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Chapter 01: Law and Legal Reasoning
Indicate whether the statement is true or false. 1. In the United States, the law consists of written laws and court decisions. a. True b. False 2. All laws establish rights, duties, and privileges that are consistent with the values and beliefs of a society or its ruling group. a. True b. False 3. The legal rules that control the actions of a business, reflect past and current thinking about how similar businesses should and should not act. a. True b. False 4. The study of business law does not involve an ethical dimension. a. True b. False 5. 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 6. A constitution is a primary source of law. a. True b. False 7. A statute is a secondary source of law. a. True b. False 8. A secondary source of law is one that clarifies a source of primary law. a. True b. False 9. Legal encyclopedias, law review articles, and treatises are sources of primary law. a. True b. False 10. Even if it conflicts with the U.S. Constitution, a state constitution is supreme within the borders of that state. a. True b. False 11. The U.S. Constitution is the basis of all law in the United States. Powered by Cognero
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Chapter 01: Law and Legal Reasoning a. True b. False 12. Only if a state legislature passes a statute, does that law become part of the relevant state code of laws. a. True b. False 13. A citation is a regulation enacted by a city or county legislative body. a. True b. False 14. A local ordinance commonly has to do with a matter concerning only a local governing unit. a. True b. False 15. A federal statute applies to all states. a. True b. False 16. The UCC is a uniform law that most states have adopted to govern commercial transactions. a. True b. False 17. Federal, state, and local governments may establish an administrative agency to perform a specific function. a. True b. False 18. Independent regulatory agencies are not subject to the authority of the President. a. True b. False 19. Rules issued by administrative agencies affect almost every aspect of the operations of a business. a. True b. False 20. Federal agency regulations take precedence over conflicting state regulations. a. True b. False 21. An administrative legislative rule is not legally binding on businesses. a. True b. False 22. The Administrative Procedure Act (APA) imposes strict procedural requirements that agencies must follow in legislative rulemaking and other functions. a. True Powered by Cognero
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Chapter 01: Law and Legal Reasoning b. False 23. If an agency fails to follow the rulemaking procedures imposed by the Administrative Act, the resulting rule may not be binding. a. True b. False 24. Common law is a body of law developed from judge’s decisions in legal controversies. a. True b. False 25. Case law governs all areas of business not covered by statutory or administrative law. a. True b. False 26. Under the doctrine of stare decisis, judges are encouraged to follow the precedents established within their jurisdictions. a. True b. False 27. Controlling precedents are binding authorities. a. True b. False 28. A court might look at fairness, social values and customs, and public policy in deciding a case if there is no precedent. a. True b. False 29. In the IRAC method of case-briefing, the A stands for analysis. a. True b. False 30. There is one right answer to every legal question. a. True b. False 31. Because courts of law and equity have merged, there is no distinction between the two any longer. a. True b. False 32. Courts will not grant an equitable remedy unless the remedy at law is adequate. a. True b. False 33. Typically, in a civil case, a private party sues another private party who has failed to comply with a duty. a. True Powered by Cognero
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Chapter 01: Law and Legal Reasoning b. False 34. In a criminal case, the object is to obtain a remedy. a. True b. False 35. Civil law has to do with wrongs committed against society for which society demands redress. a. True b. False 36. The basis of a civil law system is a written code of laws. a. True b. False 37. International law derives from a variety of sources, including the laws of individual nations. a. True b. False
Indicate the answer choice that best completes the statement or answers the question. 38. 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. silent partner. 39. An example of a primary source of law would be: a. legal encyclopedias. b. official comments to statutes. c. Constitutional law. d. legal treatises. 40. Secondary sources of law include a. state constitutions. b. law review articles. c. laws passed by local governing bodies. d. regulations created by administrative agencies. 41. A constitution sets forth the government’s general organization’s: a. limits, but not powers. b. limits and powers. c. lack of limits or powers. d. powers, but not limits. Powered by Cognero
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Chapter 01: Law and Legal Reasoning 42. 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. 43. The __________________________ to the U.S. Constitution reserves to the states, all powers not granted to the federal government. a. 1st amendment b. 14th amendment c. 10th amendment d. bill of rights 44. 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. 45. 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 the borders of that state. d. the federal provision will be enforced. 46. The Montana 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 Montana only. d. the United States Supreme Court only. 47. The Uniform Commercial Code provides a set of rules governing 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. 48. The Uniform Commercial Code provides a set of rules governing: a. commercial transactions. b. state legislative adoptions. c. congressional procedures. d. administrative processes. 49. Administrative law includes: Powered by Cognero
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Chapter 01: Law and Legal Reasoning 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. d. laws enacted by a legislative body. 50. The ___________________________, for example, is an agency within the U.S. Department of Health and Human Services. a. Uniform Commercial Code b. Internal Revenue Service c. Securities and Exchange Commission d. Food and Drug Administration 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. Congress. d. the U.S. Attorney General. 52. A main function of an administrative agency is ________________. a. overruling previous cases b. rulemaking c. hearing cases d. enforcing the law 53. Legislative rulemaking under the APA, typically involves all but which one of the following three steps: a. a comment period b. notice of proposed rulemaking c. public hearing d. final rule 54. Administrative agencies also issue ______________________ that are not legally binding, but simply indicate how an agency plans to interpret and enforce its statutory authority. a. statutes b. codes c. interpretive rules d. case law 55. 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. Powered by Cognero
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Chapter 01: Law and Legal Reasoning 56. Home Care Company is charged with violating a rule of the Social Security Administration. Most likely, Home Care will be required to appear at a hearing presided over by: a. a federal appellate court judge. b. a federal district court judge. c. an administrative law judge. d. a U.S. Marshal. 57. 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. 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 begin a judicial proceeding. 59. A precedent is: a. the chief executive officer of the United States and their authority. b. a court decision that is used as an example for deciding subsequent cases with similar facts. c. a lawsuit in which a number of persons join together for ease of filing. d. the fundamental procedure by which the government exercises its authority. 60. 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 begin a judicial proceeding. 61. Applying the relevant rule of law to the facts of a case requires a judge to find previously decided cases that, in relation to the case under consideration, are a. as different as possible. b. as similar as possible. c. at odds. d. exactly identical. 62. There are no precedents on which the court deciding the case Algorithm Corp. v. Beta Bytes, Inc., can base its decision. The court can consider, among other things, a. the opinions of the friends and relatives of the judge. b. the results of a poll of those in the courtroom. c. government policy based on widely held social values and customs. d. opinions of courts from other jurisdictions. Powered by Cognero
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Chapter 01: Law and Legal Reasoning 63. In Beto v. Car Dealership, 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 Dora v. Even Steven Autos, 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. not follow the decision of the Beto case. c. order the minor to cancel the contract. d. require the minor to fulfill the contract. 64. 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. 65. A ________________________ is a legal authority that a court may consult for guidance, but that is not binding on the court. a. legal authority b. applicable statute c. persuasive authority d. reference authority 66. In the IRAC method of case briefing the R stands for: a. remedy b. rule of law c. reference d. restitution 67. 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. 68. In a suit against Karen, Luke obtains an injunction. This is: a. an order to do or refrain from doing a certain act. b. a departure from precedent. c. a payment of damages or money. d. the cancellation of a contract. 69. At one time, a court of law could grant as a remedy only: a. monetary damages. b. an order to perform a contract. c. a judicial proceeding for resolution of a dispute. Powered by Cognero
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Chapter 01: Law and Legal Reasoning d. an injunction. 70. ___________________ is law that has to do with wrongs committed against society for which society demands redress. a. Civil law b. Statutory law c. Bill of Rights d. Civil law 71. 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. 72. If a nation violates international law then ______________________ , will be the one to enforce any violation a. the U.S. Supreme Court b. the Uniform Commercial Code c. no one can enforce it d. the other nations
73. Distinguish between primary and secondary sources of law and give specific examples of each. 74. What is the doctrine of stare decisis? In the American legal system, how is it applied, and what is its effect?
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Chapter 01: Law and Legal Reasoning Answer Key 1. True 2. True 3. True 4. False 5. False 6. True 7. False 8. True 9. False 10. False 11. True 12. True 13. False 14. True 15. True 16. False 17. True 18. False 19. True 20. True 21. False 22. True 23. True 24. True 25. True Powered by Cognero
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Chapter 01: Law and Legal Reasoning 26. False 27. True 28. True 29. False 30. False 31. True 32. False 33. True 34. False 35. False 36. True 37. True 38. d 39. c 40. b 41. b 42. a 43. c 44. a 45. d 46. a 47. a 48. a 49. b 50. d 51. b Powered by Cognero
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Chapter 01: Law and Legal Reasoning 52. b 53. c 54. c 55. a 56. c 57. a 58. a 59. b 60. b 61. b 62. c 63. a 64. a 65. c 66. b 67. a 68. a 69. a 70. d 71. d 72. d 73. There are numerous sources of American law. A source that establishes the law on a particular issue is called a primary source of law. Primary sources include the following: • The U.S. Constitution and the constitutions of the various states. • Statutory law—including laws passed by Congress, state legislatures, and local governing bodies. • Regulations created by administrative agencies, such as the federal Food and Drug Administration. • Case law (court decisions). Powered by Cognero
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Chapter 01: Law and Legal Reasoning We describe each of these important primary sources of law in the following pages. (See the appendix at the end of this chapter for a discussion of how to find statutes, regulations, and case law.) A secondary source of law is a book (or article) that summarizes and clarifies a primary source of law. Legal encyclopedias, compilations (such as Restatements of the Law, which summarize court decisions on a particular topic), official comments to statutes, treatises, articles in law reviews published by law schools, and articles in other legal journals are examples of secondary sources of law. Courts often refer to secondary sources of law for guidance in interpreting and applying the primary sources of law discussed here. 74. In a common law legal system, past judicial decisions are binding in current disputes with similar facts. This feature of 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.
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Chapter 02: Constitutional Law
Indicate whether the statement is true or false. 1. Only Congress may pass a law in conflict with the Constitution. a. True b. False 2. The national government has the implied power to undertake actions necessary to carry out its expressly designated powers. a. True b. False 3. Local governments, including cities, exercise police powers. a. True b. False 4. State regulatory powers are often referred to as police powers. a. True b. False 5. 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 6. 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 7. The U.S. Constitution divides powers among four branches of government. a. True b. False 8. 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 9. The executive, legislative, and congressional are the branches of government. a. True b. False 10. Under the privileges and immunities clause, the federal government has the power to regulate commercial activities among the states. a. True b. False Powered by Cognero
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Chapter 02: Constitutional Law 11. The commerce clause has had no greater impact on business than any other provision in the Constitution. a. True b. False 12. 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 13. State governments do not have any authority to regulate interstate commerce. a. True b. False 14. The dormant commerce clause comes into play when state regulations affect interstate commerce. a. True b. False 15. When there is a direct conflict between a federal law and a state law, both laws are rendered invalid. a. True b. False 16. 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 17. If there is an agency created by the Federal government, such as the FDA, the agency’s decisions will likely prevail if it is in conflict with a state law. a. True b. False 18. The first ten amendments to the U.S. Constitution are commonly known as the Bill of Rights. a. True b. False 19. Corporations enjoy many of the same rights and privileges as natural persons do. a. True b. False 20. Under the Ninth Amendment, people have rights in addition to those specified in the Constitution. a. True b. False 21. The right to a speedy trial is located in the Fifth Amendment. a. True b. False Powered by Cognero
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Chapter 02: Constitutional Law 22. The rights secured by the Bill of Rights are absolute. a. True b. False 23. Nonverbal expression of belief, is not a constitutionally protected form of expression. a. True b. False 24. Speech can be subject to reasonable restrictions. a. True b. False 25. If a restriction imposed by the government is content neutral, then a court will not allow it. a. True b. False 26. Political speech by corporations falls within the protection of the First Amendment. a. True b. False 27. A state may restrict certain kinds of advertising, if it is in the interest of preventing consumers from being misled. a. True b. False 28. A true threat to someone can be protected by the First Amendment. a. True b. False 29. The Free Exercise clause can apply to private employers as well as government employers. a. True b. False 30. The free exercise clause prohibits the government from passing laws that have any impact on religion. a. True b. False 31. When religious practices work against public policy, the government can act. a. True b. False 32. The Fifth Amendment allows persons to be deprived of property without due process of law. a. True b. False 33. Substantive due process requires that a person have an opportunity to object to a proposed action before a fair, neutral Powered by Cognero
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Chapter 02: Constitutional Law decision maker. a. True b. False 34. Procedural due process focuses on the content of legislation. a. True b. False 35. A law that limits a fundamental right may be held to violate substantive due process. a. True b. False 36. In situations involving fundamental rights, a law that rationally relates to a legitimate government goal, will be struck down. a. True b. False 37. Equal protection means that the government must treat all individuals the same. a. True b. False 38. 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 39. Cases involving gender discrimination, will receive less strict scrutiny than a case involving race discrimination. a. True b. False 40. Privacy rights receive no protection under federal law. a. True b. False 41. 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 42. The U.S.A. Patriot Act gives the government blanket authority to monitor internet activities, and gain personal information. a. True b. False
Indicate the answer choice that best completes the statement or answers the question. Powered by Cognero
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Chapter 02: Constitutional Law 43. 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. 44. 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. 45. Jerry just inherited her mother’s house from her mother’s will. She is moving to an adjoining state, and is worried that the new state’s laws may be so different as to affect her ownership of the house. This would fall under a. the commerce clause. b. the full faith and credit clause. c. the full faith and credit clause. d. the interstate traffic clause. 46. 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. 47. 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. 48. 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. 49. 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. Powered by Cognero
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Chapter 02: Constitutional Law c. the state’s interest in regulating the matter. d. the statute’s impact on noneconomic activity. 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 higher limits. Under the U.S. Constitution a. both the rule and the law are invalid. b. both the rule and the law apply concurrently. c. the California law takes precedence. d. the EPA rule takes precedence. 51. 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. 52. 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. 53. Leah, a citizen of Maine, obtains a federal license to operate a commercial fishing boat in a certain area off the Maine coast. The Maine state legislature enacts a law that bans all commercial fishing 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. 54. The state of Ohio 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. 55. Beverly 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. 56. Nick, the chief executive officer of On/Off Inc., a website for short rants, claims that certain government actions Powered by Cognero
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Chapter 02: Constitutional Law 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 the states. 57. 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.
Indicate one or more answer choices that best complete the statement or answer the question. 58. These are protected by the First Amendment (choose all applicable answers) a. an offensive political T-shirt. b. a political bumper sticker. c. a direct threat to a co-worker. d. a restriction on someone’s religious beliefs by the government.
Indicate the answer choice that best completes the statement or answers the question. 59. Rita, a follower of a certain religion, posts a podcast on the Sabbath! website in which she insists that Congress base all federal law on her religious principles. Under the First Amendment, Rita 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. 60. Lake City enacts an ordinance that bans the distribution of all printed materials on city streets. Mackensie opposes the city’s latest “revenue-enhancing” measure and wants to protest by distributing handbills. In her suit against Lake 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. 61. Mary creates a t-shirt design that expresses support for Nash, a presidential candidate, and distributes t-shirts to all of her friends. The t-shirts are an example of a. unprotected speech. b. commercial speech. c. symbolic speech. d. illegal speech. 62. George burns a U.S. flag in his backyard. He films the activity and posts the video on YouTube.com. George’s Powered by Cognero
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Chapter 02: Constitutional Law 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. 63. Petro Energy Corporation expresses opinions on political issues through its financial contributions to political action committees and other groups. Under the First Amendment, Petro’s “expression” is most likely a. discouraged. b. prohibited. c. protected. d. prescribed. 64. Oklahoma 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. 65. Serene City enacts an ordinance that bans the use of “sound amplifying systems” on public streets. Tyler wants to campaign for a seat on the city council by broadcasting his message through speakers mounted on a truck. In Tyler’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. 66. Taco Hot Dogs, Inc., regularly advertises its products. Under the First Amendment, in comparison with noncommercial speech, the protection given these ads is a. equally extensive. b. not as extensive. c. more extensive. d. non-existent. 67. VidGames 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. 68. 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. Powered by Cognero
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Chapter 02: Constitutional Law 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. 69. Pat stands in front of Rooster’s Round-Up Café, shouting “fighting words” that are likely to incite Rooster’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. 70. Pros in Politics, a bookstore in Capitol 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. 71. Georgia 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. Price-Lo 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. 72. 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. 73. Barry and Marie’s child Macy is very ill. The hospital determines that she needs a blood transfusion in order to survive. Barry and Marie argue that a blood transfusion is against their religion, and to force them to allow it would be a Constitution infringement on their religious rights. The government could step in and allow it under a. medical exception b. necessity exception c. public policy exception d. parental exception 74. Marie claims that a Nebraska 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. Powered by Cognero
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Chapter 02: Constitutional Law d. the steps to be taken to protect Marie’s privacy. 75. 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. 76. 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. 77. 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. 78. A law that restricts a person’s activities based on their gender will receive ______ by the courts. a. reasonableness b. strict scrutiny c. intermediate scrutiny d. compelling scrutiny 79. John, 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.
80. 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? 81. 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? 82. Joe is a new employee at the city courthouse. It is a government position, and he is required to wear a uniform. Joe is Powered by Cognero
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Chapter 02: Constitutional Law of a faith that requires afternoon prayer time for 15 minutes. He asks if he can use his lunchtime to go to an empty office and pray. His employer refuses. Discuss all of the arguments Joe may use as well as what protections he may have.
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Chapter 02: Constitutional Law Answer Key 1. False 2. True 3. True 4. True 5. False 6. True 7. False 8. True 9. False 10. False 11. False 12. False 13. False 14. True 15. False 16. True 17. True 18. True 19. True 20. True 21. False 22. False 23. False 24. True 25. False Powered by Cognero
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Chapter 02: Constitutional Law 26. True 27. True 28. False 29. False 30. False 31. True 32. True 33. False 34. False 35. True 36. False 37. False 38. False 39. True 40. False 41. True 42. False 43. b 44. b 45. b 46. b 47. a 48. b 49. c 50. d 51. a Powered by Cognero
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Chapter 02: Constitutional Law 52. d 53. d 54. a 55. b 56. b 57. a 58. a, b, d 59. d 60. d 61. c 62. b 63. c 64. a 65. b 66. b 67. a 68. a 69. b 70. b 71. b 72. d 73. c 74. a 75. b 76. d Powered by Cognero
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Chapter 02: Constitutional Law 77. a 78. c 79. b 80. 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. 81. 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. 82. The free exercise clause guarantees that people can hold any religious beliefs they want, or can have no religious beliefs. The constitutional guarantee of personal religious freedom restricts only the actions of the government, and not those of individuals or private businesses. The government must have a compelling state interest for restricting the free exercise of religion, and the restriction must be the only way to further that interest. To comply with the free exercise clause, a government action must not be a substantial burden on religious practices. A burden is substantial if it pressures individuals to modify their behavior and to violate their beliefs. When religious practices work against public policy and the public welfare, the government can act. For instance, the government can require that a child receive certain types of vaccinations or receive medical treatment when the child’s life is in danger—regardless of the child’s or parent’s religious beliefs.
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Chapter 03: Ethics in Business
Indicate whether the statement is true or false. 1. Ethics simply looks at whether a decision (or act) is legal or illegal. a. True b. False 2. The Fraud Reduction and Data Analytics Act is used to identify and assess fraud risks in private companies. a. True b. False 3. Company codes are the same as laws. a. True b. False 4. Congress enacted the Sarbanes-Oxley Act (SOX) to help reduce unethical management decisions and risky behaviors. a. True b. False 5. The triple bottom line is a measure that includes: a corporation’s profit, its impact on people, and how the corporation feels about it. a. True b. False 6. Top management’s behavior in a company sets the ethical tone for the workplace. a. True b. False 7. The term moral minimum is best defined as the highest degree of ethical behavior expected of a firm. a. True b. False 8. 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 9. One view of the role of business in society is the perceived duty of a company to only generate revenue for its owners. a. True b. False 10. When profit maximization alone is the goal, a company does not benefit by behaving ethically. a. True b. False 11. Corporate “citizenship” involves making decisions beyond just maximizing profits and dividends. a. True Powered by Cognero
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Chapter 03: Ethics in Business b. False 12. When making ethical decisions, a business should evaluate the financial implications. a. True b. False 13. One of the ways that a business can create an ethical workplace is for the top management to demonstrate its commitment to ethical decision making. a. True b. False 14. Duty-based ethics is based on the idea that every business has certain duties to others and the planet. a. True b. False 15. Under the rights theory, determining whether a business decision is unethical is to see how it affects others. a. True b. False 16. Outcome-based ethics deals with the consequences of an action, not the nature of the action itself, nor any religious or moral beliefs. a. True b. False 17. In the cost-benefit analysis utilitarian model, the focus is to always do the most amount of good for the most amount of people. a. True b. False 18. Corporate social responsibility links the responsibility of citizenship with the commitment to making ethical business decisions. a. True b. False 19. Corporate social responsibility may increase a business’s reputation or goodwill. a. True b. False 20. Under the “stakeholder view,” there is no group that ever has a greater stake in company decisions than the shareholders do. a. True b. False 21. Abnormally high profits and stock prices may lead to unethical business behavior. a. True b. False Powered by Cognero
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Chapter 03: Ethics in Business 22. An overemphasis on long-run profit maximization is a common reason for ethical problems that may occur in a business. a. True b. False 23. 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 24. Judging a job applicant based on what an online search reveals about the applicant’s activities outside the workplace, or their social media posts is universally viewed as ethical. a. True b. False 25. Rationalization is the process of making a decision based simply on whether it is good for the company. a. True b. False 26. 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 27. One common denominator identified by businesspersons who have faced ethical problems is the feeling of uncertainty. a. True b. False 28. As part of the IDDR approach as described in the text, it is important to list as many possible various alternatives, and identify strengths and weaknesses of any remaining alternatives. a. True b. False 29. Global businesses need to be conscious of the impact of different religious principles and cultural norms on ethics. a. True b. False 30. During any global outsourcing, a company should continue to monitor those suppliers to make sure those employers are treating their employees fairly. a. True b. False
Indicate the answer choice that best completes the statement or answers the question. 31. Artificial Intelligence Inc. sells to Beta Bots Corporation a promising idea for a technological innovation that is still being developed and that looks very promising. This is Powered by Cognero
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Chapter 03: Ethics in Business a. ethical and legal. b. unethical but legal. c. illegal and unethical. d. unethical and illegal. 32. Business ethics looks at whether the behavior of business decisions: a. are right or wrong. b. derive from well-known business principles. c. follow legal doctrine. d. align with corporate policy.
Indicate one or more answer choices that best complete the statement or answer the question. 33. The Fraud Reduction and Data Analytics Act was designed to: (choose all applicable answers) a. detect fraud. b. prevent fraud. c. punish companies for any fraud. d. assess fraud.
Indicate the answer choice that best completes the statement or answers the question. 34. Ethics has to do with how a businessperson applies this(ese) in their business decisions: a. legal doctrine. b. moral principles. c. corporate policy. d. financial priorities. 35. This law was designed to help reduce corporate fraud and unethical management decisions, by requiring accountability measures for publicly traded companies: a. Fraud Reductions Data Analytics Act. b. Sarbanes-Oxley Act. c. the federal code of ethics. d. the American Bar Association code of ethics. 36. Ethics are important because laws may not always be easy to interpret or apply. This is because a. laws are very organized and structured, and are complicated to read. b. laws represent the will of the people, and that is often changing. c. laws are created by a political process, and are the result of compromise. d. laws often have definition provisions to explain the meaning of terms. 37. Cynthia is the chief financial officer of Digital Corporation. In that capacity, when she 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 short-run interest of Digital. Powered by Cognero
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Chapter 03: Ethics in Business d. to maximize profit. 38. Compliance with the law is not always sufficient to determine if a decision or behavior is “right” because a. being legal does not necessarily mean it is ethical. b. company codes are also sources of law. c. business decisions can have negative impacts. d. ethical problems do not occur in business. 39. 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 moral minimum. c. the only ethical level. d. irrelevant. 40. Viaduct Corporation used untested and risky construction techniques to build a bridge under budget. The techniques were legal but the bridge collapsed, killing several people. Viaduct’s actions were a. unethical, and may result in legislation. b. ethical, because they were legal. c. dangerous, and therefore inherently illegal. d. legal under Sarbanes-Oxley, and with no penalties. 41. Many companies try and link ethics with law through creating: a. an external publicized code of conduct. b. an internal code of conduct. c. a legal code of ethics. d. a code that applies to the public. 42. 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. 43. An internal business code of conduct is not a. legally binding law. b. a set of rules the company can enforce. c. an outline of the company’s policies. d. a guide for decision makers with ethical questions. 44. The National Restaurant Association announces a new industry code of ethics. The effectiveness of this code will be determined by a. the commitment of management to enforcing the code. b. the similarity of the code to the employees’ personal values. c. the success of the campaign publicizing the code. d. the relationship between the code and the law. Powered by Cognero
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Chapter 03: Ethics in Business 45. Product Sales Inc. adheres strictly to the goal of maximizing profits. Even so, Product Sales will benefit by also using ethical behavior: a. if customer service and reviews are good. b. if its owners are happy with the revenue. c. under no circumstances. d. if it efficiently allocates its scarce resources. 46. The triple bottom line looks at all of the following except a. how decisions impact profits and revenue. b. how decisions impact sustainability and the planet. c. how decisions impact employees and consumers. d. how decisions impact relations with foreign nations. 47. Managers who set unrealistic production or sales goals increase the probability that employees will act: a. ethically b. unethically c. illegally d. not act at all 48. “Be honest and treat people fairly.” With respect to business ethics, implementing this motto is a. not important. b. only important in democratic societies. c. very important. d. only important with large customers. 49. Owen and other managers employed by Pastry Bakeries 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.
