, which prohibits the use of an unqualified U.S.-origin claim. The plaintiffs’ best ground for a possible recovery is most likely a. misleading advertising. b. unethical labeling practices. c. inconsistent puffery. d. inferior taste.

UNIT FOUR—APPLICATION AND ETHICS: SUCCESS IN GLOBAL COMMERCE 2. Home Grown Inc. is a firm based in the United States that does business overseas. When entering into a business contract, deciding which terms to include, and choosing a method to resolve a dispute, Home should a. rely solely on legal principles rather than the business relationship. b. assume that a party in another country has the same contractual expectations as a party in the United States. c. be alert to cultural influences. d. stay inflexible in the face of others’ social and cultural practices. CHAPTER 24—ETHICS TODAY: IS IT ETHICAL (AND LEGAL) TO BREW “IMPORTED” BEER BRANDS DOMESTICALLY? 3. The label on Cameron Ltd.’s beer reads, “British quality” and, beneath that phrase in small print, “Product of the U.S.A.” David and other consumers file a class action against the brewer over the fact that its beer is not brewed in Great Britain. The plaintiffs’ best ground for a possible recovery is most likely a. misleading advertising. b. unethical labeling practices. c. inconsistent puffery. d. inferior taste. CHAPTER 20—DIGITAL UPDATE: TAXING WEB PURCHASES 4. Quick Trip, an online travel company, buys blocks of rooms from Peak Season Inn, a hotel in Ocean City, at a wholesale rate. Quick resells the rooms to consumers at a retail rate. One recent effort by cities to collect taxes from e-commerce has focused on a. hotels that sell blocks of rooms at wholesale rates. b. non-resident consumers who reserve rooms in in-state hotels. c. online travel companies. d. the dire financial straits of the cities during the latest recession.

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Unit 04 UNIT FOUR—APPLICATION AND ETHICS: SUCCESS IN GLOBAL COMMERCE 5. Global Trade Inc. does business throughout the world. As an international corporation, Global can be subject to conventions issued by the United Nations Commission on International Trade Law. Conventions are a. designed to establish binding legal obligations. b. issued to recommend provisions for individual nations to adopt as part of their national law. c. promulgated to suggest non-binding guidelines for commercial norms. d. compiled at international convocations to represent consensus opinions. 6. National Company and Omni Corporation are businesses located in different countries. Representatives of National and Omni transact a deal over their cellphones. Under the United Nations Convention on the Use of Electronic Communications in International Trade (ECC), which National’s country has adopted, this deal is a. as valid and enforceable as a contract on paper. b. invalid because Omni Supply’s country has not adopted the ECC. c. invalid because it is not a contract on paper. d. invalid because the businesses are located in different countries. 7. Web Resource Inc. and World Market Ltd., businesses located in different countries, agree to a contract. Like different individuals, Web and World have different perceptions of what the agreement between them is and what it means to fulfill it. This is because a. in every country arbitration is the preferred method of dispute resolution. b. in every country it is acceptable to file an action in a court to resolve a dispute. c. a business contract is only the expression of the framework of a deal. d. Web and World are influenced by different cultures. CHAPTER 20—DIGITAL UPDATE: TAXING WEB PURCHASES 8. Online retailers that have a physical presence within a state must collect state taxes on any Web sales made to residents of that state. Sell2U.com Inc., an online retailer based in California, pays Tracker Web Services, which is located within New York, to direct traffic to Sell2U.com’s site. If Sell2U.com must collect and remit taxes on its sales to New York residents, it is most likely because a. Sell2U.com’s deal with Tracker falls within New York’s definition of physical presence. b. Congress has explicitly chosen to tax Internet sales. c. the United States Supreme Court has ruled that a state can compel an out-of-state business to collect and remit state taxes. d. New York requires its residents to self-report their purchases and pay use taxes to the state.