Indicate one or more answer choices that best complete the statement or answer the question. 50. Duty-based ethical standards are most likely to derive from (choose all applicable answers) a. a corporate ethics code. b. a religious reasoning. c. philosophical reasoning. d. the law.
Indicate the answer choice that best completes the statement or answers the question. 51. When adopting duty-based ethics, corporations often describe the values and duties they owe: a. through required government disclosure forms. Powered by Cognero
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Chapter 03: Ethics in Business b. in their mission statements and strategic plans. c. by adopting a corporate religion. d. in the biographies of corporate leaders. 52. Flo, the manager of Grounds Maintenance Inc., must decide whether to use an herbicide that could be unhealthy to employees. They want to use it (as well as the public) once it is on the ground. Flo might lose the client if she refuses to use the herbicide. If Flo analyzes the importance of good health and the avoidance of disease as the rights of people in making her decision, she is likely using a. religious principles. b. the categorical imperative. c. the principle of rights theory. d. utilitarianism. 53. When a business makes an unethical decision and then rationalizes it by saying it is only a small issue, is an example of: a. corporate social responsibility. b. categorical imperative. c. a duty-based ethics approach. d. a religious-based ethical approach. 54. Seafood Café Company makes products that can cause severe health problems to those with shellfish allergies. Seafood analyzes the cost of warning people of the risk (which they believe is obvious), and the risk of harm to people if no warning is included in advertising and on menus. This analysis most likely is part of a. a duty-based ethics approach. b. corporate social responsibility. c. religious ethical principles. d. an outcome-based ethics. 55. 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. 56. A cost-benefit analysis is part of a. a duty-based ethics approach. b. corporate social responsibility. c. the principle of rights theory. d. The utilitarian model 57. Hale, research manager for Investor Fund, Inc., adheres to utilitarian ethics in making business and ethical decisions that involve the actions of the firm. According to this standard, an action is morally correct when it produces the greatest good for a. Hale himself. b. Investor Fund Inc. Powered by Cognero
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Chapter 03: Ethics in Business c. the fewest people. d. the greatest number. 58. When deciding to engage in corporate social responsibility, a key factor when selecting activities is a. how the social activity relates to the business activities of the corporation. b. how much free publicity the corporation will get from the social activity. c. whether the corporation is required to do the social activity by law. d. whether the activity will result in short-term profit increases. 59. ChemCo Inc. expends funds and takes steps to ensure that all employees are treated fairly, and that they are acting ethically and are accountable to society. This is the concept of: a. the moral minimum. b. corporate social responsibility. c. the categorical imperative. d. the triple bottom line. 60. Under corporate social responsibility, which of these is not an activity that would qualify: a. environmental efforts to reduce the carbon footprint. b. charitable donations to local and worldwide causes. c. ethical labor practices, both local and internationally. d. paying all employees the same wage. 61. According to the theory of corporate social responsibility, any decision by the management of Precision Processing Corporation should consider how a proposed action may affect only the a. firm’s officers and shareholders. b. firm’s officers, shareholders, and stakeholders. c. firm’s shareholders only. d. firm’s suppliers and local government. 62. An overemphasis on this, is the most common reason for ethical problems in the workplace: a. long-run profit maximization. b. short-run profit maximization. c. social responsibility. d. stakeholder analysis. 63. Cody makes a business decision based on financial outcomes alone, and then attempts to argue that it is ethical as well. Cody is a. rationalizing his decision. b. questioning his decision. c. using the utilitarian approach. d. using the stakeholder approach. 64. Caryn is faced with making a business decision. As she thinks about the problem, she feels that there is no easy answer. She continues to think about what is making her uncomfortable about the situation before brainstorming possible solutions. If Caryn is using the IDDR approach to decision making, she is engaged in which step? Powered by Cognero
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Chapter 03: Ethics in Business a. the discussion step. b. the decision step. c. the inquiry step. d. the review step. 65. In making a business decision, Jin Soo brainstorms possible solutions to his problem, and then considers what he should do. If Jin Soo is using the IDDR approach to decision making, he is in the: a. discussion step. b. decision step. c. inquiry step. d. review step. 66. 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.
67. Recreation & Sports Equipment Corporation sells a profit-generating product that is capable of seriously injuring consumers who misuse it in a foreseeable way. They 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 scare off some potential customers who might not buy the product. Thinking about the different theories of the role of business in society, discuss whether Recreation & Sports Equipment Corporation behaves ethically by continuing to sell the product without a warning by discussing at least two of the theories. 68. Bob has started his new coffee company, Bob’s Java, and is looking into costs for his supplies. He notices that the cost of the coffee beans is drastically less expensive from a local distributor. He keeps researching and finds a wider array of roasts and flavors of beans from an international vendor, but the cost is much higher. Bob wants to be socially responsible, so he investigates the sustainability and economic impact each company has on the environment. He notices the international vendor pays their workers a fair wage, and uses fair trade ingredients. He cannot find that information about the local vendor. He is wondering if the greater cost is worth it. Discuss what things he should think about when looking at the Corporate Social Responsibility issue.
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Chapter 03: Ethics in Business 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. True 15. True 16. True 17. True 18. True 19. True 20. False 21. True 22. False 23. False 24. False 25. True Powered by Cognero
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Chapter 03: Ethics in Business 26. False 27. True 28. True 29. True 30. True 31. a 32. a 33. a, b, d 34. b 35. b 36. b 37. b 38. a 39. b 40. a 41. b 42. c 43. a 44. a 45. a 46. d 47. b 48. c 49. a 50. b, c 51. b Powered by Cognero
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Chapter 03: Ethics in Business 52. c 53. b 54. d 55. d 56. d 57. d 58. a 59. b 60. d 61. b 62. b 63. a 64. c 65. a 66. c 67. 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, Recreation & 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 caused by either a lawsuit or the addition of a warning. As a corporate citizen, the company may consider the triple bottom line. 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. The principle of rights theory determines whether a business decision is ethical by how the decision affects the rights of others. Under a utilitarian model of ethics, an action is morally correct, or “right,” when among the people it affects, it produces the greatest amount of good for the greatest number (or creates the least amount of harm). 68. CSR is a relatively new concept in the history of business, but it is a concept that becomes more important every year. A survey of U.S. executives undertaken by the Boston College Center for Corporate Citizenship found that more than 70 percent of those polled agreed that corporate citizenship must be treated as a priority. Powered by Cognero
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Chapter 03: Ethics in Business More than 60 percent said that good corporate citizenship added to their companies’ profits. CSR can be a successful strategy for companies, but corporate decision makers must not lose track of the two descriptors in the title: corporate and social. The company must link the responsibility of citizenship with the strategy and key principles of the business. Incorporating both the social and the corporate components of CSR, and making ethical decisions can help companies grow and prosper. CSR is most successful when a company prioritizes on objectives that may not be immediately beneficial. For example, it may cost more initially to construct a new plant that meets the high standards necessary to be certified as environmentally friendly by the LEED program, but in the long run it will be beneficial. Surveys of college students about to enter the job market confirm that young people are looking for socially responsible employers. While socially responsible activities may cost a corporation now, they may also lead to more talented and more committed employees.
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Chapter 04: Courts and Alternative Dispute Resolution
Indicate whether the statement is true or false. 1. Laws would be meaningless without the courts to interpret and apply them. a. True b. False 2. Judicial review is the process through which Congress approves or rejects judicial appointments. a. True b. False 3. The landmark case of Marbury v. Madison set the decision and precedent for judicial review. a. True b. False 4. Jurisdiction refers to the ability of a citizen to bring a case before a court. a. True b. False 5. The authority of a court to hear and decide a specific case is called jurisdiction. a. True b. False 6. Any court can exercise jurisdiction over any property, no matter where it is located.
a. True b. False 7. Under a state long-arm statute, a court can exercise jurisdiction over certain nonresident defendants based on their activities within the state. a. True b. False 8. Minimum contact means that the defendant must have enough of a connection to the state for the judge to conclude that it is fair for the state to exercise power over the defendant. a. True b. False 9. A corporation is subject to jurisdiction only in states where it does such substantial and continuous business, that it is “at home” in that state. a. True b. False 10. Subject matter jurisdiction refers to whether a court is located in the area in which the plaintiff or defendant live. a. True b. False Powered by Cognero
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Chapter 04: Courts and Alternative Dispute Resolution 11. An example of a court of limited jurisdiction would be a probate court. a. True b. False 12. A federal court will apply federal law when hearing a case involving a federal question. a. True b. False 13. For purposes of diversity jurisdiction, a corporation can be considered a citizen of the state where their principal place of business is located. a. True b. False 14. In a case based on diversity of citizenship involving individuals, a federal court will apply the relevant state law. a. True b. False 15. When concurrent jurisdiction exists, the parties may choose to bring the case in state or federal court. a. True b. False 16. In a case involving Internet transactions, jurisdiction can be met by a state through minimum contacts if the company conducts substantial business in that jurisdiction through online contracts or sales. a. True b. False 17. Merely advertising a product online is never enough to avail your company to jurisdiction of that state. a. True b. False 18. Venue has to do with where the most appropriate physical location to file a lawsuit exists. a. True b. False 19. A state supreme court is considered a federal court. a. True b. False 20. A question of law is generally the focus of an appellate court. a. True b. False 21. An appellate court can only challenge a trial court’s finding of fact if the finding is clearly erroneous. a. True b. False Powered by Cognero
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Chapter 04: Courts and Alternative Dispute Resolution 22. If a party is unhappy about the decision of their case in their state supreme court, and it was a case involving state law, they can appeal it to the Federal Supreme Court. a. True b. False 23. Failing to strictly follow the procedural rules and standards for determining disputes in courts is likely to affect the outcome in a particular case. 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, as well as the jurisdiction and remedy. a. True b. False 25. Judgment entered by a court against a defendant who has failed to appear in court to answer or defend against the plaintiff’s claim is called a default judgment a. True b. False 26. A motion to dismiss asserts that a claim has no cause of action or basis in law. a. True b. False 27. A motion for summary judgment asserts that the plaintiff failed to state a claim for which the court can grant relief, and the case should have a judgment without proceeding to trial. a. True b. False 28. Discovery includes the process of serving a summons, and a copy of a complaint on a defendant. a. True b. False 29. Interrogatories consist of oral testimony given by a party under oath. a. True b. False 30. Jurors must decide a case based only on the information that they learn during the trial. a. True b. False 31. If a trial was fundamentally flawed, a party can ask the judge for a motion, and for a new trial in order to prevent a miscarriage of justice. a. True b. False 32. Appellate courts must accept all appeals. Powered by Cognero
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Chapter 04: Courts and Alternative Dispute Resolution a. True b. False 33. An electronic court filing system allows parties to file litigation-related documents via electronic means in most states. a. True b. False 34. Most states either require or encourage parties in a lawsuit to undertake ADR beforehand. a. True b. False 35. Mediation requires the use of a neutral third party to help facilitate an agreement between the parties. a. True b. False 36. The most “formal” form of alternative dispute resolution is arbitration. a. True b. False 37. Arbitration differs from other forms of alternative dispute resolution in that a third party hearing a dispute makes a binding decision for the parties. a. True b. False
Indicate the answer choice that best completes the statement or answers the question. 38. Analytica LLC 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. 39. A judicial decision on the constitutionality of an executive order that limits certain state actions is a. beyond the jurisdiction of the courts. b. a question of fact. c. a summary judgment. d. the power of judicial review. 40. 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 concept of voir dire. c. the power of judicial review. d. the concept of venue.
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Chapter 04: Courts and Alternative Dispute Resolution 41. One party wants to file a suit against another. For a court to hear the case, a. both parties must consent to the lawsuit. b. the court must have jurisdiction over the parties, as well as the subject matter at issue. c. the parties must have diversity of citizenship, and a claim of more than $75,000. d. the parties must both own property within the state. 42. Hal, a resident of Illinois, owns a warehouse in Indiana. A dispute arises over the ownership of the warehouse with Jack, a resident of Kentucky. Jack files a suit against Hal in Indiana. Regarding this suit, Indiana has a. federal jurisdiction. b. in personam jurisdiction. c. in rem jurisdiction. d. no jurisdiction.
Indicate one or more answer choices that best complete the statement or answer the question. 43. Bob is a resident of Ohio and is involved in a car accident with Joan who is a resident of Kentucky. The accident takes place in Indiana. Where can Bob bring a suit against Joan. (choose all applicable answers) a. Indiana b. Ohio c. Kentucky d. Federal court
Indicate the answer choice that best completes the statement or answers the question. 44. Cattle House Steaks, an Alabama company, enters into a contract for goods over the phone with Beef Packing Inc., an out-of-state corporation. If a dispute arises, an Alabama 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. 45. Tyler, a citizen of Utah, files a suit in a Utah state court against SeaCoast Sales Corporation, a Washington state company that does regular business in Utah. Utah state court would have jurisdiction over SeaCoast because of: a. subject matter jurisdiction. b. long-arm and minimum contacts jurisdiction. c. federal question jurisdiction. d. Utah would never have state jurisdiction over SeaCoast. 46. Jason, a citizen of Kansas, wants to file a suit against Lora, a citizen of Michigan. Their 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. Kansas state court to have jurisdiction. Powered by Cognero
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Chapter 04: Courts and Alternative Dispute Resolution 47. Kari and Lillian, who are citizens of Mississippi, are involved in a case related to the adoption of their child. Regarding jurisdiction of 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. 48. Bob wants to sue XYZ corporation, his employer, for violating his civil rights. He states their employer procedures do not apply equal rights. What court would Bob bring suit? a. state court b. federal court c. probate court d. any court he wishes
Indicate one or more answer choices that best complete the statement or answer the question. 49. Sara, a resident of Indiana is involved in a dispute over goods she bought from Jim, a resident of Florida. The amount of damages she is seeking is $75,000. In what court can Sara bring her suit against Jim? (choose all applicable answers) a. Indiana state court. b. Florida state court. c. Federal court d. Probate court
Indicate the answer choice that best completes the statement or answers the question. 50. If Terry wants to sue Jerry and they are citizens of different states, and the amount of damages sought is $100,000. Furthermore, Jerry has long-arm and minimum contacts with Terry’s state, the fact that Terry can bring the suit in his home state court or federal court is called: a. diversity of citizenship. b. concurrent jurisdiction c. subject matter jurisdiction. d. exclusive jurisdiction. 51. The courts have developed a standard, called a ___________________ standard, for determining when the exercise of jurisdiction over an out-of-state defendant is proper. a. long-arm b. minimum contacts c. sliding scale d. value based 52. __________________________ is concerned with the most appropriate physical location for a trial. a. jurisdiction b. minimum contacts c. venue d. federal diversity Powered by Cognero
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Chapter 04: Courts and Alternative Dispute Resolution 53. A person must have _______________________________, or a sufficient “stake” in the matter to justify seeking relief through the court system. a. venue b. jurisdiction c. standing to sue d. diversity of citizenship 54. Martin files a suit against Nichelle 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 Martin v. Nichelle, a party can appeal the decision to the United States Supreme Court only 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. 55. A ___________________ is an order issued by the Supreme Court to a lower court requiring that court to send the record of the case for review. a. motion for dismissal b. writ of certiorari c. a rule of four d. motion for summary judgment 56. Commercial Supply wants to initiate a suit against Downwind Power Corporation by filing a complaint. The complaint should include a statement of the facts necessary to show that: a. Downwind does not have a valid defense. b. the case can be disposed of without a trial. c. the solvency of Downwind is in question. d. Commercial is legally entitled to relief. 57. A______________________ consists of a document that notifies a defendant that a legal action has been commenced against them, and that they must appear in court to answer the complaint. a. motion to dismiss b. summons c. service of process d. motion for summary judgment 58. A __________________________________ will be granted only if there are no genuine questions of fact, and the sole question is a question of law. a. motion for summary judgment b. motion to dismiss c. motion for judgment on the pleadings d. discovery request 59. ______________________________ refers to the number of procedural devices to obtain information and gather evidence about the case from the other party or from third parties before the trial begins. Powered by Cognero
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Chapter 04: Courts and Alternative Dispute Resolution a. Motion for submission b. Motion to dismiss c. Discovery d. Venue
Indicate one or more answer choices that best complete the statement or answer the question. 60. Choose the activities that are a part of discovery: (choose all applicable answers) a. interrogatories b. depositions c. motion to compel d. a witness list
Indicate the answer choice that best completes the statement or answers the question. 61. Sara files a suit in a state court against Tech Innovations Inc. The parties are allowed to file litigation-related documents with the court online for their state. This is considered: a. online dispute resolution. b. an electronic court filing system. c. electronic discovery. d. a cyber court. 62. Jill and Kane meet with their attorneys 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 an example of: a. arbitration. b. mediation. c. negotiation.. d. none of the choices. 63. Quarry Mining Inc. and Riverside Vineyards agree to resolve a dispute in arbitration. The arbitrator meets with Quarry’s representative to discuss the matter without Riverside’s representative being present. Is this normally allowed during arbitration? a. Yes. b. No. c. Only if there is a restraining order. d. If the matter is serious enough in nature. 64. Liz and Moss disagree over the amount due under their contract. To avoid involving any third party in the resolution of their dispute, Liz and Moss could attempt to resolve their dispute through: a. arbitration. b. litigation. c. mediation. d. negotiation. 65. Farmers Pantry Products Inc. and Market Grocers LLC dispute a term in their contract. Because the parties have a Powered by Cognero
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Chapter 04: Courts and Alternative Dispute Resolution long-standing business relationship that they would like to continue, they would prefer to 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 by an expert. 66. Cornel and Deanna resolve their dispute over the destruction 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 would be: a. arbitration. b. conciliation. c. intervention. d. rendition. 67. Mandatory _________________ in employee contracts have been found to be generally acceptable and legal. a. mediation clauses b. arbitration clauses c. negotiation clauses d. reprimand procedures 68. _________________________________ may be best suited for resolving small- to medium-sized business liability claims, which may not be worth the expense of litigation or traditional ADR. a. Mediation b. Online dispute resolution c. Arbitration d. Closed negotiation 69. Numerous federal courts now hold _____________________________ (another type of ADR), in which the parties present their arguments and evidence, and the jury renders a verdict. a. negotiations b. mini trials c. summary jury trials d. early neutral case evaluation 70. One downside of arbitration is that if the parties are not satisfied with the decision, they: a. can still mediate the issue. b. cannot appeal the decision. c. can still litigate the issue. d. can sue for damages separately.
71. Jane buys personal products over the internet from ABC Corporation. After using the products, she notices she is not feeling well. She thinks it may have something to do with the ingredients in the products. She emails the company asking for a list, and they send her one. She takes it to a scientist that she knows, and he says there is nothing “wrong” with any of the ingredients. She takes a sample of the lotion to her friend to test. He finds trace amounts of poison in the lotion, and Powered by Cognero
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Chapter 04: Courts and Alternative Dispute Resolution says it comes from using imported and cheap byproducts. The poison is not listed, since it is a byproduct of another ingredient. Jane wants to sue ABC and needs to know what she needs to do first? (discuss jurisdiction, venue, standing to sue, who she can sue, service, etc.) 72. Giles is a tenant in Home Suite Home, an apartment building owned by Italo. Giles is injured when he falls in an unlighted stairwell in the building. Giles asks Italo to cover his medical expenses. Italo refuses to admit that Giles’s injury resulted from a fall in the stairwell, or that Italo should assume liability for the cost. Unable to negotiate a settlement, Giles wants to file a suit against Italo. What pleading begins a suit? Once a defendant is notified of a suit, what must he or she do?
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Chapter 04: Courts and Alternative Dispute Resolution Answer Key 1. True 2. False 3. True 4. False 5. True 6. False 7. True 8. True 9. True 10. False 11. True 12. True 13. True 14. True 15. True 16. True 17. True 18. True 19. False 20. True 21. True 22. False 23. True 24. True 25. True Powered by Cognero
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Chapter 04: Courts and Alternative Dispute Resolution 26. True 27. True 28. False 29. False 30. True 31. True 32. False 33. True 34. True 35. True 36. True 37. True 38. a 39. d 40. c 41. b 42. c 43. a, c, d 44. a 45. b 46. b 47. c 48. b 49. a, b 50. b 51. c Powered by Cognero
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Chapter 04: Courts and Alternative Dispute Resolution 52. c 53. c 54. a 55. b 56. d 57. b 58. a 59. c 60. a, b, d 61. b 62. b 63. b 64. d 65. b 66. a 67. b 68. b 69. c 70. b 71. The first thing Jane will need to determine is if she can get state jurisdiction in her state of Wyoming over the defendants, whose home office is in Oklahoma. She knows that they sell their products on a regular basis as well as advertise over the internet to her state. Most likely the state court of Wyoming would have enough minimum contacts due to ABC’s contacts selling and advertising in their state. She then would need to figure out if she can only sue in state court or if it is possible to sue in a federal court as well. Federal diversity jurisdiction may apply since they are from two different states, and the amount in controversy will exceed $75,000 due to her being so sick. She opts to take it to federal court, so there is no issue with the minimum contact question. She will then go to her attorney and have them draft a complaint which will need to be properly served on ABC. Once they are served, the trial can procced. She also has an option at that point to request ABC to go through a form of alternative dispute resolution. She could use mediation or arbitration for this if the other party is willing, and both may be successful. 72. Pleadings inform each party to a suit of the claim of the other, and specifies the issues involved. A suit begins when a Powered by Cognero
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Chapter 04: Courts and Alternative Dispute Resolution complaint (or petition, or declaration) is filed with the clerk of a trial court with appropriate jurisdiction. A complaint must contain the following: • A statement alleging facts necessary for the court to take jurisdiction. • A statement of facts necessary to show the plaintiff’s legal basis for a remedy. • A statement of the remedy that the plaintiff is seeking. A defendant is notified of a suit by being served with a summons, and a copy of the complaint. The summons informs the defendant that he or she is required to file an answer to the complaint with the court and the plaintiff within a specified time (usually twenty to thirty days after the summons is served). After the defendant is served with a copy of the complaint and summons, he or she must respond by filing an answer or a motion to dismiss. If the defendant does not respond, the court may enter a default judgment against him or her, awarding the plaintiff the remedy sought. Here, if Giles initiates a suit by filing a complaint against Italo, Giles would be the plaintiff and Italo would be the defendant. Giles would need to set out the basis of his lawsuit, and state a question of fact and law. Assuming Giles’s complaint contains the required information, Italo would be served with a copy of it, and a summons. Italo would then need to respond with an answer or a motion to dismiss within the appropriate time. If he does not, he will likely have a default judgment entered against him.
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Chapter 05: Tort Law
Indicate whether the statement is true or false. 1. A tort law is a civil wrong, including those that arise from a breach of contract. a. True b. False 2. Compensatory damages are designed to compensate or reimburse a plaintiff for actual losses. a. True b. False 3. An award of grossly excessive punitive damages is normally available in a suit involving gross negligence. a. True b. False 4. 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 5. In most states, a plaintiff can obtain an unlimited amount of noneconomic general damages in a tort action. a. True b. False 6. There are two types of torts: intentional torts and unintentional torts. a. True b. False 7. A defendant cannot be liable in an intentional tort action, even if he or she meant no harm. a. True b. False 8. Intent can be transferred when an individual intends to harm one individual but unintentionally harms another. a. True b. False 9. 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 10. Intentional physical contact with another is not a battery unless the contact is unexcused, harmful, or offensive. a. True b. False 11. Physical injury needs to occur for there to be a battery. a. True Powered by Cognero
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Chapter 05: Tort Law b. False 12. Whether a conduct is offensive is determined using a reasonable person standard. a. True b. False 13. False imprisonment occurs only when a person justifiably restrains another. a. True b. False 14. In most states, a merchant can use reasonable force to detain a person suspected of shoplifting, without liability for false imprisonment. a. True b. False 15. A person who wrongfully hurts another’s good name or reputation orally may be liable for libel. a. True b. False 16. A false statement about a person’s business can give rise to liability for defamation. a. True b. False 17. A statement of fact that is actually true but appears on its face to be negative can constitute defamation a. True b. False 18. A false statement made with actual malice can constitute defamation, unless the statement is about a public figure. a. True b. False 19. A statement that a person has committed or been imprisoned for a serious crime can constitute slander per se, without any need to prove special damages. a. True b. False 20. The use of someone’s likeness, name, or other identifying characteristics for profit without their permission constitutes a tort. a. True b. False 21. A business cannot use puffery without liability for fraudulent misrepresentation. a. True b. False 22. Intentional deceit for personal gain may be unethical, but it does not give rise to liability for a fraudulent Powered by Cognero
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Chapter 05: Tort Law misrepresentation. a. True b. False 23. 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 24. A person will not be liable for wrongful interference if the interference results from legitimate competitive behavior a. True b. False 25. 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 26. Actual harm to the land is required to prove a trespass to land tort. a. True b. False 27. If a person comes onto another’s land to assist a person in danger, they can be held liable for trespass to land. a. True b. False 28. Taking personal property from its owner, without permission or just cause, is trespass—retaining it is conversion. a. True b. False 29. If an owner consents to the taking of his or her property, a failure to return cannot be a tort. a. True b. False 30. Good intentions are a defense to conversion. a. True b. False 31. Publication of false information about another’s product or property is not a tort. a. True b. False 32. An economically injurious falsehood about a business’s product can support a tort action for disparagement of property. a. True b. False 33. Business owners have a duty to warn customers of any foreseeable risks on their property. Powered by Cognero
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Chapter 05: Tort Law a. True b. False 34. Causation in fact exists if “but for” a wrongful act, an injury would not have occurred. a. True b. False 35. Foreseeability can be a test for proximate cause. a. True b. False 36. The goal in negligence actions is to compensate an injured party for their recognized injury that resulted from a wrongful act. a. True b. False 37. Someone who is injured while they are being rescued by another, can sue that person if they commit negligence in the act of rescuing. a. True b. False 38. If a person knowingly and voluntarily puts themselves in a position of danger and is injured, they will still be allowed to sue for damages. a. True b. False 39. Under comparative law standard, if a plaintiff is 30% at fault and the defendant is 70% at fault, the plaintiff can only recover up to 70% of their damages. a. True b. False 40. BLOOM’S: Analyze a. True b. False 41. The standard of reasonable care for a professional is the same as that of an ordinary person. a. True b. False 42. Strict liability is imposed on anyone engaging in abnormally dangerous activities regardless of any intent or negligence. a. True b. False 43. A seller who introduces into commerce an unreasonably dangerous product may be subject to a tort action for strict liability. Powered by Cognero
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Chapter 05: Tort Law a. True b. False
Indicate the answer choice that best completes the statement or answers the question. 44. For those who have suffered injuries as a result of the wrongful conduct of others, through tort law, society supports a. compensation. b. fines and imprisonment c. community service. d. any and all damages. 45. Lyn is injured when a part of a building ledge breaks free and strikes her. If Lyn 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. 46. Marco is harmed when Nell defames him. If Marco brings a successful tort action against Nell, he 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. 47. Opal is injured and her property is damaged when a truck with defective brakes careens off an adjacent highway and crashes into her home. If Opal brings a successful tort action against the truck’s owner for gross negligence, she 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. she cannot sue for punitive damages 48. Rico brings a tort action against Sal and proves all of the elements of the claim. Sal’s successful defense will a. release the defendant from partial or full liability for the tortious act. b. impose liability on Rico for any harm to Sal arising from the suit. c. further no legitimate purpose and violate the due process clause. d. toll the statute of limitations. 49. 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. Powered by Cognero
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Chapter 05: Tort Law 50. Khan takes a rock from a pile of stones on Lamb’s property and throws it intending to hit Minh, but misses and hits Nasir instead. For the tort of battery, Nasir can sue a. Lamb. b. Minh. c. Khan. d. no one. 51. After a dinner at Rosario’s Diner, Sharon believes that she was overcharged and shoves Tom, the waiter, who is injured when he falls. Tom sues Sharon, alleging that the shove was a battery. Sharon is liable if a. Rosario’s did not actually overcharge her. b. the shove was offensive. c. she acted out of anger. d. Rosario’s prices are too high. 52. 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. 53. To qualify for a claim of intentional infliction of emotional distress, the conduct committed must be more _______________________ than acceptable by standards of decency in society. a. harmful b. extreme and outrageous c. innocent d. inconspicuous 54. 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. 55. 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. 56. In an online blog, Oren states that Publicity Corporation invaded the privacy of individuals when collecting 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: Powered by Cognero
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Chapter 05: Tort Law a. contempt. b. malice. c. libel. d. slander. 57. 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 58. Bob makes a statement about Joe that he has a very infectious skin disease. This is not true. Joe can sue Bob for: a. battery b. assault c. defamation d. misrepresentation 59. 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. 60. 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. 61. 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. 62. 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. Powered by Cognero
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Chapter 05: Tort Law d. opinion. 63. 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. 64. Throwing a football onto someone’s property can constitute a(n) _____________________ tort. a. conversion b. trespass to land c. misappropriation d. false representation 65. 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. has an easement for the property. 66. 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.. 67. The taking of electronic data without permission can constitute the tort of: _______________ a. trespass to land b. misappropriation c. conversion. d. false imprisonment 68. In a digital ad, Geo Treks, a retail sports equipment store, falsely accuses its competitor Headwaters of selling stolen kayaks and other gear. Headwaters’s sales decrease as a result. Geo Treks has most likely committed: a. conversion. b. trespass to property c. slander of quality. d. slander of title 69. Fred, a clerk at a Games Store, takes a game player and a selection of games from the store without permission. If Fred intends to keep the property, he is liable for: a. trade libel b. false imprisonment. Powered by Cognero
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Chapter 05: Tort Law c. conversion. d. wrongful interference 70. 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. misappropriation. b. conversion. c. misrepresentation. d. wrongful interference. 71. In torts involving _________________, the tortfeasor neither wishes to bring about the consequences of the act, nor believes that they will occur. a. trespass b. conversion c. negligence d. misappropriation 72. 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 73. DIY, a retail hardware store, must use reasonable care on its premises to warn its invitees of: a. all possible dangers b. foreseeable risks. c. dangers about which the business does not know. d. only serious dangers. 74. In a negligence cause of action there must be causation, which includes asking if there was a causation in fact, and it needs to be an act that spurs the ________________ of the injury. a. legal cause b. proximate cause c. cause in fact d. negligent cause 75. Ivy slips and falls on the deck of Jet’s Tour Boat and is injured. She incurs in 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 that are Jet’s fault. d. the entire amount of the expenses. 76. Cato is driving a car in which Diego is a passenger when an accident occurs. Diego is not injured. In Diego’s tort Powered by Cognero
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Chapter 05: Tort Law 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. 77. Shelly owns Reclaim & Restore (R&R), a demolition company. Demolition of a Quad City brownstone by an R&R crew injures Penny, a spectator. Under the doctrine of strict liability, Shelly must pay for Penny’s injury a. only if the R&R crew failed to use reasonable care. b. only if the R&R crew was greater than 50 percent at fault. c. only if the R&R crew was entirely at fault. d. without regard to the fault of the R&R crew. 78. Excavation, Inc., uses explosives to prepare land for construction projects. Strict liability is imposed on this activity because a. Excavation is a corporation. b. the activity is inherently negligent. c. the activity is extremely dangerous d. the amount of liability can be added to the costs of construction.
79. An intentional tort requires intent. The tortfeasor (the one committing the tort) must intend to commit an act, the consequences of which interfere with the personal or business interests of another in a way not permitted by law. Discuss at least three intentional torts against the person and their elements. Also discuss any potential defenses to those charges and which damages are applicable. 80. 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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Chapter 05: Tort Law Answer Key 1. False 2. True 3. False 4. False 5. False 6. True 7. False 8. True 9. True 10. True 11. False 12. True 13. False 14. True 15. False 16. True 17. False 18. False 19. True 20. True 21. False 22. False 23. False 24. True 25. True Powered by Cognero
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Chapter 05: Tort Law 26. False 27. False 28. True 29. False 30. False 31. False 32. True 33. True 34. True 35. True 36. True 37. False 38. False 39. True 40. False 41. False 42. True 43. True 44. a 45. a 46. b 47. c 48. a 49. a 50. c 51. b Powered by Cognero
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Chapter 05: Tort Law 52. b 53. b 54. d 55. d 56. c 57. d 58. c 59. b 60. b 61. c 62. c 63. d 64. b 65. b 66. d 67. c 68. d 69. c 70. b 71. c 72. d 73. b 74. b 75. a 76. d Powered by Cognero
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Chapter 05: Tort Law 77. d 78. c 79. In tort law, intent means only that the person intended the consequences of the act, or knew with substantial certainty that certain consequences would result from the act. The law generally assumes that individuals intend the normal consequences of their actions. Thus, forcefully pushing another—even if done in jest and without any evil motive—is an intentional tort if injury results because the object of a strong push can ordinarily be expected to fall down. An assault is any intentional and unexcused threat of immediate harmful or offensive contact—words or acts that create in another person a reasonable apprehension of harmful contact. If the act that created the apprehension is completed and results in harm to the plaintiff, it is a battery, which is defined as an unexcused and harmful or offensive physical contact intentionally performed. False imprisonment is the intentional confinement or restraint of another person’s activities without justification. False imprisonment interferes with the freedom to move without restraint. The tort of intentional infliction of emotional distress (IIED) can be defined as extreme and outrageous conduct resulting in severe emotional distress to another. To be actionable (capable of serving as the ground for a lawsuit), the conduct must be so extreme and outrageous that it exceeds the bounds of decency generally accepted by society. The tort of defamation involves wrongfully hurting a person’s good reputation. The law has imposed a general duty on all persons to refrain from making false, defamatory statements of fact about others. A person has a right to solitude and freedom from prying public eyes—in other words, to privacy. The Supreme Court has held that a fundamental right to privacy is implied by various amendments to the U.S. Constitution. Most states today have codified the common law tort of appropriation of identity in statutes that establish the distinct tort of appropriation, or right of publicity. A misrepresentation leads another to believe in a condition that is different from the condition that actually exists. The torts known as business torts, generally involve wrongful interference with another’s business rights. 80. 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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Chapter 06: Product Liability
Indicate whether the statement is true or false. 1. 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 2. Only big businesses face potential liability for the products they sell. a. True b. False 3. 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 4. 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 5. 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 6. Manufacturers are commonly held liable when their negligence causes their products’ consumers to be injured. a. True b. False 7. 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 8. 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 9. For fraud to be the basis of liability in a product liability suit, the misrepresentation must have been unintentional. a. True b. False 10. To bring a product liability lawsuit on the ground of misrepresentation, the plaintiff must have relied on the misrepresentation. a. True Powered by Cognero
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Chapter 06: Product Liability b. False 11. 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 12. Under the doctrine of strict liability, a defendant’s liability depends on privity of contract with the injured. a. True b. False 13. 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 14. The doctrine of strict liability applies to sellers of goods, including wholesalers. a. True b. False 15. To maintain an action in strict product liability, the plaintiff must show why, and how the product became defective. a. True b. False 16. In order for strict product liability to apply, the product in question must have been defective when sold to the consumer. a. True b. False 17. 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 18. A defective product is an unreasonably dangerous product when it is dangerous beyond the expectation of the ordinary consumer. a. True b. False 19. The types of product defects that have traditionally been recognized in product liability law include careless marketing. a. True b. False 20. Liability is imposed on a manufacturer for a manufacturing defect only when the manufacturer’s quality control efforts were “reasonable.” a. True Powered by Cognero
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Chapter 06: Product Liability b. False 21. Holding defendants strictly liable for manufacturing defects encourages greater investment in product safety and quality control standards. 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. 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 24. A product may also be deemed defective because of inadequate instructions or warnings. a. True b. False 25. A product will be considered defective when the omission of reasonable warnings renders the product not reasonably safe. a. True b. False 26. Generally, a seller is liable for failing to warn consumers of the harm that can result from a foreseeable misuse of a product. a. True b. False 27. Courts apply a “reasonableness” test to determine if a warning adequately alerts consumers to a product’s risks. a. True b. False 28. There is no duty to warn about any risks that are obvious or commonly known. a. True b. False 29. 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 30. A product liability claim against the manufacturer of a product that is subject to extensive government regulation may be preempted. a. True Powered by Cognero
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Chapter 06: Product Liability b. False 31. Product misuse is recognized as a defense to a claim for product liability, only when the particular misuse is reasonably foreseeable. a. True b. False 32. 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 33. 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 34. If a particular danger (such as electrical shock) is or should be commonly known by particular users of the product (such aselectricians), the manufacturer of electrical equipment need not warn these users of the danger. a. True b. False 35. Under a statute of limitations and tolling, an injured party must bring a claim for product liability within a certain prescribed time from the sale of the product. a. True b. False 36. A manufacturer or seller has a duty to warn about a risk that is obvious or commonly known. a. True b. False
Indicate the answer choice that best completes the statement or answers the question. 37. Quint is injured when a can of Remove-It explodes into flames. Solvents Inc. manufactured the Remove-It. Under product liability laws, Quint’s options include a. nothing at all—he has no options. b. ordering a halt to the production of Remove-It. c. issuing a recall of all Remove-It. d. suing Solvents Inc. for product liability. 38. 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. No one. d. Mai and Novi. Powered by Cognero
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Chapter 06: Product Liability 39. 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 Dora is injured as a result. Baby Things is most likely liable for a. fraud. b. misrepresentation. c. negligence d. strict liability. 40. 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. 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 are liable. c. MC or National Sales only. d. MC, National Sales, or Open Road. 42. 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. 43. 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. 44. 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. 45. 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 Powered by Cognero
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Chapter 06: Product Liability a. why the feed was poisoned. b. how the feed became poisoned. c. that the feed caused her damage. d. how many cows died. 46. 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. 47. Under the doctrine of __________________________, people may be liable for the results of their acts regardless of their intentions, or their exercise of reasonable care. a. product liability b. fraud c. strict liability d. false advertising 48. 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. 49. Sail-AwSail-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. no one. 50. 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. 51. 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 Powered by Cognero
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Chapter 06: Product Liability a. Ty bought the ladder from Steps & Rungs. b. Ty used the ladder in a non-standard way. c. the ladder was in a defective condition when Steps & Rungs sold it. d. Ty is normally engaged in the business use of ladders. 52. 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. 53. 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. 54. 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. 55. 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. 56. 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. 57. 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. Powered by Cognero
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Chapter 06: Product Liability b. only the party with the largest market share. c. both parties. d. only the party who most aggressively marketed its product. 58. 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. 59. 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. No one. 60. 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? a. Rev only. b. Rev, Sparkplugs, and the owner and operator of the Rev vehicle. c. Rev and Sparkplugs. d. Sparkplugs only. 61. 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. 62. Overland Corporation makes trucks. The brakes on Ned’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 Ned’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. 63. Sara buys a desk from IKEA, and is using it to stand on and change a lightbulb. The desk collapses and she is injured. IKEA may use which one of these as a defense to liability under product liability: a. assumption of the risk. Powered by Cognero
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Chapter 06: Product Liability b. misrepresentation. c. product misuse d. negligence. 64. If __________ is proven, it differs from other defenses in that it does not completely absolve the defendant of liability. It can, however, reduce the amount of damages that will be awarded to the plaintiff. a. intentional use b. comparative negligence c. fraud d. misappropriation 65. 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. 66. 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. 67. 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. 68. 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. 69. Etta, who is obese, files a product liability suit against Fast Meal Corporation, alleging that the company’s food products are unhealthy, because the products contain high levels of cholesterol and saturated fat. Fast Meal can most successfully assert the defense of: a. preemption. Powered by Cognero
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Chapter 06: Product Liability b. assumption of risk. c. comparative negligence. d. knowledgeable user. 70. 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. Temp-Set’s best defense is most likely a. assumption of risk. b. knowledgeable user. c. commonly known danger. d. none of the choices. 71. Garage Doors Inc. sells garage door openers to a Home & Yard Hardware store, where Ian buys one of openers. The applicable statute of limitations prescribes a period of four years. To bring a product liability claim against Garage Doors, Ian must file a suit within four years of: a. Ian’s discovery of an injury caused by the opener. b. Garage Doors’s sale of the opener to Home & Yard. c. Garage Doors’s design of the opener. d. Home & Yard’s sale of the opener to Ian. 72. 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.
73. 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? 74. 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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Chapter 06: Product Liability Answer Key 1. False 2. False 3. False 4. False 5. False 6. True 7. True 8. False 9. False 10. True 11. False 12. False 13. True 14. True 15. False 16. True 17. False 18. True 19. False 20. False 21. True 22. False 23. True 24. True 25. True Powered by Cognero
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Chapter 06: Product Liability 26. True 27. True 28. True 29. False 30. True 31. False 32. True 33. True 34. True 35. False 36. False 37. d 38. d 39. c 40. d 41. d 42. a 43. b 44. c 45. c 46. b 47. c 48. a 49. b 50. d 51. c Powered by Cognero
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Chapter 06: Product Liability 52. d 53. d 54. a 55. d 56. d 57. c 58. c 59. a 60. c 61. a 62. b 63. c 64. b 65. a 66. d 67. d 68. c 69. d 70. b 71. a 72. c 73. 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 Powered by Cognero
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Chapter 06: Product Liability 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. Today, product misuse is recognized as a defense only when theparticular use was not reasonably foreseeable. If the misuse is foreseeable, the seller must takemeasures to guard against it. 74. 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. Since privity of contract is not required, Meg could be a plaintiff with standing even though she was not using the product herself but was merely a bystander. 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. To successfully assert a design defect, a plaintiff has to show that:(1)a reasonable alternative design was available; and (2)as a result of the defendant’s failure to adopt the alternative design, the product wasnot reasonably safe. In other words, a manufacturer (or other defendant) is liable only when the harm was reasonablypreventable.
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Chapter 07: Intellectual Property Rights
Indicate whether the statement is true or false. 1. The need to protect intellectual property is recognized in the U.S. Constitution. a. True b. False 2. Intellectual property is property resulting from intellectual, creative processes, and the products of one’s mind. a. True b. False 3. A trademark is a distinctive word, symbol, sound, or design that identifies the manufacturer as the source of particular goods, and distinguishes its products from those made (or sold) by others. a. True b. False 4. The Federal Trademark Dilution Act was the first law to ever protect trademarks. a. True b. False 5. The products involved in a trademark dilution suit over a famous trademark must be similar or competing. a. True b. False 6. Once a manufacturer’s trademark is established, another manufacturer may use it without permission. a. True b. False 7. To succeed in a suit for trademark infringement, the owner must show that the infringer acted intentionally. a. True b. False 8. A trademark owner that successfully proves infringement can recover the profits that the infringer wrongfully received from the infringement. a. True b. False 9. Arbitrary and fanciful trademarks are sometimes considered to be the most distinctive trademarks, and they trigger the highest degree of protection. a. True b. False 10. A descriptive term does not receive protection under trademark law until it acquires a secondary meaning. a. True b. False 11. Only the federal government provides for the registration of trademarks. Powered by Cognero
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Chapter 07: Intellectual Property Rights a. True b. False 12. Generic terms that refer to an entire class of products, such as bicycle and computer, receive no protection, even if they acquire secondary meanings. a. True b. False 13. The term service mark refers to the image and overall appearance of a product. a. True b. False 14. The law does not prohibit the creation or shipment of counterfeit labels, unless they are attached to products. a. True b. False 15. The United States can prosecute foreign counterfeiters under U.S. law. a. True b. False 16. Service marks are protected in the same way as trademarks. a. True b. False 17. A trade name is used to indicate all or part of a business’s name. a. True b. False 18. An unusual or fanciful trade name is protected under trademark law. a. True b. False 19. 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 20. A patent applicant must demonstrate that an invention is useful to receive a patent. a. True b. False 21. A general patent gives the inventor the exclusive right to make, use, and sell an invention for a period of thirty years. a. True b. False 22. The first person to invent a product gets the patent protection. Powered by Cognero
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Chapter 07: Intellectual Property Rights a. True b. False 23. Certain business processes are patentable. a. True b. False 24. With respect to a patented process, all steps or their equivalent must be copied for infringement to occur. a. True b. False 25. The patent holder can seek an injunction against the infringer only, and no other damages. a. True b. False 26. The registration of a copyright is not required for copyright protection. a. True b. False 27. Facts that are generally known to the public are copyrightable. a. True b. False 28. Certain business processes are copyrightable. a. True b. False 29. 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 30. To obtain copyright protection under federal law, a work must be original. a. True b. False 31. If a creative work is not copyrightable, other intellectual property law will not protect it. a. True b. False 32. Works that are copyrightable include brochures, or other printed advertisements. a. True b. False 33. 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 Powered by Cognero
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Chapter 07: Intellectual Property Rights b. False 34. If a school uses a copyrighted play for educational purposes, then charges admission to the performances, this would fall under the fair use doctrine exception to the copyright law. a. True b. False 35. Some business processes can be protected as trade secrets. a. True b. False 36. Tapping into a competitor’s computer to obtain confidential business data constitutes a theft of trade secrets. a. True b. False 37. Pricing information is not a trade secret. a. True b. False 38. The European Union’s copyright rules limit the royalty protection for musicians to fifty years. a. True b. False 39. Each member country to the TRIPS agreement must include in its domestic laws broad intellectual property rights, and effective remedies for violations of those rights. a. True b. False 40. The United States has signed the Anti-Counterfeiting Trade Agreement (ACTA), an international treaty to combat global counterfeiting and piracy. a. True b. False
Indicate the answer choice that best completes the statement or answers the question. 41. Greg is marketing manager for Home Stuff LLC., Greg 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. the color of paper that Home Stuff uses for advertising, 42. 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 all confused. b. If the mark is non-distinctive, therefore causes no confusion. Powered by Cognero
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Chapter 07: Intellectual Property Rights c. only if the two companies’ products are similar. d. if the use diminishes the distinctive quality of the mark. 43. 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. violation of antitrust law. 44. 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 between the products. b. only if Sea Coast Café unintentionally used the trademark. c. only if the two companies’ products are similar. d. if the use diminishes the distinctive quality of the mark. 45. 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. unique logo. b. publications. c. printing process. d. printer. 46. Don One decides to use his personal name for a line of clothing he is developing. In this instance, 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 his product. c. Don begins to manufacture his line of clothing. d. Don buys business cards with his name on them. 47. A ________ is essentially a trademark that is used to distinguish the services (rather than the products) of one person or company from those of another. a. collective mark b. certification mark c. service mark d. patent mark 48. 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. Powered by Cognero
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Chapter 07: Intellectual Property Rights d. no one. 49. Graphix Inc. traffics 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. 50. 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. nationwide. b. limited to Gargantua’s home state. c. limited to Gargantua’s market. d. limited to those who have notice of it. 51. Wendy works as a weather announcer for a TV station under the character name Weather Wendy. Wendy can register her name as: a. a trade dress. b. a trade secret. c. a service mark. d. a trade name. 52. 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. 53. 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. 54. Salty Snacks Inc. markets a fish-shaped cracker. When Tasty Tidbits Inc. began to sell a similar product, Salty filed 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 based on trade dress. b. dismiss the suit because there is no infringement c. order both parties to redesign their respective products. d. order both parties to destroy all remaining fish-shaped crackers. 55. 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. trade names. Powered by Cognero
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Chapter 07: Intellectual Property Rights b. counterfeit goods. c. competing products. d. trademarks. 56. 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. 57. 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 actual lost 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. 58. 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. 59. 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. 60. The period of patent protection begins on the date when the patent application is ________. a. issued b. filed c. expired d. printed 61. 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. Powered by Cognero
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Chapter 07: Intellectual Property Rights 62. A patent holder who has been violated can seek ________, as well as request damages for royalties and lost profits. a. a court judgment b. jail time c. an injunction d. a written apology 63. Works that are copyrightable include all except: a. books. b. music videos. c. product packaging. d. a logo. 64. 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. a unique idea. 65. Stig creates unique graphic works that feature characters of his own imagination. Copyright protection for Stig’s work is: a. not copyrightable. b. automatic and no registration required. c. available only upon registration with the U.S. Copyright Office. d. enforceable only if Stig places a circled “c” on the work. 66. Without the permission of the copyright owner, Faye copies the literary expression of Gone with the Wind, 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. a trade secret. 67. 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 for practice purpose only. This is most likely: a. copyright infringement. b. a “fair use” of the works. c. legal only on a payment of royalties to Bette. d. legal only on a payment of royalties to City Orchestra. 68. Leigh buys To Kill a Mockingbird, 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. make copies and sell them to others. Powered by Cognero
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Chapter 07: Intellectual Property Rights 69. Copyright owners are protected against all but which of the following: a. reproduction of the work. b. public display of the work. c. distribution of the work. d. people sharing copies with friends to read. 70. 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. 71. Businesses generally attempt to protect their ________ by having all employees who use the process (or information) agree in their contracts, or in confidentiality agreements, never to divulge it. a. patents b. copyrights c. trade secrets d. trade dress 72. 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. 73. Information that may be protected as trade secrets includes all except: a. customer lists. b. pricing information. c. marketing techniques. d. employee names. 74. 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. of value to a competitor. 75. 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. no law. d. trade secrets law. Powered by Cognero
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Chapter 07: Intellectual Property Rights 76. 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. her colleagues only. 77. 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. What is United entitled to under TRIPS? 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.