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Unit 04 Answer Key 1. a 2. c 3. a 4. c 5. a 6. a 7. d 8. a

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Unit 05 Indicate the answer choice that best completes the statement or answers the question. CHAPTER 28—DIGITAL UPDATE: ELECTRONIC PAYMENT SYSTEMS ARE REDUCING THE USE OF CHECKS 1. Businesses have been required to switch to digital invoices in a. the European Union. b. the United States. c. countries that host the Association of Financial Professionals. d. the home regions of cloud-based companies. 2. A digital invoice is a. an electronic version of a paper bill that can be paid online. b. an online view of a paper bill that cannot be paid online. c. a statement for a subscription service that makes B2B payments. d. a supplemental record of a transaction payment. UNIT FIVE—APPLICATION AND ETHICS: VIRTUAL CURRENCY—IS IT SAFE? 3. Virtual currency is stored in a digital wallet and identified by public keys. To access virtual currency requires corresponding sequences of private keys. Unlike real currency, virtual currency is a. not issued or backed by any government or bank. b. subject to special digital transaction fees. c. risk-free. d. required to be accepted in payment or exchange. 4. Virtual currency has legitimate uses. Laws that apply to virtual currency include all of the following except a. federal registration requirements. b. state licensing requirements. c. the proposed uniform Regulation of Virtual Currencies Act. d. the Federal Deposit Insurance Corporation regulations. 5. Transactions in virtual currency do not require financial institutions, and can be conducted anonymously. With these features of virtual currency in mind, the most ethical action a user can take is to a. protect himself or herself. b. avoid the use of virtual currency entirely. c. use virtual currency exclusively. d. take advantage of those who are not aware of how virtual currency is used.

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Unit 05 6. Virtual currency is a medium of exchange that operates like a currency in some environments. In other words, more precisely, virtual currency is a. digital money. b. coins and bills. c. checks, notes, and other negotiable instruments in paper form. d. all of the choices.

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Unit 05 Answer Key 1. a 2. a 3. a 4. d 5. a 6. a

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Unit 06 Indicate the answer choice that best completes the statement or answers the question. CHAPTER 31—ETHICS TODAY: SHOULD THERE BE MORE RELIEF FOR STUDENT LOAN DEFAULTS? 1. Lon borrows funds through the U.S. Department of Education (DOE) to pay for his education. He defaults on the loan. DOE a. can keep the debtor’s tax refund. b. may garnish the debtor’s paycheck without a court order. c. might take the debtor’s federal benefits. d. any of the choices. 2. Maria borrows funds through the U.S. Department of Education (DOE) to pay for her education. She defaults on the loan. In some states a. any of the choices. b. a lien can be placed on the debtor’s real property to pay the debt. c. the debt can be collected by garnishment of the debtor’s bank account. d. the debtor’s professional license can be revoked. UNIT SIX—APPLICATION AND ETHICS: FEDERAL STUDENT LOANS—DEFAULT AND DISCHARGE 3. Beth borrows $10,000 from the U.S. Department of Education to help pay for her education at Community College. She signs a note payable to DOE for the amount of the loan plus interest. The borrower will be considered in default if she fails to a. any of the choices. b. repay the loan according to the terms in the note. c. graduate from Community College within four years of the loan. d. find employment in her program of study after graduation. CHAPTER 30—DIGITAL UPDATE: SECURED TRANSACTIONS—ESCROW SERVICES ONLINE 4. Hailey, a U.S. citizen, buys John Lennon’s piano from Kent, who is in Great Britain. Particularly useful to Hailey, who would prefer to conduct this deal as a secured transaction, is a. Resale Weekly. b. eBay.com. c. Escrow.com. d. Flippa.com.

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Unit 06 CHAPTER 29—ETHICS TODAY: CREDITORS’ RIGHTS WHEN DEBTORS MOVE TO ANOTHER STATE 5. Bern defaults on his debt to Credit Loan Company. The creditor obtains a judgment against Bern, who immediately moves to another state. Generally, the judgment will be a. honored in other states. b. enforced only in the state in which it was obtained. c. appealed. d. revoked. UNIT SIX—APPLICATION AND ETHICS: FEDERAL STUDENT LOANS—DEFAULT AND DISCHARGE 6. Robert borrows $15,000 from State College to help pay for his education. He signs a note payable to the school for the amount of the loan plus interest. Robert defaults, and the school transfers the note to a collection agency. This means that a. additional costs to collect payment can be added to the unpaid principal. b. additional requirements can be imposed on the borrower to graduate. c. none of the choices. d. Robert may have to accept a job offer from a select list of employers. CHAPTER 29—ETHICS TODAY: CREDITORS’ RIGHTS WHEN DEBTORS MOVE TO ANOTHER STATE 7. Dora defaults on her debt to EZ Credit Company. The lender obtains a judgment against Dora, who quickly moves to another state. The judgment is domesticated in Dora’s new location. If the lifespan of the judgment lapses before it can be collected, the domestication a. also lapses. b. may be subject to garnishment. c. can be renewed. d. must be frozen. CHAPTER 30—DIGITAL UPDATE: SECURED TRANSACTIONS—ESCROW SERVICES ONLINE 8. Reid buys a car from Skye online. To assure that the car is delivered in the condition promised, Reid a. must trust the seller. b. can use an escrow company. c. must file a financing statement. d. may take possession of different property of the seller as collateral.

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Unit 06 UNIT SIX—APPLICATION AND ETHICS: FEDERAL STUDENT LOANS—DEFAULT AND DISCHARGE 9. Olivia borrows $25,000 from the U.S. Department of Education to help pay for her education at Public University. She signs a note payable to DOE for the amount of the loan plus interest. The loan may be canceled if she is a. a teacher in a certain school or subject area. b. a military serviceperson. c. a medical technician. d. any of the choices. 10. Rita borrows $20,000 from the U.S. Department of Education to help pay for her education at State University. She signs a note payable to DOE for the amount of the loan plus interest. The loan may be discharged if a. Rita does not graduate from State University within six years of the loan. b. Rita does not find employment in her program of study after graduation. c. in bankruptcy, repayment would cause Rita undue hardship. d. any of the choices.

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Unit 06 Answer Key 1. d 2. a 3. b 4. c 5. a 6. a 7. c 8. b 9. d 10. c

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Unit 07 Indicate the answer choice that best completes the statement or answers the question. CHAPTER 34—ETHICS TODAY: IS IT FAIR TO DOCK EMPLOYEES’ PAY FOR BATHROOM BREAKS? 1. Machine Corporation requires its employees to punch out when they leave their workstations for personal breaks and punch in when they return. Under the Fair Labor Standards Act, this employer a. must compensate its employees during their breaks. b. need not compensate its employees during their breaks. c. must record the breaks for review by the U.S. Department of Labor. d. must record and report the breaks to the U.S. Department of Labor.

UNIT SEVEN—APPLICATION AND ETHICS: HEALTH INSURANCE AND SMALL BUSINESS 2. Under the Patient Protection and Affordable Care Act, small businesses that meet certain requirements— including those with fewer than twenty-five full-time employees—can a. any of the choices. b. buy health insurance for employees through the Small Business Health Options Program. c. claim a health-care tax credit. d. claim a business-expense tax deduction. CHAPTER 32—ETHICS TODAY: IS IT FAIR TO CLASSIFY UBER AND LYFT DRIVERS AS INDEPENDENT CONTRACTORS? 3. Rolf, a taxi driver for Swift Cab Company, and other cabdrivers file a suit in a Texas state court against Uber, alleging unfair competition. If the result in this suit is like the result in similar suits, the court will most likely rule in favor of a. Rolf. b. Swift Cab. c. the state of Texas. d. Uber. CHAPTER 35—DIGITAL UPDATE: HIRING DISCRIMINATION BASED ON SOCIAL MEDIA POSTS 4. Price & Profit Inc. routinely checks job applicants’ social media posts when deciding whom to hire. These sites can provide information on an applicant’s race, religion, and other protected characteristics. Price & Profit can legally base its hiring decisions on the basis of a. none of the choices. b. race. c. any protected characteristic. d. religion.