78. 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. 79. Medical Supplies R Us is a nationally known store that sells all types of medical uniforms and supplies. They have been around for 40 years. Their employees have always worn all white scrubs with a stethoscope around their neck at all locations. A new locally owned medical supply store, Sally’s Scrubs and More, opens on Main Street. Sally’s employees are wearing the exact same uniform as Medical Supplies R Us, and the store is selling almost identical products. Explain what things Medical Supplies may challenge against Sally’s. Include any pertinent discussion. 80. 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.
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Chapter 07: Intellectual Property Rights Answer Key 1. True 2. True 3. True 4. False 5. False 6. False 7. False 8. True 9. True 10. True 11. False 12. True 13. False 14. False 15. False 16. True 17. True 18. True 19. False 20. True 21. False 22. False 23. True 24. True 25. False Powered by Cognero
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Chapter 07: Intellectual Property Rights 26. True 27. False 28. False 29. False 30. True 31. False 32. True 33. False 34. False 35. True 36. True 37. False 38. False 39. True 40. True 41. a 42. d 43. c 44. a 45. a 46. b 47. c 48. a 49. c 50. a 51. c Powered by Cognero
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Chapter 07: Intellectual Property Rights 52. c 53. d 54. a 55. b 56. a 57. a 58. a 59. a 60. b 61. b 62. c 63. d 64. b 65. b 66. a 67. b 68. a 69. d 70. b 71. c 72. d 73. d 74. d 75. c 76. c Powered by Cognero
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Chapter 07: Intellectual Property Rights 77. b 78. 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 for that reason 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. 79. A discussion about trade dress could be included. The term trade dress refers to the image and overall appearance of a product. Trade dress is a broad concept that can include all or part of the total image, or overall impression created by a product or its packaging. Trademarks could also be discussed here. A trademark is a distinctive word, symbol, sound, or design that identifies the manufacturer as the source of particular goods and distinguishes its products from those made or sold by others. Under the TDRA, to state a claim for trademark dilution, a plaintiff must prove the following: 1. the plaintiff owns a famous mark that is distinctive; 2. the defendant has begun using a mark in commerce that allegedly is diluting the famous mark; 3. the similarity between the defendant’s mark and the famous mark gives rise to an association between the marks; 4. the association is likely to impair the distinctiveness of the famous mark or harm its reputation. Trademark dilution laws protect “distinctive” or “famous” trademarks (such as Rolls-Royce, McDonald’s, Starbucks, and Apple) from certain unauthorized uses. Such a mark is protected even when the unauthorized use is on noncompeting goods, or is unlikely to confuse. More than half of the states have also enacted trademark dilution laws. Trademark infringement can also be discussed. When a trademark has been infringed, the owner has a cause of action against the infringer. To succeed in a lawsuit for trademark infringement, the owner must show that the defendant’s use of the mark created a likelihood of confusion about the origin of the defendant’s goods or services. The owner need not prove that the infringer acted intentionally or that the trademark was registered (although registration does provide proof of the date of inception of the trademark’s use). 80. 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 the most significant and supports the conclusion that CCS’s use of the materials is not a fair use.
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Chapter 08: Internet Law, Social Media, and Privacy
Indicate whether the statement is true or false. 1. 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 same sender. a. True b. False 2. Under the Federal CAN-SPAM act, it is prohibited to send unsolicited commercial e-mail to randomly generated e-mail addresses. a. True b. False 3. The Safe Web Act gives any party who gives information to the Federal Trade Commission concerning possible deceptive conduct in a foreign jurisdiction, immunity from liability. a. True b. False 4. The Internet Corporation for Assigned Names and Numbers (ICANN) oversees and sells the distribution of domain names. a. True b. False 5. Cybersquatting occurs when the owner of a trademark registers the mark as a domain name, but does not use it or need it for that purpose. a. True b. False 6. Under the Lanham Act, the federal law protecting trademarks, having a domain name that is identical or confusingly similar to the trademark of another is one element of a claim of illegal cybersquatting. a. True b. False 7. Cybersquatting is illegal if a domain name is identical to the trademark of another, as well as if the name is confusingly similar. a. True b. False 8. Under the Cybersquatting laws, if a person is offering to sell a domain name that is the same (or similar) as another’s trademark and intends to profit from the sale, it is legal. a. True b. False 9. Typosquatting is where cybersquatters register names that are misspellings, or popular brand names, to get high internet traffic. a. True b. False Powered by Cognero
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Chapter 08: Internet Law, Social Media, and Privacy 10. The Anticybersquatting Consumer Protection Act (ACPA) applies to all domain name registrations of trademarks, both personal and business. a. True b. False 11. Using another’s trademark as a meta tag may be permissible if it is proven to be reasonably necessary a. True b. False 12. To maintain a claim of trademark dilution, there must be proof that consumers are likely to be confused by a connection between the unauthorized use and the actual mark a. True b. False 13. A license limits the use of software to a license to use, and not any ownership rights in it. a. True b. False 14. File sharing using peer-to-peer (P2P) networking is primarily done through cloud computing. a. True b. False 15. Anyone can circumvent encryption software or other technological antipiracy protection without penalty. a. True b. False 16. Criminal liability for the piracy of copyrighted materials extends to persons who exchange unauthorized copies for profit, as well as those who share without seeking profit. a. True b. False 17. The Digital Millennium Copyright Act protects copyrighted material from piracy in an online environment. a. True b. False 18. BitTorrent is an example of a website that promotes illegal copying of movies without downloading them from their original site. a. True b. False 19. “Fair use” includes exceptions for educational purposes for using copyrighted works. a. True b. False 20. An Internet service provider that shuts down a subscriber who infringes copyrights, can qualify for a “safe harbor” exemption under the Digital Millennium Copyright Act. Powered by Cognero
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Chapter 08: Internet Law, Social Media, and Privacy a. True b. False 21. File-sharing can be used to download others’ stored music files without raising copyright issues. a. True b. False 22. Social media posts are not subject to discovery in litigation. a. True b. False 23. A social media post cannot be used to invalidate a settlement agreement that includes confidentiality clauses. a. True b. False 24. It is legal for law enforcement to set up a phony social media account to obtain information, or help catch a suspect. a. True b. False 25. Federal guidelines allow a company to disclose material information about itself through social media, such as those that may affect stock prices, as long as investors are notified in advance a. True b. False 26. Employees who use social media in a way that violates their employers’ stated policies, may be disciplined, or even fired. 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. State law may protect individuals from having to disclose their social media passwords to potential employers. a. True b. False 29. Employers are completely prohibited from taking actions against employees, or applicants based on their social network postings. a. True b. False 30. An Internet service provider is normally held liable for publishing defamatory statements that come from a third party. a. True b. False Powered by Cognero
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Chapter 08: Internet Law, Social Media, and Privacy 31. Under the Communications Decency Act, Internet service providers may be held liable for publishing defamatory statements if they are proven to be discriminatory and a violation of federal law. a. True b. False 32. Online defamation is a huge problem in today’s legal environment. a. True b. False 33. A person may have a reasonable expectation of privacy when entering their banking information online. a. True b. False 34. In posting statements or photos to social media sites, a person has a reasonable expectation of privacy. a. True b. False 35. The Electronic Communications Privacy Act (ECPA) amended wiretapping laws to cover electronic forms of communication. a. True b. False 36. Any electronic communication having to do with business, made on a device that an employer provides to an employee for use in the “ordinary course of business,” is subject to employer discovery. a. True b. False 37. An online retailer can generally track a user’s web activities with cookies, without violating the person’s right to privacy. a. True b. False 38. It is most often companies, rather than courts or legislatures, that define the privacy rights of online users. a. True b. False
Indicate the answer choice that best completes the statement or answers the question. 39. Under the Controlling the Assault of Non-Solicited Pornography and Marketing (CAN-SPAM) Act, which of these would be allowed? a. Using false statistics about a product on an advertisement. b. Sending a randomly generated email advertisement to someone. c. Using a false return email or actual address on an advertisement. d. Mailing a seasonal coupon out to a previous customer. Powered by Cognero
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Chapter 08: Internet Law, Social Media, and Privacy 40. Volatile Investments Inc. sends e-mail ads to all e-mail address they can find on the Web, or otherwise generate with software. Under the CAN-SPAM Act, Volatile’s marketing method: a. may be permitted. b. is prohibited. c. must be reviewed. d. is preempted. 41. In response to combatting spam, thirty-seven states have: a. enacted laws to prohibit or regulate it. b. enacted laws to permit its use by business entities. c. allowed its use by individuals. d. deferred to federal law alone. 42. Broadband Inc., an Internet service provider, supplies information to the Federal Trade Commission concerning possible unfair or deceptive ads originating in a foreign jurisdiction. Which federal law would apply in this case? a. The CAN-SPAM Act. b. U.S. Safe Web Act. c. The Federal Trade Commission Act. d. The ACPA Act. 43. 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, Resourcing LLC. This is an example of: a. cybersquatting. b. typosquatting. c. trademark infringement. d. trademark dilution. 44. Pia registers a domain name—quallitytires.com—that is confusingly similar to the domain name qualitytires.com used by Quality Tires Inc. Quality Tires Inc. also owns the trademark of quality tires. Pia has a “bad faith intent” to profit from the domain name by selling it to Quality Tires. This would be: a. a legitimate business practice. b. illegal by cybersquatting. c. a bid to obtain a license. d. a trademark dilution. 45. Ross registers a domain name—sweetfriedpotatos.com—that is a misspelling of a popular brand of sweet fried potatoes that has a domain name of sweetfriedpotatoes.com. This is an example of: a. cybersquatting. b. typosquatting. c. trademark infringement. d. trademark dilution. 46. Web Invest Inc. buys and sells domain names with the click of a mouse. The high rate at which domain names change hands, and the difficulty in keeping track of mass automated registrations, have created a situation where: a. cybersquatting can easily flourish. Powered by Cognero
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Chapter 08: Internet Law, Social Media, and Privacy b. typosquatting occurs unintentionally. c. brands and trademarks are protected from cybersquatters. d. the Federal Trade Commission sanctions Web Invest. 47. Grain Mill Company brings a suit against Milled Grain Company under the Anticybersquatting Consumer Protection Act (ACA), alleging that Milled Grain is profiting from a domain name that is confusingly similar to Grain Mill’s trademark. If Grain Mill is successful, their recovery may include: a. actual damages and profits. b. statutory damages no greater than $1,000. c. statutory damages no less than $100,000. d. no damages are allowed. 48. Rue obtains permission from Saga Corporation to use the firm’s game app, Boggle, on their mobile devices. Rue does not obtain any ownership rights in the app. This is an example of: a. a license. b. a cookie. c. cloud computing. d. a violation of the law. 49. Afford Motors LLC, an auto broker, uses the trademark of Ford Motor Company in a meta tag without Ford’s permission. This is an example of: a. cybersquatting. b. typosquatting. c. trademark infringement. d. trademark dilution 50. Without authorization, Java Joe uses the trademark of The Best Coffee Company to help promote his cheap, flavorless coffee candy, which is not at all similar to The Best’s products. Therefore it diminishes the distinctive quality of the coffee company’s mark. This is an example of: a. cybersquatting. b. typosquatting. c. trademark infringement. d. trademark dilution. 51. Flash Inc., a maker of athletic shoes, registers and uses “flash” as its domain name. Later, Got Shoes Company begins to use “flashh” (an intentional misspelling of “flash”) as its domain name. Got Shoes is most likely: a. typosquatting against Flash Inc. b. acting with fair use of Flash’s mark. c. licensing the use of Flash’s mark for itself. d. engaging in lawful competitive conduct. 52. Mix Restaurant Corporation owns the trademark “Mix.” Remix Café Company begins to use the mark without authorization as their domain name. Mix files a suit against Remix on a theory of trademark dilution. This claim requires proof that: a. no proof is necessary. Powered by Cognero
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Chapter 08: Internet Law, Social Media, and Privacy b. consumers are confused by the names. c. the products involved are too similar. d. Mix has registered all variations of the domain “Mix.” 53. CallTalk Corporation, a phone calling service, uses its mark “calltalk” as its domain name. Later, Converse Inc. uses the domain name “caltalk” (a deliberate misspelling of “calltalk”) without CallTalk’s authorization, to sell sexually explicit phone conversations. This is an example of: a. a legitimate marketing technique. b. a fair use. c. a license. d. trademark dilution. 54. 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 is not connected with the original site. b. if the two sites appear in the same search engine results. c. if the use constitutes trademark infringement. d. if it is shown to be reasonably necessary for BeFriend’s business. 55. Burger Corporation allows its trademark to be used as part of a domain name for Burger NY Inc., an unaffiliated company. Burger NY Inc. does not obtain ownership rights in the mark. This is an example of: a. trademark infringement. b. fair use. c. a license. d. trademark dilution. 56. Dana downloads music into her computer’s cloud memory without authorization. This is: a. copyright infringement. b. within Dana’s rights. c. liability for the computer manufacturer. d. trademark infringement.
Indicate one or more answer choices that best complete the statement or answer the question. 57. Basso includes in his song “Chords” a few seconds of Dante’s copyrighted sound recording “Etudes” without permission. Some federal courts have found that such digital sampling could be: (choose all applicable answers) a. a violation of copyright law. b. a “fair use” exception to the act. c. a “research exception” of the act. d. a personal protection exception of the act. 58. To test computer security and conduct encryption research, Solutions Inc., was hired by Tech Corporation to circumvent the encryption software and other antipiracy protection of Tech Corporation’s software. Under the Digital Millennium Copyright Act, this is: (choose all applicable answers) a. a violation of copyright law. Powered by Cognero
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Chapter 08: Internet Law, Social Media, and Privacy b. allowed under the research exception of the act. c. a “fair use” exception to the provisions of the act. d. permitted for reconsideration every three years. 59. Because of the loss of significant amounts of revenue as a result of unauthorized digital downloads, file-sharing has created problems for: (choose all applicable answers) a. the motion picture industry. b. recording artists and their labels. c. the companies that distribute file-sharing software. d. there are no problems as a result of file-sharing.
Indicate the answer choice that best completes the statement or answers the question. 60. Jay transfers downloaded musical recordings, without the copyright owners’ authorization, from his phone to his friends’ phones. Jay does not charge his friends for his “service,” nor did he pay for downloading the music. This is an example of: a. copyright infringement. b. a license. c. goodwill. d. “fair use.” 61. Skye posts excerpts from comics and graphic novels on social networking sites without the permission of the owners of the copyrights. She says her reason is to promote the artists’ work. This is an example of: a. copyright infringement. b. a license. c. goodwill. d. “fair use.” 62. The employees of Eco Engineering Inc. share company-related resources among multiple computers without requiring a central network server. This is an example of: a. digital sampling. b. BitTorrent. c. cloud computing. d. peer-to-peer (P2P) networking.
Indicate one or more answer choices that best complete the statement or answer the question. 63. Employees, clients, and others with authorization, use World Transport Corporation’s network around the globe to share computer files. This is: (choose all applicable answers) a. an invasion of privacy. b. peer-2-peer (P2P) networking. c. digital sampling. d. a distributed network.
Indicate the answer choice that best completes the statement or answers the question. Powered by Cognero
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Chapter 08: Internet Law, Social Media, and Privacy 64. ConnectWeb, Inc., operates a subscription-based service that extends the software and data storage capabilities of its subscribers. This is an example of: a. dilution of networks. b. peer-to-peer (P2P) networking. c. cloud computing. d. a distributed network.
Indicate one or more answer choices that best complete the statement or answer the question. 65. Posting on social media can affect: (choose all applicable answers) a. damages awarded in a lawsuit. b. prior settlement agreements. c. criminal investigations. d. an employee’s hourly wage. e. a person’s internet ranking.
Indicate the answer choice that best completes the statement or answers the question. 66. Odell is an employee of Packing Corporation. She uses social media in a way that violates her employer’s stated social media policies. Packing Corporation disciplines Odell, and then fires her after a second transgression. This is: a. a violation of the Stored Communications Act. b. within the employer’s rights. c. illegal under the CAN-SPAM act. d. a “business-extension exception” under the Act. 67. More than half of the states have enacted some type of legislation that: a. allows the employers to ask employees and prospective employees their social networking passwords. b. prevents employers from asking employees or prospective employees their social media passwords. c. punishes employees for content posted on social media that may be offensive. d. punishes employers who simply look at social media of employees or prospective employees. 68. Sales Corps Inc. provides tablets for its employees to use “in the ordinary course of its business.” Sales Corps Inc. intercepts the employees’ personal communications made on these devices. Under the Electronic Communications Privacy Act, this is a. prohibited for the employer. b. a matter for which an employer must obtain employees’ consent c. a subject for dispute resolution by an Internet service provider. d. permissible by the employer. 69. ABC Corporation wants to create something that will help protect their trade secrets and still allow communication between employees of all of their branches. What would be their best option? a. an extranet. b. an internal social media network. c. a private group on a social network site. d. an ongoing email system. Powered by Cognero
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Chapter 08: Internet Law, Social Media, and Privacy 70. 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 the poster’s identity: a. only when ordered to do so by a court. b. whenever and however the provider chooses. c. if the poster has posted something offensive to the provider. d. in no circumstances could they disclose. 71. 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. Payback Inc. should first: 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 for a subpoena. 72. The law that applies to ISPs and protects them from liability for posting defamatory statements from a third party is: a. the CAN-SPAM Act. b. the Digital Millennium Copyright Act. c. ICANN d. Communications Decency Act. 73. Interactive Entertainment Corporation markets its products online. Through the use of cookies, Interactive Entertainment and other online marketers can: a. track individuals’ Web browsing and shopping activities. b. gain access to competitors’ servers. c. “sweet talk” consumers into buying certain products. d. attack competitors’ Web sites.
74. “Dawn” is a song included in the soundtrack 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. 75. 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, and support 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 apply to this situation? Has this law been violated? Discuss. 76. Jerry’s Jumping Devices, a trampoline manufacturer, has obtained the domain name of jerryjump.com and also owns the trademark Jerry’s Jumping Devices. Jeri Jones, who owns a medicinal natural health food store that promises more energy than you have ever had, has obtained the name jerijump.com, and has been using it to promote all types of vitamins and low-quality supplements. She is also using Jerry’s trademark on some of her advertising, since he is so wellknown. Jerry’s Jumping Devices wants to sue Jeri, and is not sure what possible charges he can sue for? Discuss all Powered by Cognero
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Chapter 08: Internet Law, Social Media, and Privacy possibilities?
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Chapter 08: Internet Law, Social Media, and Privacy Answer Key 1. True 2. True 3. False 4. True 5. False 6. True 7. True 8. False 9. True 10. True 11. True 12. True 13. True 14. True 15. False 16. True 17. True 18. True 19. True 20. True 21. False 22. False 23. False 24. True 25. True Powered by Cognero
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Chapter 08: Internet Law, Social Media, and Privacy 26. True 27. False 28. True 29. False 30. False 31. True 32. True 33. True 34. False 35. True 36. True 37. True 38. True 39. d 40. b 41. a 42. b 43. a 44. b 45. b 46. a 47. a 48. a 49. c 50. d 51. a Powered by Cognero
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Chapter 08: Internet Law, Social Media, and Privacy 52. a 53. d 54. d 55. c 56. a 57. a, b 58. b, c 59. a, b, c 60. a 61. a 62. d 63. b, d 64. c 65. a, b, c 66. b 67. b 68. a 69. b 70. a 71. a 72. d 73. a 74. Yes, the digital sampling described in this question most likely would be held to constitute copyright infringement. To transfer material 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 to a cloud storage site without authorization, a copyright is infringed. Technology has vastly increased the potential for copyright infringement with electronic options available at the touch of a finger. Thus, digitally sampling a copyrighted sound recording of any length constitutes copyright infringement. Powered by Cognero
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Chapter 08: Internet Law, Social Media, and Privacy 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. FasTrac would need to obtain permission from George Harrison’s publicist and pay the appropriate royalty fees. The sampling did in fact involve “copying” the solo digitally into a computer which constitutes copyright infringement. 75. The federal law discussed in this chapter that most likely apply to the situation described in this question is the Stored Communications Act (SCA), which is part of the Electronic Communications Privacy Act (ECPA). The SCA appears to have been violated in this case. 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. Now if the company discovered the posts on laptops that the company issues to the employees for business use and can show a correlation that the posts were business related, they might fall under the business extension exception. 76. Jeri could be liable for typosquatting, which is the process of registering a domain name that is a misspelling of a popular brand name (or company) in order to gain more internet traffic. The ACPA would apply as it regulates all registration of domain names and trademarks. Jeri could also be found guilty of trademark dilution. Trademark dilution occurs when a trademark is used, without authorization, in a way that diminishes the distinctive quality of the mark. Here, Jeri’s products are sub-par, and have nothing to do with trampolines. The fact that she is using his logo on her advertising is a violation of this. Since there does not have to be proof of consumer confusion for this to apply, this would most likely apply to Jeri.