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Unit 07 CHAPTER 33—GLOBAL INSIGHT: ISLAMIC LAW AND RESPONDEAT SUPERIOR 5. In Pakistan, Mohammad, an employee of Noor, enters into a contract with Hassan. Under the principles of sharia law, liability for any breach of the contract may lie with Noor a. in all circumstances. b. if Hassan was aware of Mohammad’s employee status. c. if Mohammad entered into the contract on Noor’s direct order. d. under no circumstances. 6. Nadya, an employee of Omar in Saudi Arabia, engages in a wrongful act without Omar’s knowledge or consent. Under the principles of sharia law, responsibility for Nadya’s act lies with a. only Nadya. b. only Omar. c. Nadya and vicariously—by extension—to Omar. d. neither Nadya nor Omar. UNIT SEVEN—APPLICATION AND ETHICS: HEALTH INSURANCE AND SMALL BUSINESS 7. The Patient Protection and Affordable Care Act sets forth responsibilities and benefits for businesses and their employees with respect to health care and insurance. Small businesses—those with fewer than fifty full-time employees—are a. required to offer their employees health insurance. b. subject to minimum standards on health plans offered to employees. c. required to contribute to the premium for an employee’s private plan. d. eligible for “Marketplace Coverage Options.” CHAPTER 35—DIGITAL UPDATE: HIRING DISCRIMINATION BASED ON SOCIAL MEDIA POSTS 8. Marketing Rep Company routinely checks job applicants’ social media posts when deciding whom to hire. According to the results of at least one study, online disclosures of personal traits a. results in widespread hiring discrimination. b. may lead to job offers for which the applicants are not qualified. c. has no meaningful effect on hiring decisions by any employer. d. can significantly influence the hiring decisions of some employers.

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Unit 07 CHAPTER 32—ETHICS TODAY: IS IT FAIR TO CLASSIFY UBER AND LYFT DRIVERS AS INDEPENDENT CONTRACTORS? 9. Kayla, a driver for Lyft, files a suit against the firm to change her job classification and obtain better benefits. Lyft considers its drivers to be a. employees. b. dependent contractors. c. independent contractors. d. none of the choices. CHAPTER 34—ETHICS TODAY: IS IT FAIR TO DOCK EMPLOYEES’ PAY FOR BATHROOM BREAKS? 10. Clear Coding Inc. provides its employees personal breaks of up to twenty minutes per break. Under the Fair Labor Standards Act, this employer must a. compensate its employees during their breaks. b. not compensate its employees during their breaks. c. record the breaks for review by the U.S. Department of Labor. d. record and report the breaks to the U.S. Department of Labor. UNIT SEVEN—APPLICATION AND ETHICS: HEALTH INSURANCE AND SMALL BUSINESS 11. Under the Patient Protection and Affordable Care Act, a health insurance company can increase an employer’s premium a. if an employee files a claim. b. as an employee gets older. c. when the employer hires a woman. d. none of the choices. 12. Employer responsibilities and benefits under the Patient Protection and Affordable Care Act are linked to the number of “full-time equivalent” employees. To avoid the requirements of the act, there is evidence that some employers a. reduce the hours of their employees. b. employ part-time workers instead of full-time employees. c. are urging unemployed Americans to remain out of the work force. d. all of the choices.