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Chapter 09: Criminal Law and Cyber Crime
Indicate whether the statement is true or false. 1. Crimes are offenses against society as a whole. a. True b. False 2. The crime victim must bring the case against the defendant. a. True b. False 3. 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 4. In a criminal case, typically only three-fourths of the jurors need to agree in order to convict the defendant. a. True b. False 5. In a criminal case, the state must prove its case beyond a reasonable doubt. a. True b. False 6. A civil case has a burden of proof that is a preponderance of the evidence. a. True b. False 7. One of the purposes of criminal law is to compensate the victims. a. True b. False 8. A crime is punishable, in some cases, by death. a. True b. False 9. Some torts can be criminal as well as civil, depending on the laws in place. a. True b. False 10. A felony must be punishable by a minimum of one year in prison. a. True b. False 11. A petty offense can be punishable by jail time. a. True b. False Powered by Cognero
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Chapter 09: Criminal Law and Cyber Crime 12. Most crimes require an act of commission. a. True b. False 13. An act of omission cannot be a crime. a. True b. False 14. A criminal conspiracy exists when two or more people agree to commit an unlawful act, and then take some action toward its completion. a. True b. False 15. A specified state of mind, or intent, is not necessary to establish criminal liability. a. True b. False 16. Criminal negligence must have intent in order for there to be a liability. a. True b. False 17. Under the responsible corporate officer doctrine, a CEO may be held criminally liable for the crimes of other employees. Whether they participated in, directed, or even knew about a given criminal violation a. True b. False 18. Robbery is considered a violent crime. a. True b. False 19. Burglary is the breaking and entering of the dwelling of another at night. a. True b. False 20. A statute that prohibits theft by means of false pretenses usually applies only to goods, not to services or cash. a. True b. False 21. An illegal act committed by a business using nonviolent means to obtain a business advantage is a white-collar crime. a. True b. False 22. Embezzlement includes the making (or altering) of any writing in a way that changes the legal rights and liabilities of another. a. True Powered by Cognero
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Chapter 09: Criminal Law and Cyber Crime b. False 23. Fraudulent appropriation of another’s property with which a person has been entrusted is the crime of receiving stolen goods. a. True b. False 24. The most potent weapons against white-collar criminals include the federal laws prohibiting mail and wire fraud. a. True b. False 25. The crime of bribery is only present if the person is a public official. a. True b. False 26. To constitute the crime of bribery, the bribe must consist of money. a. True b. False 27. Bribing foreign officials to obtain favorable business contracts is no crime. a. True b. False 28. Insider trading is the purchase or sale of securities on the basis of information that has already been made available to the public. a. True b. False 29. Under federal law, banks, and other financial institutions are required to report currency transactions involving more than $20,000. a. True b. False 30. It is not a crime to use income obtained from a racketeering activity to buy an interest in a legitimate enterprise, as long as the deal is otherwise legal. a. True b. False 31. Generally speaking, people can use the amount of force that seems necessary to protect themselves, their dwellings, or other property or to prevent the commission of a crime, even if it is deadly. a. True b. False 32. A mistake of fact can often excuse criminal responsibility. a. True b. False Powered by Cognero
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Chapter 09: Criminal Law and Cyber Crime 33. Entrapment is a defense, and not a crime in and of itself. a. True b. False 34. The U.S. Constitution provides safeguards that apply not only in federal, but also in state courts. a. True b. False 35. Warrants are required for searches of businesses in highly regulated industries a. True b. False 36. The Fourth Amendment protects only against searches that violate a person’s reasonable expectation of privacy. a. True b. False 37. The prohibition against double jeopardy means that once a criminal defendant is acquitted (found “not guilty”) of a particular crime, the government may not retry that defendant for the same crime. a. True b. False 38. The privilege against self-incrimination applies to persons as well as corporations. a. True b. False 39. A criminal defendant has the right to confront accusers, and to present his or her own witnesses. a. True b. False 40. A corporation can refuse to produce business records that might subject the firm to criminal prosecution. a. True b. False 41. 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 42. A person arrested for a crime must ask for a lawyer specifically. Saying “maybe it would be a good idea to get a lawyer” is not enough. a. True b. False 43. A person who accesses a computer online without authority to obtain protected data is subject to criminal prosecution a. True b. False Powered by Cognero
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Chapter 09: Criminal Law and Cyber Crime 44. Malware is a hacker whose purpose is to create a serious negative impact. a. True b. False 45. Phishing is a distinct form of identity theft and cyber fraud. a. True b. False 46. The Computer Access Device and Computer Fraud and Abuse Act prohibits cyber theft. a. True b. False
Indicate the answer choice that best completes the statement or answers the question. 47. Haji is arrested at a warehouse in Industrial Park and is charged with the crime of theft. Haji will be prosecuted by a. the victim of the crime. b. a district attorney or an attorney general. c. a judge. d. the police. 48. 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. 49. 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. 50. 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. 51. 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. Powered by Cognero
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Chapter 09: Criminal Law and Cyber Crime b. civilly liable. c. criminally liable. d. none of the choices. 52. Under _________, a court may impose criminal liability on corporate officers regardless of whether they participated in, directed, or even knew about a given criminal violation. a. aiding and abetting b. conspiracy c. responsible corporate officer doctrine d. implied liability 53. 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. bribery. b. any crime. c. larceny. d. robbery. 54. 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. 55. Ed works for Family Dwellings Inc., an investment firm that buys, renovates, and rents foreclosed houses. Ed 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. 56. 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. 57. Chuck signs Dolly’s name, without her authorization, to the back of her paycheck, which was issued by Eastside Market. This is a. no crime. b. forgery. c. larceny. d. robbery. Powered by Cognero
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Chapter 09: Criminal Law and Cyber Crime 58. 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. 59. _______ is often called a victimless crime, because it only harms the offender. a. larceny b. arson c. robbery d. public order 60. 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. 61. Quay, the owner of RV Park, trusts Sara to manage the resort’s daily cash flow. One night, without Quay’s knowledge or consent, Sara takes and keeps $1,000 from the receipts. This is most likely a. robbery. b. embezzlement. c. larceny. d. burglary. 62. 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. 63. Sid offers Tina, a city inspector, money to overlook health code violations in his restaurant. Tina accepts the money and overlooks the violations. Sid is charged with the crime of bribery. The crime occurred when a. Sid violated the health code. b. Sid offered the bribe. c. Tina accepted the bribe. d. Tina overlooked the violations. 64. Quint, an employee of Reservations Inc. pays Sienna, an employee of Reservations’ competitor Travel Inc., for a list of Travel’s clients. This is most likely a. bribery of a public official. Powered by Cognero
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Chapter 09: Criminal Law and Cyber Crime b. commercial bribery. c. bribery of a foreign official. d. no crime. 65. 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 if the circumstances constitute organized crime. 66. Firms that violate the FCPA can be fined up to $2 million. Individuals can be fined up to _______, and imprisoned for up to five years. a. 25,000 b. 50,000 c. 10,000 d. 100,000 67. The Economic Espionage Act made the theft of trade secrets a federal crime. Individuals face up to _______ in fines. a. 100,000 b. 50,000 c. 500,000 d. 1,000,000 68. Insider trading is a violation of _______. a. securities law b. espionage laws c. federal RICO crimes d. treason crimes 69. __________ engages in financial transactions to conceal the identity, source, or destination of illegally gained funds. a. RICO b. Money laundering c. Espionage d. Racketeering 70. The Racketeer Influenced and Corrupt Organizations Act has become 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. organized crime 71. Under self-defense, a person may use whatever force necessary if they fear ________. a. imminent danger b. any threat Powered by Cognero
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Chapter 09: Criminal Law and Cyber Crime c. any injury d. offense 72. 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 her crime. 73. ______ can excuse one from criminal liability under the theory of mistake. a. Mistake of fact b. Mistake of law c. Mistake of identity d. Mistake of description 74. For ________ to succeed as a defense, both the suggestion and the inducement must take place. a. larceny b. entrapment c. duress d. mistake 75. Leo is accused of a crime. To obtain information about the crime from Leo, the state can a. bribe Leo in a way that serves the public interest. b. force Leo to provide information that can be used to prosecute him. c. grant Leo immunity from prosecution. d. summon him to testify. 76. ______ does not prevent an injured party from bringing civil charges against a defendant once they are found innocent in a criminal case. a. Mistake of law b. Mistake of fact c. Privilege against self-incrimination d. Double jeopardy 77. 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. 78. ______ states that all evidence derived from illegal means, normally must be excluded from the trial proceedings. a. Fruit of the poisonous tree Powered by Cognero
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Chapter 09: Criminal Law and Cyber Crime b. Exclusionary rule c. Self-incrimination d. The Miranda rule 79. Erica, 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. 80. 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. 81. 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.
82. Cameron is an accountant in the accounting department of Data Analytics Company. Cameron’s son’s college tuition is due within a week. To meet the due date, Cameron 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 re¬paid, and Cameron is arrested. What crime, or crimes, if any, has Cameron committed? Explain. 83. Discuss three of the property crimes in detail and how they differ. (burglary, larceny, obtaining goods by false pretenses, receiving stolen goods, arson, and forgery)
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Chapter 09: Criminal Law and Cyber Crime Answer Key 1. True 2. False 3. False 4. False 5. True 6. True 7. False 8. True 9. True 10. True 11. True 12. True 13. False 14. True 15. False 16. False 17. True 18. True 19. False 20. False 21. True 22. False 23. False 24. True 25. False Powered by Cognero
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Chapter 09: Criminal Law and Cyber Crime 26. False 27. False 28. False 29. False 30. False 31. False 32. True 33. False 34. True 35. False 36. True 37. True 38. False 39. False 40. False 41. True 42. True 43. True 44. False 45. True 46. True 47. b 48. b 49. c 50. a 51. c Powered by Cognero
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Chapter 09: Criminal Law and Cyber Crime 52. c 53. d 54. a 55. c 56. c 57. b 58. c 59. d 60. b 61. b 62. d 63. b 64. b 65. b 66. c 67. c 68. a 69. b 70. d 71. a 72. c 73. a 74. b 75. c 76. d Powered by Cognero
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Chapter 09: Criminal Law and Cyber Crime 77. c 78. a 79. b 80. a 81. a 82. Cameron committed embezzlement. The crime of embezzlement is committed when a person entrusted with another’s funds or property fraudulently appropriates it. That Cameron 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 Cameron engineered the theft, he may have committed other crimes—forgery, larceny, or a cyber crime, for example. 83. Traditionally, burglary was defined under common law as breaking and entering the dwelling of another at night with the intent to commit a felony. Originally, the definition was aimed at protecting an individual’s home and its occupants. Most state statutes have eliminated some of the requirements found in the common law definition. The time of day at which the breaking and entering occurs, for example, is usually immaterial. Under common law, the crime of larceny involves the unlawful taking and carrying away of someone else’s personal property with the intent to permanently deprive the owner of possession. Put simply, larceny is stealing, or theft. Obtaining goods by means of false pretenses is a form of theft that involves trickery or fraud, such as using someone else’s credit card number without permission. It is a crime to receive goods that a person knows (or should have known) were stolen or illegally obtained. To be convicted, the recipient of such goods needs not know the true identity of the owner or the thief, and he need not have paid for the goods. The willful and malicious burning of a building (and, in some states, vehicles and other items of personal property) is the crime of arson. At common law, arson traditionally applied only to burning down another person’s house. The law was designed to protect human life. Today, arson statutes have been extended to cover the destruction of any building, regardless of ownership, by fire or explosion. The fraudulent making or altering of any writing (including electronic records) in a way that changes the legal rights, and liabilities of another is forgery.
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Chapter 10: Nature and Classification
Indicate whether the statement is true or false. 1. A declaration that binds the person who makes it, to do or not do, a certain act is called a promise. a. True b. False 2. A promisee has the right to expect or demand that something will or will not happen in the future. a. True b. False 3. 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 4. Contract law does not distinguish between moral and legal obligations. a. True b. False 5. Contracts relating to real estate and insurance are governed by common law. a. True b. False 6. The Uniform commercial code (UCC) governs the sale of goods a. True b. False 7. By supplying procedures for enforcing private agreements, contract law provides an essential condition for the existence of a market economy. a. True b. False 8. The objective theory of contracts focuses on the parties’ intentions. a. True b. False 9. What a party said when entering into a contract is a subjective fact. a. True b. False 10. 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 11. For a valid contract to exist, only one party needs to provide consideration. a. True Powered by Cognero
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Chapter 10: Nature and Classification b. False 12. The term consideration means that one party must consider the feelings of the other party. a. True b. False 13. An agreement to form a contract cannot modify the terms of a previous contract. a. True b. False 14. All contracts must be in writing to be enforceable. a. True b. False 15. An offer that can be accepted simply by a promise to perform, does not create a binding contract. a. True b. False 16. A payment of funds or a delivery of goods must take place for a bilateral contract to be formed. a. True b. False 17. Contests and lotteries are unilateral contracts. a. True b. False 18. Modern view states that the offeror may revoke an offer up until full performance. a. True b. False 19. A promissory note is a type of formal contract. a. True b. False 20. A check is an informal contract. a. True b. False 21. Susan babysits for Mrs. Jones. After she is finished, she is expecting to get paid her normal hourly rate even though there was no formal agreement or writing. This is an implied contract, and can be enforced. a. True b. False 22. An executed contract is one that has been fully performed by both parties to it. a. True b. False Powered by Cognero
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Chapter 10: Nature and Classification 23. If one party to a contract has fully performed but the other has not, the contract is executory. a. True b. False 24. A contract that only one of the parties can enforce in a court is not valid. a. True b. False 25. A signed agreement for Wi-Fi service is an express written contract. a. True b. False 26. A contract is an implied contract if the conduct of the parties creates and defines some of the terms. a. True b. False 27. If a voidable contract is ratified, both parties must fully perform it. a. True b. False 28. If a minor enters into a contract, either party may then avoid the contract. a. True b. False 29. A contract involving a person who signed it while intoxicated is void. a. True b. False 30. A contract for the purchase of a television which is stolen is valid. a. True b. False 31. Quasi contract are not actual contracts. a. True b. False 32. Quasi contracts are imposed on parties in the interest of fairness and justice. a. True b. False 33. A party who confers a benefit on someone else unnecessarily, or as a result of misconduct or negligence, can obtain its fair value by invoking the doctrine of quasi contract. a. True b. False Powered by Cognero
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Chapter 10: Nature and Classification 34. The doctrine of quasi contract cannot be imposed if there is already a valid written contract addressing the issue. a. True b. False 35. If what is written in a contract is clear, a court will enforce the contract according to its obvious terms. a. True b. False 36. A contract is considered to be unequivocal even when a term is susceptible to more than one interpretation. a. True b. False 37. Insofar as possible, a reasonable, lawful, and effective meaning will be given to all of the terms of a contract. a. True b. False
Indicate the answer choice that best completes the statement or answers the question. 38. Yuri agrees to zap.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. 39. 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. a promise to take a person on a date 40. Cass, a certified public accountant, agrees to perform an audit for Drone Distribution 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. 41. 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.
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Chapter 10: Nature and Classification 42. 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. 43. 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. cease business. b. make another promise. c. pay damages. d. perform a different service. 44. Bob claims that Carla breached their contract for tutoring. Carla responds that she never intended to enter into a contract with Bob. The 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. 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. character. c. subjective beliefs. d. motives. 46. 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. 47. Steel Mill Inc. makes an offer to Tom 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. Tom 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. 48. Field Construction Inc. contracts with Mesa Ranch to build a new horse 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 Powered by Cognero
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Chapter 10: Nature and Classification a. capability. b. legality. c. necessity. d. marketability. 49. Omar asserts that a deal he entered into with Pat to sponsor and host a motivational conference for independent sales representatives was formed as the result of a mistake. Omar’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. 50. 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. 51. On Monday, Neil tells Outdoor Landscaping, Inc., that he will pay Outdoor $500, if a variety of tasks are completed by Friday. On Wednesday, when Outdoor is more than half done with the work, Neil says that he has changed his mind. These parties had a. an expired contract when Neil said that he had changed his mind. b. a quasi contract when Neil said that he would pay for certain work. c. a unilateral contract as soon as Outdoor began to perform. d. no contract. 52. Jerry agrees to pay Joan $100 a week for babysitting her daughter. What time of agreement is this? a. a bilateral contract. b. a unilateral contract. c. a void contract. d. an unenforceable contract. 53. 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. 54. Red offers to pay Sara to deliver certain documents within thirty minutes. Sara can accept the offer only by completing the task within the deadline. If she does, Red and Sara will have a. a bilateral contract. b. a unilateral contract. c. a void contract. Powered by Cognero
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Chapter 10: Nature and Classification d. an executive contract. 55. 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. 56. The Uniform Commercial Code (UCC) governs all negotiable instruments,thereforenegotiable instrumentsare considered ________. a. unilateral b. bilateral c. informal d. formal 57. 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. The payment term is a. express. b. implied. c. quasi. d. non-existent. 58. 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. a unilateral contract. b. an express contract. c. an implied contract. d. a simple contract. 59. On behalf of the jazz group Fusion, their manager Greg agrees to a performance in Hillside Amphitheatre on July 4. Greg and Hillside sign a written copy of the agreement. These parties have a. an express contract. b. an implied contract. c. a quasi contract. d. have no contract. 60. 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. In terms of Vicky’s obligation to pay the bill, this is a. an express contract. b. an implied contract. c. a quasi contract. d. no contract. 61. When a rainstorm erupts outside Rita’s Clothing Shop, Rita and Shaw enter into an implied contract to split the Powered by Cognero
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Chapter 10: Nature and Classification revenue from Shaw’s sale of umbrellas to Rita’s customers. The terms of this contract are defined by a. the conduct of the parties. b. the words of the parties. c. the unforeseeable storm that gave rise to the deal. d. the unexpressed subjective intent of the parties. 62. 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. 63. 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. 64. Oceans Inc., a seafood distributor, agrees to buy from Paul, (a commercial fisherman) any “overstock” of fish that Paul catches in excess of his legal limit. This agreement is most likely a. enforceable. b. quasi. c. void. d. voidable. 65. Sales Corporation and Real Estate Inc. agree to the payment of a commission for the sale of certain property. If this deal has all of the elements necessary for one of the parties to enforce it in court, it is most likely a. a valid contract. b. a voidable contract. c. a void contract. d. none of the choices. 66. Rough Water LLC and Schafer enter into a contract for the delivery of a used fishing boat. Until the boat is delivered and paid for, these parties have a. an executory contract. b. no contract. c. a quasi contract. d. an executed contract. 67. Cheri drives into Domestic Auto Service and asks to have a tire replaced on her car. After Domestic replaces the tire and Cheri pays for it, the contract between them is a. executed. b. executory. Powered by Cognero
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Chapter 10: Nature and Classification c. void. d. unenforceable. 68. Saul claims that his contract with Teri for piano lessons is voidable because he is 17. If Saul avoids the contract, then a. both parties are released from it. b. both parties must fully perform their obligations under it. c. the parties’ contractual obligations are postponed. d. the parties are proscribed from another contract on the same subject. 69. Bob enters into an agreement with Jane to buy some oxycodone for his back pain. This contract would be a. voidable. b. void. c. executory. d. unilateral. 70. Jerry orders some new gourmet food from FreshHipFood Inc. online. The food is delivered to Janice by mistake. Janice keeps the food and does not pay for it. FreshHipFoodInc. can enforce Janice to pay under the theory of a. quasi-contract theory. b. voidable contract. c. executed contract. d. unilateral contract. 71. 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. 72. Susan enters into a contract with Trey to act as his personal sports trainer. If a dispute later arises, 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.
73. On May 1, Ramona and Santo orally agree that Santo will guide a party from the base of Mount McKinley to its summit, and from the summit to a return to the base. Under the agreement, Ramona will pay for the service after the completion of the climb on June 1. On May 1, is this contract express or implied? On May 31, after the climb has been made but before payment is paid, is the contract executed or executory? 74. Ed, a businessperson, is a friend of Fran, the owner of Good Morning, a coffee pastries kiosk. Every day, Ed spends five minutes at the kiosk, looking at the goods and usually buying one or two cinnamon buns or bagels. One afternoon, Ed looks at the items, and picks up a $1 chocolate brownie. He waves the brownie at Fran without saying a word and walks Powered by Cognero
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Chapter 10: Nature and Classification on. Is there a contract? If so, how would it be classified in terms of formation, performance, and enforceability? 75. James enters into an agreement with ABC Corporation to make available 500 of his new inventions for them to sellintheir retail stores. James buys all of the supplies necessary, and he begins making the inventions. What facts are necessary to determine if there is a legal contract between the two parties? Discuss the elements, and also whether or not there are remedies available to the parties if one of them does not pay at this point.
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Chapter 10: Nature and Classification Answer Key 1. True 2. True 3. False 4. False 5. True 6. True 7. True 8. False 9. False 10. False 11. False 12. False 13. False 14. False 15. False 16. False 17. True 18. False 19. True 20. False 21. True 22. True 23. True 24. False 25. True Powered by Cognero
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Chapter 10: Nature and Classification 26. True 27. False 28. False 29. False 30. False 31. True 32. True 33. False 34. True 35. True 36. False 37. True 38. d 39. b 40. a 41. c 42. c 43. c 44. b 45. a 46. a 47. c 48. b 49. d 50. c 51. c Powered by Cognero
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Chapter 10: Nature and Classification 52. a 53. b 54. b 55. a 56. d 57. b 58. b 59. a 60. b 61. a 62. b 63. b 64. c 65. a 66. a 67. a 68. a 69. b 70. a 71. a 72. a 73. 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 Ramona and Santo is an oral contract, in which the terms are fully expressed. That means their contract is an express contract. The contract between Ramona and Santo 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 (Santo) has fully performed but the other (Ramona) has not—because she has not yet made the payment promised on a certain date—the contract, executed on one side and executory on the other, is classified as executory. Powered by Cognero
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Chapter 10: Nature and Classification 74. 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 brownie for $1), both parties have 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 Ed’s action of waving the item and by his past conduct. By his conduct Ed is telling Fran that he will pay for the item later. The contract is also bilateral (as opposed to unilateral) because Fran impliedly promises to sell the item to Ed in exchange for Ed’s implied promise to pay. The contract is partially executory, as Ed 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. 75. The following list briefly describes the four requirements that must be met for a valid contract to exist. If any of these elements is lacking, no contract will have been formed. (Each item will be explained more fully in subsequent chapters.) 1. Agreement. An agreement to form a contract includes an offer and an acceptance. One party must offer to enter into a legal agreement, and another party must accept the terms of the offer. 2. Consideration. Any promises made by the parties must be supported by legallysufficient and bargained-for consideration (something of value received or promised to convince a person to make a deal). 3. Contractual capacity. Both parties entering into the contract must have thecontractual capacity to do so. The law must recognize them as possessingcharacteristics that qualify them as competent parties. 4. Legality. The contract’s purpose must be to accomplish some goal that is legal and not against public policy. Express contracts and implied contracts are actual or true contracts formed by the words oractions of the parties. A quasi contract, or contract implied in law, is not an actual contractbecause it does not arise from any agreement, express or implied, between the parties themselves.Rather, it is a fictional contract that courts can impose on the parties “as if” the partieshad entered into an actual contract. Although quasi contracts exist to prevent unjust enrichment, in some situations, the partywho obtains a benefit is not liable for its fair value. Basically, a party who has conferred abenefit on someone else unnecessarily, or as a result of misconduct or negligence cannotinvoke the doctrine of quasi contracts. The enrichment in thesesituations will not be considered“unjust.”