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Unit 07 Answer Key 1. b 2. a 3. d 4. a 5. c 6. a 7. b 8. d 9. c 10. a 11. d 12. a

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Unit 08 Indicate the answer choice that best completes the statement or answers the question. CHAPTER 39—GLOBAL INSIGHT: DOES CLOUD COMPUTING HAVE A NATIONALITY? 1. Outlier Inc. hosts client accounts in servers located in foreign countries. The U.S. government issues a warrant to obtain e-mails related to a drug case from one of those accounts. Outlier refuses to comply. On the government’s appeal, it is most likely that a court will order a. the owner of the account to “stand and deliver.” b. Outlier to comply with the warrant. c. the government to abide by Outlier’s refusal. d. the foreign countries to seize Outlier’s servers.

CHAPTER 41—DIGITAL UPDATE: INVESTMENT CROWDFUNDING—REGULATIONS AND RESTRICTIONS 2. To raise equity capital by crowdfunding, Data Analytica Inc. a. must sell shares only online and directly to investors. b. must go through an online fundraising platform registered with the SEC. c. can simply create a video asking people to send money via the Internet. d. can gain access to public funds only after filing a registration statement. CHAPTER 37—ETHICS TODAY: SHOULD AN INNOCENT GENERAL PARTNER BE JOINTLY LIABLE FOR FRAUD? 3. Pi and Quia are general partners in Risqué Investissements, a limited partnership. Without Pi’s knowledge or consent, Quia defrauds potential investors into buying limited partnerships in the firm and steals the amounts of their investments. In a suit by those partners against Pi to recover for their losses, Pi is most likely liable a. if the investors are viewed as innocent third parties. b. if the investors are construed as limited partners. c. under any circumstances. d. under no circumstances. CHAPTER 36—DIGITAL UPDATE: A SOLE PROPRIETORSHIP, FACEBOOK POKER, AND BANKRUPTCY 4. Beth starts Checklist to market a new app. Debit Bank loans $30,000 to Beth for the project. Later, the debt is most likely to be discharged in bankruptcy a. if Beth provides a complete, accurate record of business transactions. b. if the loan is not subject to an agreement that imposes personal liability. c. if Beth’s business is a sole proprietorship. d. under no circumstances.

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Unit 08 CHAPTER 39—GLOBAL INSIGHT: DOES CLOUD COMPUTING HAVE A NATIONALITY? 5. Trade Secrets Inc. hosts client accounts in servers located in foreign countries. The U.S. government issues a warrant to obtain e-mails related to a possible criminal case from one of those accounts. Before a court, as part of a refusal to comply with the order, Trade Secrets’ best arguments include that the warrant a. threatens the privacy of U.S. citizens. b. all of the choices. c. exceeds the power of the government to conduct a reasonable search. d. will cause the firm to lose business because its clients will no longer trust it to keep their data secret. CHAPTER 39—DIGITAL UPDATE: PROGRAMS THAT PREDICT EMPLOYEE MISCONDUCT 6. Predictive analytics in the digital realm focuses on a. predicting certain behavior based on certain data. b. analyzing certain data to predict digital developments. c. analyzing certain predictions to monitor certain results. d. predicting certain digital data based on reasoned analysis. CHAPTER 36—DIGITAL UPDATE: A SOLE PROPRIETORSHIP, FACEBOOK POKER, AND BANKRUPTCY 7. Bill starts Castaway to market a new line of uniquely designed fishing gear. Delta Finance Company loans $50,000 to Bill for the project. Delta is most likely to recover the amount of the loan from Bill’s personal assets a. if Bill provides a complete, accurate record of business transactions. b. if the loan is not subject to an agreement that imposes personal liability. c. if Bill’s business is a sole proprietorship. d. under no circumstances. CHAPTER 37—ETHICS TODAY: SHOULD AN INNOCENT GENERAL PARTNER BE JOINTLY LIABLE FOR FRAUD? 8. Nina and Owen are general partners in Property Management L.P., a limited partnership. Without Nina’s knowledge or consent, Owen defrauds the firm’s clients, resulting in the firm’s liability for the losses. The limited partners file a suit against Nina to recover their investments. She is most likely liable a. if the clients are viewed as innocent third parties. b. in a state that does not protect innocent partners from fraud suits. c. under any circumstances. d. under no circumstances.

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Unit 08 CHAPTER 41—DIGITAL UPDATE: INVESTMENT CROWDFUNDING—REGULATIONS AND RESTRICTIONS 9. The advantage of crowdfunding to a small entrepreneur is a. selling shares online directly to investors. b. fundraising without providing financial statements to potential investors. c. simply creating a video asking people to send money via the Internet. d. gaining access to public funds without filing a registration statement. CHAPTER 39—DIGITAL UPDATE: PROGRAMS THAT PREDICT EMPLOYEE MISCONDUCT 10. Personnel Resources Company considers using software to analyze employee behavior with the goal of predicting wrongdoing. In this situation, the ethical focus is on a. the success of the software. b. sanctions for something yet to be done. c. questions of privacy. d. whether data mining should occur only online. UNIT EIGHT—APPLICATION AND ETHICS: BUSINESS START-UPS ONLINE 11. Rick forms Study Groups Inc. to start a social media site online. He selects Takeaway as the domain name. Responsible for coordinating databases related to namespaces online a. are the website hosts of online businesses. b. is the U.S. Copyright Office. c. is the U.S. Patent and Trademark Office. d. is the Internet Corporation for Assigned Names and Numbers. 12. Like other online businesses, Amazing.com collects and retains its customers’ account numbers and other personal information. Keeping this data private will most likely a. protect against liability for wrongful disclosure or misuse. b. comply with federal and state laws that also cover offline businesses. c. meet the standards of foreign countries’ privacy laws. d. all of the choices. 13. As with other online businesses, the customers of Biz.com are heavily reliant on the firm’s reputation. For an online business, dealing in good faith a. can be more important than in a brick-and-mortar location. b. is irrelevant. c. involves minimal compliance with the laws of a targeted market. d. is not a significant part of an effective customer service program.

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Unit 08 14. Vera starts World Markets Inc., an online business to advertise and sell goods handcrafted in a variety of countries. The purpose of advertising law generally is to create marketplaces in which businesses can operate free of a. deceptive and unfair practices. b. international restrictions on speech. c. the rules of private websites (such as Facebook). d. competition.

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Unit 08 Answer Key 1. b 2. b 3. a 4. a 5. b 6. a 7. c 8. b 9. d 10. b 11. d 12. d 13. a 14. a

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Unit 09 Indicate the answer choice that best completes the statement or answers the question. CHAPTER 44—DIGITAL UPDATE: REGULATING “NATIVE” ADS ON THE INTERNET 1. Advertising generally is required to be accompanied by certain disclosures. According to Federal Trade Commission guidelines, disclosures accompanying native ads should a. not be where consumers will notice them. b. not be above or before the native ad. c. not be as close as possible to where consumers look first. d. stand out.

UNIT NINE—APPLICATION AND ETHICS: CLIMATE CHANGE 2. The effects of climate change can be lessened by a reduction in greenhouse gases (GHGs). With this purpose in mind, GHG emission goals have been set by a. about half a dozen states. b. about a dozen states. c. about half of the states. d. nearly all of the states. CHAPTER 47—ETHICS TODAY: WHAT ARE AN ATTORNEY’S RESPONSIBILITIES FOR PROTECTING DATA STORED IN A CLOUD? 3. Eyre is an attorney. With respect to client information, under the American Bar Association’s Model Rules of Professional Conduct, Eyre, like other attorneys a. is required to guarantee that a breach of confidentiality will never occur. b. has an ethical duty to safeguard the information. c. does not need to be concerned with keeping the information secure. d. does not own the data. CHAPTER 46—DIGITAL UPDATE: THE EUROPEAN UNION ISSUES RECORD FINES AGAINST GOOGLE IN ANTITRUST CASE 4. The European Union (EU) charged Google Inc. with promoting its comparison-shopping service at the expense of its competitors. As a remedy, the EU ordered Google to change the way it shows its search results. Google is now required to a. display the most relevant services first. b. maintain its core software unchanged. c. cut traffic to its competitors. d. crowdsource.