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Chapter 11: Agreement
Indicate whether the statement is true or false. 1. An agreement exists when one party offers a certain bargain to another party. a. True b. False 2. One element necessary for an effective offer is the offeror’s good faith, and a belief in its reasonableness. a. True b. False 3. Two disinterested parties are required for an offer to be effective. a. True b. False 4. An offer must contain definite terms to be valid. a. True b. False 5. The offeror’s intention to become bound by the offer must be subjectively clear. a. True b. False 6. An offer made in undue excitement is an effective offer. a. True b. False 7. An expression of opinion can indicate an intent to enter into a binding agreement. a. True b. False 8. A request to negotiate is an offer. a. True b. False 9. An invitation to submit bids is an offer. a. True b. False 10. John sees a new watch on eBay. The listing and auction is an offer to form a contract. a. True b. False 11. An agreement to agree to the material terms of a contract at some future date may be enforceable. a. True b. False Powered by Cognero
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Chapter 11: Agreement 12. In rare circumstances, an advertisement may be construed as an offer. a. True b. False 13. Putting up an item for sale on an online auction site is an offer. a. True b. False 14. To satisfy the requirement of definiteness, a contract must clearly identify the parties involved. a. True b. False 15. An offer must express reasonably the definite terms to be effective—no term may ever be reasonably inferred. a. True b. False 16. Ordinarily, one can agree to a bargain without knowing that it exists. a. True b. False 17. The power of acceptance continues forever. a. True b. False 18. An 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 19. The offeror can revoke the offer only by expressly repudiating it. a. True b. False 20. The offeror’s act of withdrawing an offer is referred to as repudiation a. True b. False 21. Revocation can occur at any time as long as it is before the completion of the contract. a. True b. False 22. Rejection of an offer is effective only when it is actually received. a. True b. False 23. An option contract may exist without any extra consideration. Powered by Cognero
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Chapter 11: Agreement a. True b. False 24. Merely inquiring about an offer constitutes rejection. a. True b. False 25. The mirror image rule requires the acceptance of an offer to be substantially similar to the original offer. a. True b. False 26. In effect, a counteroffer converts the original offeror into an offeree with the power of acceptance. a. True b. False 27. An offer terminates automatically when the period of time specified in the offer has passed. a. True b. False 28. Bob contracts with Susan to buy her smartphone. They sign a contract which contains all material terms. Before Susan gives the phone to Bob, it is run over and destroyed. Can Bob sue for enforcement of the contract? a. True b. False 29. An offer can be accepted by the offeree or any third party. a. True b. False 30. The offeree must accept the offer without adding or changing any terms. a. True b. False 31. Acceptance must consist of words. Conduct is irrelevant. a. True b. False 32. Silence can also operate as an acceptance, when the offeree has had prior dealings with the offeror. a. True b. False 33. Acceptance is timely if it is effective before the offer is terminated. a. True b. False 34. 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.” Powered by Cognero
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Chapter 11: Agreement a. True b. False 35. The mailbox rule states that an acceptance is effective once the communication is put into the mail. a. True b. False 36. Acceptance of an offer by a method not authorized by the offeror renders the offer invalid. a. True b. False 37. Acceptance of an e-contract must show that the offeree voluntarily assented to the offer’s terms. a. True b. False 38. An e-offer might include an arbitration clause specifying that any dispute arising under the contract will be arbitrated in a designated forum. a. True b. False 39. Choice of law provisions in e-contracts have been found to be invalid. a. True b. False 40. Courts normally have not enforced the terms of click-on agreements. a. True b. False 41. A click-on agreement can indicate the acceptance of an online offer. a. True b. False 42. 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 43. For an e-signature to be enforceable, the contracting parties must have agreed to use electronic signatures. a. True b. False 44. The E-sign Act applies to all types of legal documents. a. True b. False 45. The primary purpose of the Uniform Electronic Transactions Act is to give a legal effect to electronic signatures and Powered by Cognero
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Chapter 11: Agreement records. a. True b. False 46. Before the UETA applies, each party to a transaction must agree to conduct it by electronic means. a. True b. False
Indicate the answer choice that best completes the statement or answers the question. 47. The first requirement for an effective offer is serious, ____________________ intent on the part of the offeror. a. intentional b. subjective c. objective d. conclusive 48. 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. 49. Kent tries to start his car with no success. He yells that he will sell the car to anyone for $10. Livy, a passerby, hears Kent’s yelling offer. This is not an effective offer because it lacks a. communication. b. definite terms. c. serious intent. d. practicality. 50. An ad for the New Plays Festival asks playwrights to submit their work and “we might produce it for the world.” Odell submits a play with a note that states, “I accept.” Between the Festival and Odell, 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. not a valid contract. 51. 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. 52. Ian goes to Jona for a portrait. Jona says that the work will be “perfect.” When the portrait is finished, however, Ian thinks that it is “awful.” With respect to breach of contract, Jona is Powered by Cognero
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Chapter 11: Agreement a. liable for damages. b. not liable, because a portrait is not a serious subject for a contract. c. not liable, because “perfect” is an opinion. d. not liable, because Ian went to Jona, not vice versa. 53. Vin admires Will’s collection of coins. Vin asks, “Will you sell it?” This statement is a. an offer. b. an invitation to negotiate, not an offer. c. an expression of intent, not an offer. d. a request, not an offer. 54. Lon says to Misty, “I would like to sell you my vinyl records.” This statement is a. an offer. b. an invitation to negotiate, not an offer. c. a circular, not an offer. d. a request, not an offer. 55. Pastries Inc. sends Rollo its catalogue showcasing a variety of baked goods for certain prices. This catalogue is: a. an offer. b. an invitation to negotiate, not an offer. c. an advertisement, not an offer. d. a request, not an offer. 56. Owen decides to sell his ranch, Pine Ridge, 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 circular, not an offer. d. a price list, not an offer. 57. Rich, an auctioneer, puts a sailboat up for auction. Rich is a. the offeror. b. the offeree. c. the bidder. d. none of the choices. 58. Luke puts his motorcycle up for sale via a post 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. 59. 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. Powered by Cognero
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Chapter 11: Agreement b. an invitation to submit offers, not an offer itself. c. a catalogue, not an offer. d. a circular, not an offer. 60. 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. 61. Rona asks Steve, “Do you want to hire me to repair your fishing net?” This is a. an offer. b. not an offer because the terms are not definite. c. not an offer because Rona did not express an intent. d. not an offer because Steve did not respond. 62. 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. 63. The offeror’s act of withdrawing an offer is referred to as: a. repudiation b. revocation c. counteroffer d. invitation to offer 64. On May 1 Ralph offers to cure and smoke Sam’s pork, and promises to keep the offer open until June 1. On May 3 Ralph mails Sam a letter revoking the offer. Sam receives and reads the letter on May 5 and responds to Ralph on May 6. Ralph’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. 65. Simone offers Tom a dozen piano 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. Powered by Cognero
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Chapter 11: Agreement 66. 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. 67. 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. 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. 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. 70. 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. 71. Kelly offers to sell a certain used forklift to Lumber Outlet, but Kelly dies before Lumber 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. 72. 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. Powered by Cognero
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Chapter 11: Agreement c. only after he hauls away the debris. d. when he hears the offer. 73. 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 by Shep. b. sent from Reliable’s email. c. followed up by a confirmation letter sent by regular mail. d. composed on a Reliable computer. 74. 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. 75. 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. 76. An _____________, must meet the same basic requirements (agreement, consideration, contractual capacity, and legality) as a paper contract. a. implied contract b. unilateral contract c. e-contract d. mailed contract 77. Online contracts may be formed not only for the sale of goods and services, but also for: a. intellectual property. b. licensing. c. future contracts. d. negotiations. 78. Barry purchases some goods online from Acme Corp. He had clicked the accept terms box on the website when purchasing, which included a dispute resolution agreement that all disputes would be sent to arbitration. He is unhappy with the product and injured by it. He brings a lawsuit in court against Acme Corp, and Acme files to dismiss based on the arbitration agreement. Barry will: a. be able to sue Acme in court. b. have to pursue arbitration for his dispute. c. seek damages without going to court. d. is not able to seek any damages from Acme. Powered by Cognero
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Chapter 11: Agreement 79. Obie, a user of phone-apps.com’s website, can download apps for free, if he first clicks on “I accept.” As long as he views or reads certain terms and accepts them. 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. 80. 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. 81. According to a ________, the party who opens the box automatically accepts the terms by keeping the goods. a. click-on agreement b. shrink-wrap agreement c. browse-wrap agreement d. partnering agreement 82. 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. 83. 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. 84. 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. 85. Under the UETA, if an electronic record or signature is the act of a particular person, the record, or signature may be ________that person. a. forced upon b. attributed to Powered by Cognero
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Chapter 11: Agreement c. legally obligated to d. any symbol of 86. Once the electronic record ________ or comes under the control of the recipient, the UETA deems it to have been sent. a. leaves control of the sender b. is mailed via U.S. mail c. is told over the phone d. is told in person 87. 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.
88. On December 1, Petroleum, Inc., sent Rachel & Rico (R&R) a letter, via overnight delivery, offering to employ R&R for reviewing Petroleum’s tax situation for the current year, it will be paid the sum of $10,000. In the letter, the company stated that R&R had ten days to accept. On December 5, R&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, an R&R competitor, offered to conduct the appraisal for $8,000. On learning of this offer, R&R immediately e-mailed Petroleum, agreeing to do the work for $10,000. Petroleum received this message on December 7. Explain why R&R and Petroleum do, or do not, have a contract. 89. Johnson Grocery Store is a local store that sells food and other supplies to residents. They are wanting to branch out and offer online shopping as well. What are some things that Johnson must include on their website in order for the contracts to be valid just as they are in-person? Discuss all necessary requirements, and other things that should be included that are not needed for in-person transactions. 90. Business Software Corporation (BSC) sells business apps—wage, price, and inventory coordinating programs, for example—in different combinations and packages, at different prices, all 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.
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Chapter 11: Agreement Answer Key 1. False 2. False 3. False 4. True 5. False 6. False 7. False 8. False 9. False 10. False 11. True 12. True 13. False 14. True 15. False 16. False 17. False 18. True 19. False 20. False 21. False 22. True 23. False 24. False 25. False Powered by Cognero
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Chapter 11: Agreement 26. True 27. True 28. False 29. False 30. True 31. False 32. True 33. True 34. False 35. True 36. False 37. True 38. True 39. False 40. False 41. True 42. False 43. True 44. False 45. True 46. True 47. c 48. d 49. c 50. d 51. a Powered by Cognero
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Chapter 11: Agreement 52. c 53. d 54. b 55. c 56. b 57. b 58. b 59. b 60. b 61. b 62. a 63. b 64. b 65. a 66. a 67. a 68. c 69. b 70. b 71. d 72. c 73. b 74. c 75. b 76. c Powered by Cognero
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Chapter 11: Agreement 77. b 78. b 79. b 80. b 81. b 82. a 83. a 84. a 85. b 86. a 87. a 88. R&R and Petroleum have a contract. R&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 e-mail did not indicate an intent to reject the offer, and a reasonable person in Petroleum’s position would not conclude that the e-mail was a rejection. R&R’s e-mail was simply an inquiry about the offer. R&R was still considering the offer. Learning of Smith & Taylor’s offer did not act as a revocation of Petroleum’s offer to R&R (although the offer would have been revoked if Petroleum had accepted Smith & Taylors’s offer, and R&R had learned of this acceptance). In accepting Petroleum’s offer, R&R used a medium that was reasonable under the circumstances, because Petroleum did not expressly specify any particular method of acceptance. Thus, R&R’s acceptance was timely sent and received. Consequently, the acceptance was effective on dispatch. 89. Numerous contracts are formed online. An electronic contract, or e-contract, must meet the same basic requirements (agreement, consideration, contractual capacity, and legality) as a paper contract. Disputes concerning e-contracts, however, tend to center on contract terms and whether the parties voluntarily agreed to those terms. Sellers doing business via the Internet can protect themselves against contract disputes and legal liability by creating offers that clearly spell out the terms that will govern their transactions, if the offers are accepted. All-important terms should be conspicuous and easy to view. The seller’s website should include a hypertext link to a page containing the full contract, so that potential buyers are made aware of the terms to which they are assenting. The contract generally must be displayed online in a readable format such as in a twelve-point typeface. All provisions should be reasonably clear. Provisions to include could be that the offeror (seller) controls the offer and thus the resulting contract. The seller should therefore anticipate any desired contractual terms and provide for them in the offer. In some instances, a standardized Powered by Cognero
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Chapter 11: Agreement contract form may suffice. At a minimum, an online offer should include the following provisions: 1. Acceptance of terms. A clause that clearly indicates what constitutes the buyer’s agreement to the terms of the offer, such as a box containing the words “I accept” that the buyer can click on to indicate acceptance. 2. Payment. A provision specifying how payment for the goods (including any applicable taxes) must be made. 3. Return policy. A statement of the seller’s refund and return policies. 4. Disclaimer. Disclaimers of liability for certain uses of the goods. For instance, an online seller of business forms may add a disclaimer that the seller does not accept responsibility for the buyer’s reliance on the forms rather than on an attorney’s advice. 5. Limitation on remedies. A provision specifying the remedies available to the buyer if the goods are found to be defective, or if the contract is otherwise breached. Any limitation of remedies should be clearly spelled out. 6. Privacy policy. A statement indicating how the seller will use the information gathered about the buyer. 7. Dispute resolution. Provisions relating to dispute settlement, such as an arbitration clause. Dispute-Settlement Provisions Online frequently include provisions relating to dispute settlement. For instance, the offer might include an arbitration clause specifying that any dispute arising under the contract will be arbitrated in a designated forum. 90. The courts have concluded that the act of clicking on a box labeled “I accept” or “I agree” can indicate acceptance of an online offer. The agreement resulting from such an acceptance is often called a click-on agreement (sometimes, a click-on license or click-wrap agreement). Generally, the law does not require that the parties have read all of the terms in a contract for it to be effective. Therefore, clicking on a box that states “I agree” to certain terms can be enough to bind a party to these terms. The terms may be contained on a website through which the buyer is obtaining goods or services, or they may appear on the screen of a computer, smartphone, or other device when software is downloaded from the Internet. This is a click-on agreement, which occurs when a buyer, is about to complete a transaction on a computer, and it indicates his or her assent to be bound by the terms of the 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 in general). 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 was referred to in the terms, meaning that the buyer knew, or should have known, what he was agreeing to.
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Chapter 12: Consideration, Capacity, and Legality
Indicate whether the statement is true or false. 1. Contracts entered into by persons lacking the capacity to do so are void. a. True b. False 2. Contracts involving the performance of an illegal act are voidable. a. True b. False 3. Consideration is the value given in return for a promise (or performance) in a contractual agreement. a. True b. False 4. Painting a garage can constitute “something of legally sufficient value.” a. True b. False 5. The elements of consideration, in a bilateral contract for a sale of goods are a promise for a promise. a. True b. False 6. With respect to consideration, a bargained-for exchange distinguishes a contract from a gift. a. True b. False 7. 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 8. A large difference in the value of the consideration involved in a contract could indicate fraud. a. True b. False 9. If a party has a legal duty to perform a certain duty, that duty can serve as consideration. a. True b. False 10. The modification of a contract may be fair and equitable in view of circumstances not anticipated by the parties when the contract was made. a. True b. False 11. Rescission is the unmaking of a contract so as to return the parties to the positions they occupied before the contract was made. Powered by Cognero
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Chapter 12: Consideration, Capacity, and Legality a. True b. False 12. A promise made in return for an act or event that has already taken place is unenforceable. a. True b. False 13. If a person expresses contract terms with such uncertainty that the terms are not definite, the promise is illusory and unenforceable. a. True b. False 14. For an accord and satisfaction to occur, the amount of a debt must be in dispute. a. True b. False 15. An accord and satisfaction cannot take place for a liquidated debt. a. True b. False 16. A release precludes the parties from pursuing a legal claim against each other. a. True b. False 17. For the doctrine of promissory estoppel to be applied, there must be a clear and definite promise. a. True b. False 18. When the doctrine of promissory estoppel is applied, the promisor is estopped, or barred, from asserting lack of consideration as a defense. a. True b. False 19. A party may have the capacity to enter into a valid contract, and the right to avoid liability under it. a. True b. False 20. A minor can enter into any contract an adult can, without exception. a. True b. False 21. An adult who enters into a contract with a minor can disaffirm their duty to fulfill the contract on their own. a. True a. True b. False Powered by Cognero
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Chapter 12: Consideration, Capacity, and Legality 22. A minor can ratify a contract and thus make it enforceable. a. True b. False 23. If a person was sufficiently intoxicated to lack mental capacity, his or her contracts are void. a. True b. False 24. A contract entered into by a mentally ill person is void even if entered into during a period of being lucid. a. True b. False 25. A contract that calls for an action contrary to public policy is illegal and unenforceable. a. True b. False 26. 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 27. All contracts entered into with unlicensed parties are enforceable. a. True b. False 28. The lack of a license in certain occupations bars the enforcement of work-related contracts. a. True b. False 29. A court usually will enforce a covenant not to compete provided its restrictions are reasonable. a. True b. False 30. When a covenant not to compete is unreasonable in its essential terms, a court will refuse to reform the covenant. a. True b. False 31. An unconscionable contract is one in which the terms of the agreement are oppressive, unscrupulous, or grossly unfair. a. True b. False 32. A contract may be found to be unconscionable if the party to sign was not allowed a chance to review it and ask questions. a. True b. False Powered by Cognero
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Chapter 12: Consideration, Capacity, and Legality 33. 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 34. A landlord can avoid liability for injuries that occur on the rental property by including an exculpatory clause in the lease. a. True b. False 35. Generally neither party to an illegal contract can sue for breach. a. True b. False 36. Generally, any party to an illegal contract can recover for performance rendered. a. True b. False 37. If an illegal contract is executory, either party can enforce it. a. True b. False 38. 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
Indicate the answer choice that best completes the statement or answers the question. 39. 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. 40. 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. 41. Allen promises to pay Barb, his niece, $5,000 if she obtains her degree at City University, where she is in her third year. Barb graduates. Allen must pay Barb because a. Barb was already at City. Powered by Cognero
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Chapter 12: Consideration, Capacity, and Legality b. obtaining a degree benefits Barb. c. a job can be hard to find after college. d. Barb obtained a degree at City. 42. Sports Bar and Tasty Bakery are adjacent businesses with adjoining parking lots. Sports Bar offers Tasty a discount on purchases if the bakery will not tow the cars of Sports Bar’s patrons who park in the bakery’s lot. The discount is legally sufficient consideration a. because it is a promise of something of value. b. only if Sports Bar adds a cash rebate. c. only if Tasty uses it. d. under no circumstances. 43. Under the doctrine of freedom of contract, it is up to the parties to decide: a. the appraised value of the items. b. what the items are worth to them. c. the legality of the items. d. the impossibility of completion. 44. Brad defends against a breach-of-contract suit by College Credit Corporation by claiming that their deal—a student loan—was unfair because the consideration for the contract was inadequate. With respect to Brad’s defense, the court will most likely a. promise to do something that it has no prior legal duty to do. b. perform an action that it is not otherwise legally obligated to undertake. c. refrain from an action that it has a legal right to undertake. d. not consider the adequacy. 45. Under a contract with Red Wines, Sancho begins grading a terraced hillside for the planting of grapes. Halfway through the project, Sancho asks for $5,000 over the contract price, claiming an increase in the “cost of doing business.” Red agrees but later refuses to pay. Red’s agreement to pay more is a. unenforceable because Sancho’s performance was a preexisting duty. b. unenforceable because Red’s promise was illusory. c. enforceable on its face. d. unenforceable because Sancho’s request modified the contract. 46. Rex 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. Rex 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. 47. Business Center Inc. and Catering 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. Powered by Cognero
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Chapter 12: Consideration, Capacity, and Legality c. valid. d. voidable. 48. 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. 49. 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 on its face. 50. Dale’s Uncle Ed tells Dale, “If I feel you deserve it at the time, I will give you a new car when you graduate from college.” Ed’s promise is a. illusory. b. enforceable. c. a forbearance. d. a preexisting duty. 51. Brick and Carmen are in an auto accident. Brick offers Carmen $2,000 if she promises not to pursue her potential legal claim against Brick. Carmen accepts. Later, Carmen discovers that it will cost $1,500 to repair her car, and $4,000 to cover the medical expenses for a latent injury and files suit. In Carmen’s suit against Brick to recover her repair and medical expenses, Carmen will most likely recover a. half the amount to pay the costs over what Brick already paid Carmen. b. nothing at all. c. the estimated amount to pay those costs and any other liability. d. the exact amount to pay those costs and no more.
Indicate one or more answer choices that best complete the statement or answer the question. 52. A release must have the following requirements: (choose all applicable answers) a. the contract is accompanied by consideration. b. the agreement is made in good faith. c. the promises are illusory. d. the release contract is in signed writing. 53. For promissory estoppel to occur, the following requirements need to be met: (choose all applicable answers) a. there must be a clear and definite promise. b. the promisor should have expected the promisee to rely on the promise. c. the promisee reasonable relies on the promise in a definite and substantial manner. Powered by Cognero
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Chapter 12: Consideration, Capacity, and Legality d. the parties changed their minds, so there can be no enforcement. e. enforcement is necessary to prevent an injustice.
Indicate the answer choice that best completes the statement or answers the question. 54. Greta files a suit against Home Repair Corporation under the doctrine of promissory estoppel. Greta must show that a. she justifiably refused to fulfill a promise to Home Repair b. she justifiably relied on Home Repair’s promise. c. Home Repair justifiably refused to fulfill a promise to Greta. d. Home Repair justifiably relied on Greta’s promise. 55. Blanche, a minor, enters into a contract to buy two all-season passes from Chalet Mountain Resort. The contract will be made enforceable upon her reaching the age of majority if Blanche a. ratifies it. b. disaffirms it. c. nullifies it. d. voids it. 56. Ben, a minor, signs a contract to buy a Call-U phone from Dallas, an adult sales representative. Dallas a. can avoid the contract without Ben’s consent. b. cannot avoid the contract. c. can avoid as much of the contract as Ben elects to avoid. d. must obtain Ben’s consent to avoid the contract. 57. Donald is a minor. He can enter into any contract an adult can, provided a. the adult is willing to enter into contracts with minors. b. Donald 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.
Indicate one or more answer choices that best complete the statement or answer the question. 58. Lee, a minor, enters into a contract to buy a dirt bike from Motor Bikes & Cycles. Lee can ordinarily disaffirm the contract: (choose all applicable answers) a. in a timely manner. b. at any time during minority. c. for a reasonable time after coming of age. d. after he ratifies it upon majority.
Indicate the answer choice that best completes the statement or answers the question. 59. Van, 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, Van 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. Powered by Cognero
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Chapter 12: Consideration, Capacity, and Legality c. must return the skis and pay for the damage. d. cannot return the skis unless they can be fully restored. 60. Martin, a minor, inherits the rights to several patents. To make use of this property, Martin petitions a court to be treated as an adult for business purposes. If the court grants the request, Martin loses the right to a. none of the choices. b. engage in business contracts. c. ratify business contracts. d. disaffirm business contracts 61. 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. 62. If a person is sufficiently intoxicated and the person they are dealing with had reason to know of it, then the contract will be a. voidable b. void c. valid d. a counteroffer 63. Sam is mentally incompetent but has not been adjudged by a court to be incompetent. Sam enters into a contract with Tony for the cleaning and maintenance of Uptown Office building. Most likely, the contract is a. voidable if Sam did not comprehend the consequences. b. enforceable if Tony did not know Sam was mentally incompetent. c. enforceable if Sam is the owner of the building. d. void on its face.
Indicate one or more answer choices that best complete the statement or answer the question. 64. The following contracts are void on their face (choose all applicable answers) a. usury contracts. b. contract to commit a crime. c. gambling contracts. d. a contract that is unfair.
Indicate the answer choice that best completes the statement or answers the question. 65. The state of New York 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. Powered by Cognero
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Chapter 12: Consideration, Capacity, and Legality c. specify clauses that must be included in certain contracts. d. prohibit certain contracts based on their subject matter. 66. Jack enters into a contract with Kris, 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 Kris’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. 67. 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. 68. Cathy agrees to sell her Daily Donut shop to Ernie. In the agreement, there is a covenant not to compete that prohibits Cathy from operating a donut shop within a certain distance. If the restriction is unreasonable, a court will most likely a. award Cathy damages. b. order Ernie to stop doing business. c. reform the covenant. d. prohibit both parties from operating donut shops. 69. 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 15 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. 70. A lease between Mia and Niles for a 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. 71. 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. not enforce the contract. 72. Adam agrees in writing to pay Bob to damage Adam’s car, which is fully insured. Bob damages the car, but Adam’s Powered by Cognero
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Chapter 12: Consideration, Capacity, and Legality insurer refuses to pay for the damage. In Adam and Bob’s suit against each other for breach of contract, the court is most likely to a. enforce the contract. b. allow Adam to recover. c. allow Bob to recover. d. dot enforce the contract. 73. 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. not recover. b. recover from Quint. c. enforce the contract with Quint. d. recover from the competitor. 74. 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 and unenforceable. c. voidable at the option of either party. d. voidable at the option of the party having less bargaining power.
Indicate one or more answer choices that best complete the statement or answer the question. 75. 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 (choose all applicable answers) a. withdraw from the deal. b. recover what she invested. c. enforce the contract. d. enforce part and recover on the rest.
Indicate the answer choice that best completes the statement or answers the question. 76. 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 at any time before it occurs. d. not withdraw from the deal without paying Mac’s expenses.
Indicate one or more answer choices that best complete the statement or answer the question. 77. 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 (choose all applicable answers) a. say nothing and keep the policy in effect. b. enforce the policy and recover from the insurer. Powered by Cognero
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Chapter 12: Consideration, Capacity, and Legality c. obtain a license to sell insurance and a list of the insurer’s customers. d. collect benefits under the policy immediately.
78. Games Corporation hires Haley, a minor, to create a new customized game software for certain clients. Haley signs a contract that requires her to work for Games for eighteen months. Before beginning work, Haley tells Games that she will not create new software for Games, and that she is going to work for Imagine Inc., a Games competitor. Is Games’s contract with Haley enforceable? Why or why not? 79. 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 employment 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? 80. Discuss legally sufficient value, bargained-for-exchange, and adequacy of consideration. Discuss in detail and give examples of each.