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Unit 09 CHAPTER 44—DIGITAL UPDATE: REGULATING “NATIVE” ADS ON THE INTERNET 5. In response to the growth in native advertising, the Federal Trade Commission has issued guidelines for those who use the ads. The focus of the guidelines is whether consumers are able to a. differentiate advertising from other content. b. block traditional online ads. c. access the ads on small screens, such as those on phones. d. click a widget to be taken to a different site. UNIT NINE—APPLICATION AND ETHICS: CLIMATE CHANGE 6. To reduce the emission of greenhouse gases through the use of motor vehicle and transportation fuels, the federal government a. imposes emission standards on cars and trucks. b. encourages the use of fuel-efficient vehicles. c. encourages the use of alternative fuels. d. all of the choices. CHAPTER 45—GLOBAL INSIGHT: CAN A RIVER BE A LEGAL PERSON? 7. If courts did not impose fairly strict requirements on who has standing a. a party wishing to sue would have to have a stake in the outcome. b. courts would be flooded with many more lawsuits than are filed today. c. no one would have a legal right to bring a suit if nature were involved. d. an organization would not have rights that did not depend on its staff. 8. Those who favor enacting a law that declares a river to be a legal person would most likely argue that throughout the world a. a party wishing to sue must have a stake in the outcome. b. courts can hear many more lawsuits than are filed today. c. no one should have a legal right to bring a suit when nature is involved. d. an organization has rights that do not depend on its staff. UNIT NINE—APPLICATION AND ETHICS: CLIMATE CHANGE 9. To reduce the emission of greenhouse gases, power companies are required to save specified amounts of energy by a. all of the states. b. less than half of the states. c. more than half of the states. d. none of the states.

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Unit 09 CHAPTER 46—DIGITAL UPDATE: THE EUROPEAN UNION ISSUES RECORD FINES AGAINST GOOGLE IN ANTITRUST CASE 10. The European Union charged Google Inc. with an antitrust violation—promoting its comparison-shopping service at the expense of its competitors. Google’s defense to this charge was that a. “Google” has become a verb synonymous with conducting a search. b. search engines have proliferated on the Web. c. Google was merely using its dominant position to its advantage. d. Google prominently displayed its service in its general search results. UNIT NINE—APPLICATION AND ETHICS: CLIMATE CHANGE 11. A business that acts to take advantage of the economic and political opportunities offered by climate change is acting a. legally and ethically. b. legally, but unethically. c. illegally, but not unethically. d. illegally and unethically. CHAPTER 47—ETHICS TODAY: WHAT ARE AN ATTORNEY’S RESPONSIBILITIES FOR PROTECTING DATA STORED IN A CLOUD? 12. Dobie, like many attorneys, is storing his firm’s confidential client information on the cloud. Like other professionals, Dobie should assume that a. he does not need to be concerned with keeping the information secure. b. the cloud provider will take precautions to keep the information secure. c. he is ultimately responsible for the information. d. privacy notification requirements are being complied with.

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Unit 09 Answer Key 1. d 2. c 3. b 4. a 5. a 6. d 7. b 8. d 9. c 10. b 11. a 12. c

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Unit 10 Indicate the answer choice that best completes the statement or answers the question. UNIT TEN—APPLICATION AND ETHICS: BUSINESS PLANNING FOR DIVORCE 1. Lin starts Modern Roofing, which becomes successful through her efforts. Meanwhile, she marries Noel. To ensure that her business will not break up if her marriage falls apart, Lin should a. avoid involving Noel in the business. b. employ Noel in the business in a minor capacity. c. appoint Noel to be the business’s chief executive officer. d. hire Noel to work for the business on a per-project basis 2. Gwen starts Handy Crafts to advertise and sell ceramic pots, quilts, glass work, and so on. Later, Gwen marries Ivan, who creates and runs the firm’s marketing. If Gwen and Ivan divorce, in most states the business will be considered a. Gwen’s separate property. b. Ivan’s separate property. c. marital property. d. neither separate nor marital property. CHAPTER 51—DIGITAL UPDATE: SOCIAL MEDIA ESTATE PLANNING 3. Online estate planning is essential because a. a deceased can be a victim of identity theft. b. a deceased’s social media account should be kept open to thwart fraud. c. a deceased’s e-mail address can serve as a repository for spam. d. a deceased’s social media profile can provide a backstory to a blog. UNIT TEN—APPLICATION AND ETHICS: BUSINESS PLANNING FOR DIVORCE 4. Carrie starts Dance & Diet Nutrition, a weight-loss products enterprise, before marrying Edgar. To legitimately protect Carrie’s business assets from Edgar’s claims if the spouses divorce, Carrie could use a. a prenuptial agreement preceded by fully disclosing the business assets. b. a postnuptial agreement without fully disclosing the business assets. c. conceal the business assets. d. all of the choices.

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Unit 10 CHAPTER 51—DIGITAL UPDATE: SOCIAL MEDIA ESTATE PLANNING 5. Most likely, the responsibilities of an online executor includes dealing with a deceased’s a. real estate, bank accounts, and investments. b. online identity. c. all of the choices. d. unscrupulous fraud, account hijacking, and family-member harassment. CHAPTER 49—ETHICS TODAY: SHOULD EMINENT DOMAIN BE USED TO PROMOTE PRIVATE PROPERTY? 6. Bay City condemns private, residential property and conveys it to Commercial Construction Corporation to develop a shopping, dining, and entertainment complex on the city’s waterfront. According to the United States Supreme Court, a. a state can prohibit taking for economic development. b. eminent domain may be used to further development. c. a state can permit taking for redevelopment of slum areas. d. all of the choices. 7. According to the United States Supreme Court, a. Metro City can take a parking lot for a privately owned sports stadium. b. all of the choices. c. Laborville can condemn a vacant field for a private manufacturing plant. d. Sleepyton can take residential property for a private corporate complex. CHAPTER 48—DIGITAL UPDATE: THE EXPLODING WORLD OF DIGITAL PROPERTY 8. Kevin and Laura are married. Together, they buy a virtual asteroid near the virtual planet Magellan in the virtual NightSky universe. In the event of a divorce, to avoid property division issues with respect to the asteroid, this couple a. can use a pre-nuptial agreement or an addenda to it. b. cannot split their interests in the asteroid or any virtual property. c. must surrender their rights in the asteroid to the creators of NightSky. d. must abandon their rights in the asteroid to other virtual property owners in the NightSky universe. 9. Bob owns a virtual asteroid near the virtual planet Cosmo in the virtual DeepSpace universe. Property consists of a bundle of rights in anything that has an ascertainable value and is subject to ownership. This definition encompasses a. intangible objects used in virtual worlds like DeepSpace. b. digital books, music libraries, and movie downloads. c. all of the choices. d. domain names and expensively created Web sites.

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Unit 10 UNIT TEN—APPLICATION AND ETHICS: BUSINESS PLANNING FOR DIVORCE 10. Kim and Li own Moe’s, a successful restaurant. Kim, who is married, asks Li, her unmarried partner, to convert Moe’s to a limited liability company and agree that each has the right to buy the other’s interest to keep control of the business. In terms of Kim’s spouse and Li’s future spouse, this agreement is a. illegal and unethical. b. illegal, but not unethical. c. legal, but unethical. d. legal and ethical.

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Unit 10 Answer Key 1. a 2. c 3. a 4. d 5. b 6. d 7. b 8. a 9. c 10. d

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