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Chapter 12: Consideration, Capacity, and Legality Answer Key 1. False 2. False 3. True 4. True 5. True 6. True 7. False 8. True 9. True 10. True 11. True 12. True 13. True 14. True 15. True 16. True 17. True 18. True 19. True 20. False 21. False 22. True 23. False 24. False 25. True Powered by Cognero
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Chapter 12: Consideration, Capacity, and Legality 26. False 27. False 28. True 29. True 30. False 31. True 32. True 33. False 34. False 35. True 36. False 37. False 38. True 39. d 40. c 41. d 42. a 43. b 44. d 45. a 46. b 47. a 48. a 49. d 50. a 51. b Powered by Cognero
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Chapter 12: Consideration, Capacity, and Legality 52. a, b, d 53. a, b, c, e 54. b 55. a 56. b 57. c 58. a, b, c 59. c 60. d 61. d 62. a 63. a 64. a, b, c 65. a 66. d 67. b 68. c 69. b 70. d 71. d 72. d 73. a 74. b 75. a, b 76. c Powered by Cognero
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Chapter 12: Consideration, Capacity, and Legality 77. a, b 78. The contract is not enforceable. Haley is a minor, so any contract that she enters is voidable by her. In other words, Haley 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. Haley’s announcement that she would not be bound by the contract was sufficient to disaffirm it. Haley had not received anything under the contract with Games, so there is nothing to return under a duty of restitution. Also, there is no significance to Haley’s agreeing to work for Imagine, Games’s competitor. If Haley chose to, she could have stayed in the contract and fulfilled it, but it was her choice to get out of it. 79. 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, it 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. 80. Consideration usually is defined as the value given in return for a promise. Often, consideration is broken down into two parts: (1) something of legally sufficient value must be given in exchange for the promise, and (2) there must be a bargained-for exchange. To be legally sufficient, consideration must be something of value in the eyes of the law. The “something of legally sufficient value” may consist of any of the following: 1. a promise to do something that one has no prior legal duty to do; 2. the performance of an action that one is otherwise not obligated to undertake (such as providing accounting services); 3. the refraining from an action that one has a legal right to undertake (called a forbearance). Consideration in bilateral contracts normally consists of a promise in return for a promise. In a contract for the sale of goods, for instance, the seller promises to ship specific goods to the buyer, and the buyer promises to pay for those goods when they are received. Each of these promises constitutes consideration for the contract. The second element of consideration is that it must provide the basis for the bargain struck between the contracting parties. The item of value must be given (or promised) by the promisor (offeror) in return for the promisee’s promise (or performance). This element of bargained-for exchange distinguishes contracts from gifts. On the surface, when the items exchanged are of unequal value, fairness would appear to be an issue. Normally, however, a court will not question the adequacy of consideration based solely on the comparative value of the things exchanged. In other words, the determination of whether consideration exists does not depend on the values of the things exchanged. Something need not be of direct economic (or financial value) to be considered of legally sufficient consideration. In many situations, the exchange of promises and potential benefits is deemed to be in sufficient consideration.
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Chapter 13: Defenses to Contract Enforceability
Indicate whether the statement is true or false. 1. An otherwise valid contract is enforceable even if the parties have not genuinely agreed to its terms. a. True b. False 2. A party who can show that he or she did not genuinely agree to the terms of a contract can still choose to carry out the deal. a. True b. False 3. Generally a unilateral mistake does not give the mistaken party any right to relief from the contract. a. True b. False 4. With a unilateral contract, a mistake in math can cause the contract to not be enforced. a. True b. False 5. 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 6. 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 7. If a mistake concerns the quality of the object of the contract, the mistake is one of fact, and the contract normally is enforceable. a. True b. False 8. The first element of proving fraud is to show that the innocent party is not easily fooled. a. True b. False 9. Intent to deceive is an element of fraud. a. True b. False 10. An innocent party who does not suffer harm as a result of a misrepresentation can nevertheless collect damages. a. True b. False Powered by Cognero
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Chapter 13: Defenses to Contract Enforceability 11. In the context of fraudulent misrepresentation, an opinion is objective and verifiable, whereas a fact is subject to debate. a. True b. False 12. Ordinarily, every party to a contract has a duty to come forward and disclose facts. a. True b. False 13. In general, a seller must disclose all defects of the product to the buyer. a. True b. False 14. For purposes of fraudulent misrepresentation, scienter clearly exists if a party asserting a fact knows it is not as stated. a. True b. False 15. Reliance on a misrepresentation is justified even if the innocent party knows the true facts. a. True b. False 16. 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 17. Because of the potential for punitive damages, plaintiffs often include a claim for fraudulent misrepresentation in their contract disputes. a. True b. False 18. Persuasion that induces a person to act according to the will of a dominant party is undue influence. a. True b. False 19. Forcing a party to enter into a contract under the fear of threats constitutes undue influence. a. True b. False 20. A threat to exercise a legal right to sue someone ordinarily constitutes duress. a. True b. False 21. A contract involving property of any kind must be in writing to be enforceable. a. True b. False Powered by Cognero
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Chapter 13: Defenses to Contract Enforceability 22. Under the Statute of Frauds, a contract involving an interest in land must be in writing to be enforceable. a. True b. False 23. Marriage contracts must be in writing. a. True b. False 24. The Statute of Frauds operates as a defense to the enforcement of an oral contract for the sale of land. a. True b. False 25. A contract must be in writing to be enforceable, that is if it cannot by its terms be performed within one year from the day after the contract’s formation. a. True b. False 26. 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 27. A contract in which a party assumes a secondary obligation must be in writing to be enforceable. a. True b. False 28. A sales contract for goods priced at $500 or more, must be in writing to be enforceable. a. True b. False 29. If a party has a primary obligation on a debt, the contract must be in writing to be enforceable. a. True b. False 30. If a contract is not enforceable under the Statute of Frauds, promissory estoppel may be another remedy. a. True b. False 31. To satisfy the UCC’s Statute of Frauds, a writing evidencing a sales contract need only state the price term. a. True b. False 32. An oral contract that would otherwise be unenforceable under the Statute of Frauds, may be enforced if a person making a promise could foresee the promisee’s reliance on it. a. True Powered by Cognero
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Chapter 13: Defenses to Contract Enforceability 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 written contract must consist of a single document to constitute an enforceable contract. a. True b. False 35. A memorandum evidencing an oral contract must contain every term of the deal to be enforceable. a. True b. False 36. Parol evidence is testimony (or other evidence about communications) between parties that is not contained in their written contract. a. True b. False 37. Parol evidence cannot be introduced to correct an obvious clerical error in a contract, even if the error clearly does not represent the parties’ agreement. a. True b. False 38. 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 39. Usage of trade, practices, and customs can be brought in to clarify (or supplement a writing) by showing prior dealings. a. True b. False 40. An integrated contract is any writing with more than one subject or part. a. True b. False
Indicate the answer choice that best completes the statement or answers the question. 41. 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. Powered by Cognero
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Chapter 13: Defenses to Contract Enforceability 42. 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. 43. 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 that 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. 44. 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. 45. Gary owns two all-terrain vehicles (ATVs), worth $1,000 and $500, respectively. Helen enters into a contract to buy “Gary’s ATV” for $750. Gary believes, in good faith, that he is selling the $500 ATV. Helen believes, in good faith, that she is buying the $1,000 ATV. In this situation a. Gary is entitled to $750 for the $500 ATV. b. Helen is entitled to the $1,000 ATV for $750. c. Helen must buy both ATVs for $1,500. d. the contract is not enforceable. 46. County Title Company processes information furnished by others to transfer title of a real estate from a seller to a buyer. In performing this task for a sale of land from Dale to Ezra, the furnished information is mistaken. The contract between Dale and Ezra includes a mistake, and it may be rescinded because the mistake a. is about a material fact. b. concerns a term in the contract subject to only one interpretation. c. involves a detail on which the parties had a true “meeting of the minds.” d. affects County Title, a third party.
Indicate one or more answer choices that best complete the statement or answer the question. 47. Car Lot’s salesperson Dick offers to sell Ernie, who is twenty years old, a car. Dick intentionally misrepresents the vehicle’s wear and repairs. In reliance, Ernie buys the car. To prove fraud, Ernie must show that (choose all applicable answers) Powered by Cognero
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Chapter 13: Defenses to Contract Enforceability a. Dick intentionally deceived Ernie. b. Dick misrepresented material facts. c. Ernie is under twenty-one. d. Ernie justifiably relied on Dick’s misrepresentations.
Indicate the answer choice that best completes the statement or answers the question. 48. 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. 49. Ken, a real estate agent, assures Lily that a certain parcel of commercial property fronts on the most highly trafficked street in Metro City. Lily buys the property and then discovers that the street has no more traffic than any other in its vicinity. Lily may recover damages for a. the city’s undue influence. b. the agent’s fraudulent misrepresentation. c. the buyer’s mistake. d. unfairness. 50. Bram, a salesperson for Cruisin’ Motors, promises Deb a certain car will give her a “smooth ride.” Bram offers a test drive, which Deb declines. She buys the car but soon realizes its suspension is in poor condition. Deb 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. she cannot rescind. 51. 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. unfairness. 52. Dennis sells a motorcycle to Elton without disclosing that the odometer, which reads 10,000 miles, was disconnected 100,000 miles ago. Dennis is most likely liable for a. fraudulent misrepresentation. b. none of the choices. c. mistake. d. puffery. 53. In selling a warehouse, Riley, a real estate broker, tells Sam that the property has a certain capacity, making it suitable Powered by Cognero
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Chapter 13: Defenses to Contract Enforceability for a nightclub. Riley knows nothing about the capacity of the building, but it is not as he specifies. Sam buys the building. Sam’s best course of action is most likely to a. scam Riley. b. induce Riley to give him the commission on her next sale. c. recover damages or rescind the contract to buy the building. d. sabotage Riley’s career with bad publicity. 54. 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. only if Marc realizes the fact. 55. Don enters into a contract with Eve, 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, Don learns that Eve does not have access to the algorithm and files a suit, alleging fraud. Don must show harm to a. recover damages. b. rescind the contract. c. undo Eve’s influence. d. punish the defendant. 56. An intent to deceive or guilty knowledge, can also be referred to as a. compulsion. b. unfaithfulness. c. scienter. d. bad faith. 57. If a person makes a statement that the person believes to be true, but that actually misrepresents material facts, the person is guilty of a. intentional misrepresentation. b. innocent misrepresentation. c. mistake. d. breach of contract. 58. Eugene, an accountant, convinces his client Faye to enter into a contract to invest her savings in Gathering, a nonexistent 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. 59. Mona is induced by her guardian Newt to sign a contract to invest funds in Oil, Inc., through Newt’s investment firm. Unknown to Mona, Newt realizes a commission from the investment. Most likely, Mona may rescind the contract on the basis of Powered by Cognero
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Chapter 13: Defenses to Contract Enforceability a. duress. b. fraud. c. mistake. d. undue influence. 60. Moe threatens physical harm to force Niki to contract to pay him for protecting her restaurant, Pasta Plates, from vandalism. Most likely, Niki may a. rescind the contract or refuse to comply with its terms. b. do nothing once she has agreed to pay. c. recover from her insurer for the cost. d. recover from the local police for their failure to protect her store. 61. Alice and Bart enter into a contract for the sale of Canyon 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. dated before the property is taken. 62. 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. it is not enforceable. 63. Ray agrees to buy one hundred pounds of almonds from Sol. To be enforceable, the agreement must be in writing if the almonds cost at least a. $50. b. $250. c. $499. d. $500. 64. 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 these require a writing. 65. 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. Powered by Cognero
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Chapter 13: Defenses to Contract Enforceability 66. Nate promises to pay for dental services provided by Otto to Polly. Nate receives no personal benefit for the promise. To be enforceable, the promise must be in writing if a. Nate promises to pay only if Polly does not pay. b. Nate 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. 67. 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. 68. 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. 69. 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. 70. Physicians Clinic orders by phone seven cases of single-use latex gloves from Quality Medical Supplies, Inc., at a cost of $100 per case. After three cases are delivered and accepted, Physicians 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 cases. d. the extent of the four undelivered cases. 71. A party who has justifiably relied on an oral contract may use ________ if the courts will not enforce it, because of failure of a writing. a. breach of contract b. undue influence c. duress d. promissory estoppel 72. Bob and Jim enter into a contract where Jim will custom make curtains for Bob’s living room. Bob picks out the fabric Powered by Cognero
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Chapter 13: Defenses to Contract Enforceability and Jim makes the curtains. He delivers them to Bob, and Bob refuses to pay and says he does not like them. On what basis can Jim enforce? a. Custom made goods exception b. Fair dealings act c. Good faith d. Duress 73. Main St. Markets Inc. and Nature’s Food Corporation discuss the terms of a contract. They exchange “signed” e-mails that summarize the terms on which they agree. Main St. begins to perform, but Nature’s refuses to pay. Between Main St. and Nature’s, the e-mails are a. an oral contract. b. a pre-contract. c. a written contract. d. no contract. 74. Maya and Nick enter into a contract. To be enforceable, the contract must include a. no particular signatures. b. the signatures of both Maya and Nick. c. the signature of the party against whom enforcement is sought. d. the signature of the party who is seeking enforcement. 75. 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. 76. 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. 77. 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 written terms. d. nothing. 78. 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 Powered by Cognero
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Chapter 13: Defenses to Contract Enforceability 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.
Indicate one or more answer choices that best complete the statement or answer the question. 79. The following are instances where the parol evidence rule would not apply (choose all applicable answers) a. contracts containing ambiguous terms. b. contracts subsequently modified. c. to bring in previous notes between the parties. d. prior dealing and course of performance.
Indicate the answer choice that best completes the statement or answers the question. 80. 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.
81. Health Source, Inc., offers to buy Medico Equipment & 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. 82. 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?
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Chapter 13: Defenses to Contract Enforceability Answer Key 1. False 2. True 3. True 4. True 5. False 6. False 7. False 8. False 9. True 10. False 11. False 12. False 13. False 14. True 15. False 16. False 17. True 18. True 19. False 20. False 21. False 22. True 23. True 24. True 25. True Powered by Cognero
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Chapter 13: Defenses to Contract Enforceability 26. False 27. True 28. True 29. False 30. True 31. False 32. True 33. True 34. False 35. False 36. True 37. False 38. True 39. False 40. False 41. a 42. a 43. c 44. d 45. d 46. a 47. a, b, d 48. b 49. b 50. d 51. a Powered by Cognero
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Chapter 13: Defenses to Contract Enforceability 52. a 53. c 54. c 55. a 56. c 57. b 58. b 59. d 60. a 61. c 62. d 63. d 64. d 65. d 66. a 67. b 68. b 69. d 70. c 71. d 72. c 73. c 74. c 75. d 76. a Powered by Cognero
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Chapter 13: Defenses to Contract Enforceability 77. d 78. a 79. a, b, d 80. a 81. 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, 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. Ordinarily, neither party to a contract has a duty to come forward and disclose facts, and a contract normally will not be set aside because certain pertinent information has not been volunteered. Sometimes, a party will make a misrepresentation through carelessness, believing the statement is true. Such a misrepresentation may constitute negligent misrepresentation, if the party did not exercise reasonable care in uncovering or disclosing the facts or did not use the skill and competence that the party’s business or profession requires. 82. 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. In various types of relationships, one party may have an opportunity to dominate and unfairly influence another party. Minors and elderly people, for instance, are often under the influence of guardians (persons who are legally responsible for them). If a guardian induces a young or elderly ward (the person whom the guardian looks after) to enter into a contract that benefits the guardian, the guardian may have exerted undue influence. The essential feature of undue influence is that the party being taken advantage of does not exercise free will in entering into a contract. It is not enough that a person is elderly or suffers from some mental or physical impairment. There must be clear and convincing evidence that the person did not act with free will. Similarly, the existence of a fiduciary relationship alone is insufficient to prove undue influence.
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Chapter 14: Third Party Rights and Discharge
Indicate whether the statement is true or false. 1. Privity of contract establishes the basic principle that third parties have no rights in contracts to which they are not parties. a. True b. False 2. The transfer or one’s contract rights is called a delegation. a. True b. False 3. If it were not possible to assign contract rights, many businesses could not continue to operate. a. True b. False 4. 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 5. 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 6. In general, an assignment can be in writing or orally. a. True b. False 7. The unconditional assignment of rights under a contract extinguishes the rights of the assignee. a. True b. False 8. The unconditional assignment of rights under a contract extinguishes any defenses that the obligor had against the assignor. a. True b. False 9. The assignee receives greater rights than the original assigner had. a. True b. False 10. A contract that states any assignment is void effectively prohibits any assignment. a. True b. False 11. A contract right for personal services can normally be assigned. Powered by Cognero
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Chapter 14: Third Party Rights and Discharge a. True b. False 12. A restraint against alienation is when an original obligor neglects their contractual obligation. a. True b. False 13. The assignment of the same contract right to two different persons creates parallel and equal rights and obligations. a. True b. False 14. 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 15. As a general rule, most any duty can be delegated. a. True b. False 16. Bob hires Joan to sing the National Anthem at the basketball finals. She delegates her singing to Jason. Can Joan delegate this? a. True b. False 17. No contract can prohibit the delegation of its duties. a. True b. False 18. On a delegation of contract duties, the delegator is absolved from any liability for performance under the contract. a. True b. False 19. Under an assignment of “all rights” on a contract, the assignor is absolved of their rights under the contract. a. True b. False 20. 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 21. An intended third party beneficiary cannot enforce the contract against the original parties once the rights of the third party have vested. a. True b. False Powered by Cognero
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Chapter 14: Third Party Rights and Discharge 22. Expressly designating a third party as a beneficiary in a contract, indicates that the beneficiary is intended. a. True b. False 23. Any beneficiary to a contract who is not deemed an intended beneficiary is an incidental beneficiary. a. True b. False 24. If a contract performance is rendered directly to a third party, the third party is an incidental beneficiary. 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. The most common way to terminate contractual duties is by performance. a. True b. False 27. In most contracts, promises of performance are conditioned. a. True b. False 28. If a condition to a lease for university housing that the tenant must be a student is not satisfied, then the landlord’s obligations under the lease are discharged. a. True b. False 29. A contract promise that is absolute, must be performed, or the party who made the promise will be in breach. a. True b. False 30. A seller who places goods at the disposal of a buyer has tendered delivery, but cannot yet demand payment. a. True b. False 31. A buyer who offers to pay for goods has tendered payment, but cannot yet demand delivery. a. True b. False 32. Under a construction contract that requires a builder to meet certain specifications, complete performance is required to avoid material breach. a. True Powered by Cognero
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Chapter 14: Third Party Rights and Discharge b. False 33. A party who in good faith performs substantially all of the terms of a contract can enforce the contract against the other party. a. True b. False 34. If performance of a contract is not substantial, there is a material breach, which excuses the nonbreaching party from performance. a. True b. False 35. If a breach of contract is minor, the nonbreaching party’s duty to perform is discharged. a. True b. False 36. Before either party to a contract has a duty to perform, one of the parties may refuse to perform that party’s contractual obligations. This is referred to as an anticipatory repudiation. a. True b. False 37. Any contract can be discharged by agreement of the parties. a. True b. False 38. For mutual rescission of a contract to take place, the parties must make another agreement that satisfies the legal requirements for a contract. a. True b. False 39. A novation terminates the original contract. a. True b. False 40. An accord and its satisfaction do not discharge an original contractual obligation. a. True b. False 41. A statute of limitations limits the amount of damages that the nonbreaching party can obtain for a breach. a. True b. False 42. Contractual obligations will be discharged when the specific subject matter of the contract is destroyed. a. True b. False Powered by Cognero
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Chapter 14: Third Party Rights and Discharge 43. Performance becomes commercially impracticable when a foreseeable, added burden of performing increases the cost slightly. a. True b. False
Indicate the answer choice that best completes the statement or answers the question. 44. Farah makes and sells camping gear. Farah and Gobi enter into a contract for a delivery of the gear to Gobi’s Outfitters retail locations for an invoiced price. Farah 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. 45. John is obligated under a contract to pay Katie $500. Katie assigns the right to receive the funds to Loren. If John 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. go after Katie. 46. Lance enters into a contract to mow Mary’s yard every week for the summer. Mary sells her house and yard to Nora and assigns the right to receive Lance’s services to Nora. Mary is a. the obligor. b. a third party beneficiary. c. the assignee. d. the assignor. 47. 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. 48. Music Masters, Inc., enters into a contract to pay Nagi for a dozen original songs. Nagi transfers the right to payment under the contract to Omni Artists. After the transfer, Nagi’s contract right to the payment is a. unaffected. b. extinguished. c. conditional. d. secondary. 49. Retail Outlets LLC contracts with Smooth Paving, Inc., to grade and pave a parking lot. The contract provides that it cannot be assigned without Retail’s consent. Later, Smooth assigns the contract to Tough Road Company without obtaining Retail’s consent. Retail could most successfully argue that the contract cannot be assigned because Powered by Cognero
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Chapter 14: Third Party Rights and Discharge 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. 50. Ira owes Jessie $1,000. Kerry owes Ira $1,000. Ira unconditionally assigns to Jessie the right to Kerry’s payment. Jessie’s right to the $1,000 is subject to the defenses that a. Jessie had against Ira. b. Kerry had against Ira. c. Ira had against Kerry. d. Jessie had against Kerry. 51. Beck and Caty enter into a contract under which Beck agrees to cater Caty’s wedding. The contract expressly prohibits any transfer of rights without the assignee’s consent. Caty may transfer the right to receive Beck’s services to her sister Dian a. if Beck consents. b. if Caty decides to use a different caterer. c. if Dian is also getting married. d. under no circumstances. 52. 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. 53. 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. 54. Bill and Charlene enter into a contract for the clearing, plowing, and preparing of Charlene’s 100-acre tract for which she agrees to pay $1,000. Bill transfers his duty under this contract to Dewey. With respect to the duties under the original contract, this transfer a. does not relieve Bill of the potential obligation to perform. b. extinguishes Bill’s obligation to perform. c. is an invalid transfer of a non-transferable obligation. d. requires a special form to constitute a valid transfer. 55. Uri and Victor enter into a contract by which Uri promises to deliver business cards, advertising banners, and other marketing materials to Victor. Uri cannot transfer this duty a. if performance depends on Uri’s personal skill. Powered by Cognero
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Chapter 14: Third Party Rights and Discharge b. if Victor does not agree. c. if the parties do not rescind the original contract. d. under any circumstances. 56. Ilene, an accountant, and Jerry enter into a contract under which Ilene agrees to perform audits for Jerry’s Plastics Company. Ilene can delegate the duty to perform the audits to a. any reputable accountant. b. any accountant working at Ilene’s firm. c. any accountant performing other financial services for Jerry. d. no other party. 57. Leon contracts to install automatic watering troughs in Kendall’s dairy barn. Leon then becomes seriously ill and contracts with Jason to install the troughs. Jason is unreliable and never shows up to install the troughs. Kendall hires Izzy to do the installation. To recover for any loss on the deal, Kendall can sue a. no one. b. Jason or Izzy. c. Leon only. d. Jason or Leon. 58. Restore Construction Company enters into a contract to remodel Sam’s Home Store, agreeing to use only products from United Building Supplies. Halfway through the project, Restore refuses to finish the job. The contract can be enforced against Restore by a. Sam’s. b. United. c. Sam’s or United. d. none of the choices. 59. Lyle and Miranda agree that Lyle will fix the refrigeration unit in Miranda’s Bagel Café in exchange for her payment of a debt that Lyle owes to New Credit Corporation. Under this contract, the intended beneficiary is a. Miranda. b. New Credit. c. Lyle. d. any customer of Miranda’s. 60. Kent enters into a contract with Life Insurance Company for a policy that designates Mia as the beneficiary. Kent 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 Kent makes. c. subject to the first-in-time rule. d. terminated by the reservation. 61. An intended third-party beneficiary cannot enforce a contract against the original parties untilthe third party’s rights have a. been fulfilled. b. been breached. Powered by Cognero
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Chapter 14: Third Party Rights and Discharge c. vested. d. terminated. 62. 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. 63. 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 Molly’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. 64. Dairy Farm enters into a contract with Edible 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. Edible 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 Edible. 65. Build-It Construction LLC contracts to build a warehouse for Corporate Storage, Inc. 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. 66. The most common way to terminate contractual duties is by a. agreement. b. breach of contract. c. failure of a condition. d. performance. 67. Don 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 as not being substandard. If the appraiser deems the condition to be substandard, the parties’ obligations will be a. discharged. b. breached. c. altered. d. performed. Powered by Cognero
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Chapter 14: Third Party Rights and Discharge 68. 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 precedent b. a novation. c. a condition subsequent. d. an operation of law. 69. Security Company enters into a contract with Town 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. 70. Sara enters into a contract to sell her condo to Ted for a certain price on a specific day. On that day, Sara unconditionally offers to perform. Sara’s offer a. conditions Ted’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. 71. 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. 72. 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. 73. 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. 74. Before either party to a contract has a duty to perform, one of the parties may refuse to perform that party’s contractual obligations. This is referred to as a. material breach. Powered by Cognero
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Chapter 14: Third Party Rights and Discharge b. anticipatory repudiation. c. duress. d. undue influence. 75. 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. 76. 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. 77. Jason and Kelly enter into a contract for Jason to renovate Kelly’s house by a certain date. Jason never performs. After the applicable limitations period has passed, Kelly decides to bring a suit against Jason 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 after Kelly decides to sue. d. must be filed between four and five years after Kelly decides to sue.
Indicate one or more answer choices that best complete the statement or answer the question. 78. The following are factors that strongly indicate that a third party is an intended beneficiary of a contract (choose all applicable answers) a. the third party has a right to control the details of the performance. b. the third party is expressly designated as a beneficiary in a contract. c. the third party says that the obligor wanted them as a beneficiary. d. performance is rendered directly to the third party. 79. The requirements of a novation are as follows (choose all applicable answers) a. a new, valid contract. b. an agreement by all the parties to a new contract. c. paying in full for the previous obligation. d. a previous, valid obligation. 80. The basic requirements for performance to qualify as substantial performance are (choose all applicable answers) a. the performance must not vary greatly from the performance promised in the contract. b. the party must have performed in good faith. c. the performance must create substantially the same benefits as those promised in the contract. Powered by Cognero
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Chapter 14: Third Party Rights and Discharge d. the performance must be at least 50% completed. 81. These basic types of situations may qualify as grounds for the discharge of contractual obligations based on impossibility of performance (choose all applicable answers) a. when the specific subject matter is destroyed. b. when an essential party to the completion of the contract dies. c. it is a little more expensive to fulfill the contract. d. when a change in the law renders performance illegal.
82. Pam borrows $5,000 from Quality Auto Sales to buy a car. When Pam does not pay the loan or return the car, Quality wants to transfer 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 Pam’s consent? If so, and Quality committed fraud in the deal with Pam, could Pam legitimately refuse to pay Rapid? Explain. 83. A-One Landscapers, Inc., owes Friendly Finance Company $5,000. A-One enters into a contract with Suburban Office Park under which A-One promises to maintain the landscaping on Suburban’s property. Under the contract, Suburban promises to pay Friendly Finance the amount that will be due A-One until A-One’s debt to Friendly Finance is paid. AOne performs as promised, but Suburban does not pay Friendly Finance. Can Friendly Finance succeed in a suit against Suburban? Why, or why not?
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Chapter 14: Third Party Rights and Discharge Answer Key 1. True 2. False 3. True 4. False 5. False 6. True 7. False 8. False 9. False 10. True 11. False 12. False 13. False 14. True 15. True 16. False 17. False 18. False 19. True 20. True 21. False 22. True 23. True 24. False 25. True Powered by Cognero
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Chapter 14: Third Party Rights and Discharge 26. True 27. False 28. True 29. True 30. False 31. False 32. True 33. True 34. True 35. False 36. True 37. True 38. True 39. True 40. False 41. False 42. True 43. False 44. b 45. c 46. d 47. c 48. b 49. d 50. b 51. a Powered by Cognero
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Chapter 14: Third Party Rights and Discharge 52. b 53. c 54. a 55. a 56. d 57. d 58. c 59. b 60. b 61. c 62. b 63. d 64. c 65. d 66. d 67. a 68. a 69. b 70. b 71. b 72. a 73. d 74. a 75. a 76. b Powered by Cognero
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Chapter 14: Third Party Rights and Discharge 77. b 78. a, b, d 79. a, b, d 80. a, b, c 81. a, b, d 82. Quality can transfer the right to receive Pam’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 (Pam), 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 Pam’s payment, Pam can raise this fraud as a defense against payment to Rapid. When rights under a contract are assignedunconditionally, the rights of the assignor are extinguished. The assignee has a right to demand performance from the other original party to the contract, the obligor. The assignee obtains only those rights thatthe assignor originally had. Once a valid assignment of rights has been made to a third party, the third party should notifythe obligor of the assignment. 83. Friendly Finance could succeed in a suit against Suburban. When a party promises to perform under a contract with the express intent that the other party’s payment will 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 Suburban expressly states that Suburban’s payment for A-One’s performance is to go directly to Friendly Finance. Thus, it is a third-party beneficiary contract. Friendly Finance (the third-party beneficiary) is, under the terms of the contract, an intended beneficiary. As such, Friendly Finance can successfully sue Suburban to enforce Suburban’s promise to pay A-One’s debt. Like the plaintiff in Classic Case Example 14.14, a creditor beneficiary benefits from a contract in which one party (the promisor) promises another party (the promisee) to perform a duty that the promisee owes to a third party (the creditor beneficiary). As an intended beneficiary, the creditor beneficiary can sue the promisor directly to enforce the contract.
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Chapter 15: Breach and Remedies
Indicate whether the statement is true or false. 1. There is a remedy available for nearly every breach of contract. a. True b. False 2. Normally, a court will not award an equitable remedy unless a remedy at law is inadequate. a. True b. False 3. 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 4. The standard measure of compensatory damages is the value of the breaching party’s actual performance. a. True b. False 5. The measure of compensatory damages does not vary by type of contract. a. True b. False 6. The expenses incurred because the breach occurred, and thus it was necessary to obtain performance from another source are not recoverable in a suit for breach. 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. 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 9. 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 10. Special damages that compensate for a loss caused by circumstances beyond the contract itself are incidental damages. a. True b. False Powered by Cognero
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Chapter 15: Breach and Remedies 11. 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 12. A seller can avoid the risk of liability for consequential damages by limiting the buyer’s remedies in their contract. a. True b. False 13. 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 14. For a nonbreaching party to recover consequential damages, the breaching party must know (or have reason to know) that special circumstances will cause the nonbreaching party to suffer an additional loss. a. True b. False 15. Consequential damages are designed to punish the wrongdoer, and set an example to deter similar conduct in the future. a. True b. False 16. 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 17. 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 18. Liquidated damages provisions are normally unenforceable. a. True b. False 19. A liquidated damages provision specifies an amount to be paid in the event of a future default or breach of contract. a. True b. False 20. The failure of one party to perform under a contract entitles the other party to rescind the contract. a. True b. False 21. When a breach is material and willful, an innocent party seeking to rescind it must show that the contracting parties Powered by Cognero
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Chapter 15: Breach and Remedies cannot be restored to the status quo. a. True b. False 22. 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 23. Restitution may be available in situations when damages cannot be proved or are difficult to prove. a. True b. False 24. A court will grant specific performance as a remedy, only when the legal remedy is inadequate. a. True b. False 25. The breach of a contract for a sale of goods qualifies for specific performance, when substantially identical goods can be bought or sold in the market. a. True b. False 26. 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 27. 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 28. 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 29. 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 30. 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 Powered by Cognero
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Chapter 15: Breach and Remedies 31. 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 32. A court will only impose a quasi-contract if the parties originally had a contract with one another. a. True b. False 33. In quasi-contract, the party who is seeking recovery must show that the other party who received a benefit would be unjustly enriched if they were allowed to retain the benefit without paying for it. a. True b. False 34. If the Statute of Frauds bars the enforcement of an oral contract, a court will not impose a quasi-contract regardless of the circumstances. a. True b. False 35. 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 36. 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 37. A limitation-of-liability clause in a contract limits the period of time within an action for breach can be brought. a. True b. False 38. The Uniform Commercial Code provides that remedies may not be limited in a contract for the sale of goods. a. True b. False
Indicate the answer choice that best completes the statement or answers the question. 39. 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.
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Chapter 15: Breach and Remedies
Indicate one or more answer choices that best complete the statement or answer the question. 40. All of these are types of damages in a breach of contract: (choose all applicable answers) a. nominal. b. compensatory. c. punitive. d. wrongful.
Indicate the answer choice that best completes the statement or answers the question. 41. 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 since damages cannot be ascertained. 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. 42. Sabo contracts to work exclusively for Thermal Company during July for $5,000. On June 30, Thermal cancels the contract. Sabo finds a similar job for the month of July, but earns only $3,000. Sabo files a suit against Thermal. As compensatory damages, Sabo can recover a. $5,000. b. $3,000. c. $2,000. d. $0. 43. Rita contracts to work for Social Media Corporation (SMC) during April for $4,500. On March 31, SMC cancels the contract. Rita declines a similar job with Tech Talk, Inc., which would have paid $3,500. Rita files a suit against SMC. As compensatory damages, Rita can recover a. $4,500. b. $3,500. c. $1,000. d. $0. 44. Quill contracts to buy an oven from Restaurant Appliances Inc. for $5,000, but the seller fails to deliver. Quill buys a similar oven from another dealer for $6,500. Quill’s measure of damages is a. $5,000. b. $1,500. c. $1,500, plus any additional expense to obtain the oven. d. $6,500. 45. 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—there are no proven damages b. the contract price. c. the costs needed to complete construction. Powered by Cognero
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Chapter 15: Breach and Remedies d. profits plus the costs incurred up to the time of the breach. 46. Foundation Construction Company agrees to lay a foundation for Garth but fails to finish the job. Garth hires Housing Projects Inc. to complete the work. In a suit for breach, Garth may recover from Foundation 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. 47. 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. 48. 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. 49. 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 on 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. 50. 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. 51. 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. Powered by Cognero
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Chapter 15: Breach and Remedies 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. 53. Sparkling 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. 54. Copper Circuit 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. 55. 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. find another job or receive no damages. 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. 56. Renew Turf Inc. enters into a contract with Sports Park to provide surface material for Sports Park’s baseball fields 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. 57. 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. 58. To induce the sale of an auto parts business, Carmel fraudulently represents the worth of the inventory to Drew, who Powered by Cognero
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Chapter 15: Breach and Remedies 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. 59. Shuster’s lease of retail premises from Thurgood requires Shuster to pay certain fees, subject to the landlord’s proof of the correct amount. Thurgood (the landlord) overcharges Shuster 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. 60. Daisy enters into a contract with Evan for the construction of a Fast Food Café, according to a certain schedule. The parties perform some preparatory steps, but Evan materially and willfully fails to begin work on the specified date. To rescind the contract, Daisy 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. 61. Under this remedy, parties are restored to their original position prior to loss or injury, or placed in the position they would have been in, had the breach not occurred. _____ involves returning goods, property, or funds. a. Rescission b. Restitution c. Specific damages d. Legal action 62. Ivy orally agrees to buy a unique collection of sports memorabilia for $10,000 from Jess and sends $2,500 as an initial payment. When Ivy pays the rest of the price, Jess refuses to ship the collection. In a suit for breach, Ivy should seek a. damages. b. restitution. c. a quasi contract. d. specific performance. 63. 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. 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. 64. Jill enters into a contract to buy a certain building from Kim. At the closing, Kim refuses to transfer title. In a suit for breach, Jill should seek specific performance to Powered by Cognero
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Chapter 15: Breach and Remedies 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. 65. 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. 66. Reese contracts to sell her 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. 67. 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. 68. 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. 69. 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. 70. 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 Powered by Cognero
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Chapter 15: Breach and Remedies 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.
Indicate one or more answer choices that best complete the statement or answer the question. 71. For a quasi-contract to exist, the following must apply (choose all applicable answers) a. the party conferred a benefit on the other party. b. the party receiving the benefit would be unjustly enriched, if allowed to retain the benefit without paying. c. the party conferred the benefit with the expectation of being paid. d. the parties are not happy with the outcome of the agreement.
Indicate the answer choice that best completes the statement or answers the question. 72. 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. liquidated damages. b. restitution. c. specific performance. d. quasi contract. 73. 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. It is not enforceable under any circumstances. 74. Dwellings Inc. enters into a contract with Estates Management to manage and maintain Dwellings’s apartment complex. Their contract contains a clause that limits Estates’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. 75. 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. Powered by Cognero
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Chapter 15: Breach and Remedies
76. Complete Boring Corporation ships its only pump to Drills & Bits, Inc., the manufacturer, for repair. Complete Boring hires Everywhere Shipping, Inc., to take the pump to Drills & Bits and to return it to Complete Boring as soon as the repair is complete. Complete Boring is forced to suspend operations without a pump, but Everywhere Shipping does not know this. Complete Boring expects to be without the pump for five days, and to lose profits of $5,000. When the pump is not returned by the end of the fifth day, Complete Boring rents a pump at a cost of $100 per day. Everywhere Shipping delays five more days before returning the pump. Complete Boring files a suit against Everywhere Shipping, asking for compensatory, consequential, and punitive damages. Will Complete Boring recover? 77. Lunch Trucks, Inc., contracts to deliver and serve Meals Catering Service’s products to its clients for $5,000 per event, payable in advance. Meals Catering pays the money, but Lunch Trucks fails to perform. Can Meals Catering rescind the contract? Can Meals Catering also obtain restitution? What does it mean to “rescind” a contract? How is a contract rescinded? What is restitution? How is restitution accomplished? Explain. 78. Bob agrees to sell his new product that is a personal alarm device to the BigBox Stores. BigBox agrees to purchase 500 of Bob’s product to sell in their retail stores. Bob buys the supplies and begins constructing the products. What if BigBox neglects to follow through on the agreement? What if Bob neglects to follow through? What remedies are available to each, and why? Does it matter if the agreement is in writing or oral?
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Chapter 15: Breach and Remedies Answer Key 1. True 2. True 3. False 4. False 5. False 6. False 7. True 8. True 9. True 10. False 11. True 12. True 13. False 14. True 15. False 16. True 17. False 18. False 19. True 20. True 21. False 22. True 23. True 24. True 25. False Powered by Cognero
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Chapter 15: Breach and Remedies 26. True 27. False 28. True 29. False 30. False 31. True 32. True 33. True 34. False 35. False 36. True 37. False 38. False 39. c 40. a, b, c 41. a 42. c 43. c 44. c 45. d 46. c 47. c 48. d 49. c 50. a 51. d Powered by Cognero
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Chapter 15: Breach and Remedies 52. b 53. b 54. a 55. b 56. b 57. c 58. c 59. c 60. a 61. b 62. d 63. a 64. b 65. b 66. b 67. b 68. b 69. d 70. b 71. a, b, c 72. d 73. d 74. a 75. a 76. Yes, and no. Complete Boring will succeed in recovering damages, but not all of the damages that it seeks. Everywhere Shipping’s failure to perform promptly is a breach of contract for which Complete Boring can recover Powered by Cognero
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Chapter 15: Breach and Remedies damages. Because of Everywhere Shipping’s late delivery of the pump, Complete Boring is entitled to recover the cost of renting the pump for the five days that Everywhere Shipping delayed. Expenses that are caused directly by a breach— such as the cost to rent the replacement pump after Everywhere Shipping breached the contract—are recoverable as compensatory damages. These expenses were foreseeable. Consequential damages—damages caused by special circumstances 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, Complete Boring’s shutdown of its operations is a special circumstance, but Everywhere Shipping did not know of these circumstances, so Complete Boring’s consequent loss of profits is not recoverable. Only if something was stated in the contract about a due date (or lost profits) might it be enforceable. Complete could try and argue consequential since it was reasonably foreseeable that they would incur damages as a special circumstance in not receiving the pump back on time. Since there was no overt knowledge about this, consequential damages would be unlikely. Also, Complete Boring 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 it would have occupied if the contract had been performed. 77. Yes, Meals Catering 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. In that case, each will return 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. Rescission of a contract on the basis of a breach is appropriate, where the breach is found to be material and willful. A party seeking rescission must also show that the contracting parties can be restored to the status quo. 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. Restitution may be required when a contract is rescinded, but the right to restitution is not limited to rescission cases. Because an award of restitution basically returns something to its rightful owner, a party can seek restitution in actions for breach of contract, tort actions, and other types of actions. 78. Answer should include what constitutes a contract. If there is a contract, what damages are available. A breach of contract entitles the nonbreaching party to sue for monetary damages. In contract law, damages compensate the nonbreaching party for the loss of the bargain (whereas in tort law, damages compensate for harm suffered as a result of another’s wrongful act). Often, courts say that innocent parties are to be placed in the position they would have occupied had the contract been fully performed. If there is not a contract, what other relief is available. Quasi-contracts should be discussed, in some situations, when no actual contract exists, a court may step in to prevent one party from being unjustly enriched at the expense of another party. As previously discussed, quasi contract is a legal theory under which an obligation is imposed in the absence of an agreement. The legal obligation arises because the law considers that the party accepting the benefits has made an implied promise to pay for them. Generally, when one party has conferred a benefit on another party, justice requires that the party receiving the benefit pay the reasonable value for it. The party conferring the benefit can recover in quantum meruit, which means “as much as one deserves.” Powered by Cognero
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Chapter 15: Breach and Remedies Quasi contracts allow a court to act as if a contract exists, when there is no actual contract or agreement between the parties. Therefore, if the parties have entered into a contract concerning the matter in controversy, a court normally will not impose a quasi-contract. A court can also use the doctrine when the parties entered into a contract that is unenforceable for some reason. Quasi-contractual recovery is often granted when one party has partially performed under a contract that is unenforceable. Quasi contracts provide an alternative to suing for damages, and allows the party to recover the reasonable value of the partial performance. Depending on the case, the amount of the recovery may be measured either by the benefit received, or by the detriment suffered. To recover on a quasi-contract theory, the party seeking recovery must show the following: 1. the party conferred a benefit on the other party; 2. the party conferred the benefit with the reasonable expectation of being paid; 3. the party did not act as a volunteer in conferring the benefit; and 4. the party receiving the benefit would be unjustly enriched if allowed to retain the benefit without paying for it.
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Chapter 16: Sales and Lease Contracts
Indicate whether the statement is true or false. 1. The Uniform Commercial Code requires parties to form sales and lease contracts with the same formality used in forming other types of contracts. a. True b. False 2. The UCC promotes commerce by simplifying and streamlining commercial transactions. a. True b. False 3. 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 4. Article 2 of the UCC deals with sales of goods and intangible property. a. True b. False 5. To qualify as a sale under the UCC, the price in the transaction must be payable in cash. a. True b. False 6. Corporate stocks and bonds meet the requirements to be among the items of property characterized as goods under the UCC. a. True b. False 7. A contract for a sale of natural gas can be a contract for a sale for goods. a. True b. False 8. 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 9. 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 10. The UCC imposes certain special business standards on merchants because of their commercial expertise. a. True b. False 11. An agreement to transfer the right to possess and use goods for a commercial purpose for a period of time in exchange Powered by Cognero
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Chapter 16: Sales and Lease Contracts for payment is a lease. a. True b. False 12. A party may enter into a contract even if they did not intend to do so. a. True b. False 13. Parties to sales and lease contracts are not free to agree to terms different from those stated in the UCC. a. True b. False 14. 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 15. 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 16. 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 17. 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 18. 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 19. 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 20. Except for an option contract, a firm offer by a merchant is revocable at any time before acceptance. a. True b. False 21. Acceptance of an offer to lease goods can be made by any means reasonable under the circumstances, including a prompt shipment of the goods. Powered by Cognero
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Chapter 16: Sales and Lease Contracts a. True b. False 22. 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 23. 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 24. 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 25. 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 26. To satisfy the UCC’s Statute of Frauds, a writing indicating an intent to form a sales contract must be signed by both parties a. True b. False 27. 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 28. An excessive price for the goods and unequal bargaining power can indicate to a court that a sales contract is unconscionable. a. True b. False 29. 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, and the right to recover from third parties who damage them. a. True b. False 30. Identification of future goods, like puppies, occurs at the time the puppies are born. a. True b. False Powered by Cognero
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Chapter 16: Sales and Lease Contracts 31. If the owners of a certain grade of wheat stored in a single silo hold title as tenants in common, a seller-owner can pass title to a buyer only by separating the goods. a. True b. False 32. If a person buys cattle at a livestock auction, title will pass to the buyer when the cattle are physically delivered unless the parties agree otherwise. a. True b. False 33. 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 34. If a seller supplies ten white dishwashers in response to an order for ten black 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 35. 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 36. If a buyer accepts goods that have defects, they are waiving their further right to reject. a. True b. False 37. Under the United Nations Convention on Contracts for the International Sale of Goods, contracts do not have to be in writing or any particular form. a. True b. False 38. Under the United Nations Convention on Contracts for the International Sale of Goods, when the parties to an agreement do not specify a price term, or at least provide for its specification, normally no contract will exist. a. True b. False 39. Under the United Nations Convention on Contracts for 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
Indicate the answer choice that best completes the statement or answers the question. 40. Miko owns a lake house that she rents to vacationers. Miko gives her son Ninh a trip to Omaha on his graduation from Powered by Cognero
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Chapter 16: Sales and Lease Contracts community college. Miko sells her car to her neighbor Pye for $4,500. UCC Article 2 covers a. the lake house rentals. b. the gift to Ninh. c. the sale to Pye. d. the rentals and the car sale. 41. Jake offers to sell Kyle a collection of baseball cards. To qualify as a sale under the UCC, Kyle’s payment for the cards 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. 42. Life Products, Inc., enters into a contract to sell medical supplies to Med Clinic, which later sells some of the items to Nina, a patient and consumer. Article 2 of the UCC applies to a. both transactions. b. the sale from Life Products to Med Clinic only. c. the sale from Med Clinic to Nina only. d. neither of the transactions. 43. Greg buys a skateboard from Hobby Shop. In a dispute arising from the sale, the shop will be considered to have the status of a merchant under the UCC if a. it had sold any skateboards within the last year. b. it holds itself out by occupation as a regular seller of skateboards in the transaction. c. its owner enjoys skateboarding. d. it subscribes to Boards, a biweekly trade magazine. 44. The UCC imposes on merchants a. the predominant-factor test. b. certain special business standards. c. a relatively high degree of commercial expertise. d. the business of buying or selling particular goods. 45. 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. a mixed lease. 46. 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. Powered by Cognero
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Chapter 16: Sales and Lease Contracts c. a merchant. d. an employer and manager. 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. Sara and Tim enter into a contract for a sale of orchids that requires payment within thirty days of delivery. Under the UCC, the specific payment term in the parties’ contract a. removes the entire transaction from under the requirements of the UCC. b. is enforceable to the extent it mirrors the rule in the UCC. c. is fully enforceable. d. is not enforceable. 49. Interstate 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. 50. Grains, Inc., agrees to sell to Harvest Bread 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 nonbreaching party. b. whatever favors the plaintiff. c. whatever is reasonable. d. nothing. 51. Bob’s Neighborhood Grocery agrees to buy all of Patricia’s green beans that she produces this year. This is an example of a a. requirements contract. b. output contract. c. necessaries contract. d. revocable contract. 52. Bon, an agent for City Motors, Inc., e-mails Dale on May 1 that the dealer will sell 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. Powered by Cognero
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Chapter 16: Sales and Lease Contracts 53. Fresh Dairy Mart is the offeror and Gelato Company is the offeree under a unilateral sales contract in which Helado Corporation is also interested. Fresh is not notified of Gelato’s beginning performance within a reasonable time. Fresh a. may treat the offer as having lapsed. b. must assume that Gelato has started to perform c. must contact Gelato. d. must notify Helado. 54. Clean Clinic offers to buy from Dental Supplies Company a specific quantity of a certain type of floss for a stated price. Dental can accept the offer by a. a material alteration of the terms within a reasonable time. b. a promise to ship (or a prompt shipment) the goods. c. a prompt shipment of the goods only. d. a promise to ship only. 55. 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. d. a counteroffer.
Indicate one or more answer choices that best complete the statement or answer the question. 56. 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 will not automatically become part of the contract if (choose all applicable answers) 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. they are boilerplate language.
Indicate the answer choice that best completes the statement or answers the question. 57. Dona offers to sell her used sofa, chair, coffee table, end table, and lamp to Erma for $700. Erma 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. 58. Rice Farm Corporation 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. Powered by Cognero
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Chapter 16: Sales and Lease Contracts c. the terms of the original offer. d. whatever the court decides. 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 it is a counteroffer. 60. Bean Processor, Inc., agrees to ship a certain quantity of coffee beans to Coffee Café LLC. Bean sends to Coffee an email indicating that the parties intended to form a contract. Against Bean in a lawsuit, 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. if Bean calls Coffee as well. 61. Farmers Produce, Inc., and Growers Market enter into a contract for the delivery of vegetables. Some of the produce spoils before the buyer can resell it. Growers refuses to pay for the spoiled goods. In a suit over the dispute, the seller claims that the buyer assumed the risk of spoilage. The court may allow evidence of this claim if it finds that the parties’ contract is a. fully integrated. b. not fully integrated. c. partially complete. d. a complete and final statement of their agreement. 62. Bert’s 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. an original term. d. a usage of trade.
Indicate one or more answer choices that best complete the statement or answer the question. 63. Under the UCC, if a court deems a contract (or a clause) to have been unconscionable at the time it was made, the court can do any of the following (choose all applicable answers) a. refuse to enforce the contract. b. enforce the entire contract. c. enforce the remainder of the contract without the unconscionable part. d. limit the application of the unconscionable term, in order to avoid an unconscionable result. 64. An incident happened after a sale of oranges from Citrus Farm to Juice Factory, Inc.,that were to be delivered after the harvest, a fire destroyed the fruit before it was picked. Under the UCC, the rights and liabilities of Citrus and Juice in this circumstance are generally determined by (choose all applicable answers) Powered by Cognero
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Chapter 16: Sales and Lease Contracts a. insurable interest. b. who has title. c. the concepts of identification and risk of loss. d. ownership rights.
Indicate the answer choice that best completes the statement or answers the question. 65. Safety 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 with the VIN numbers. c. cannot take place unless the cars are in Town’s possession. d. cannot take place until the cars are in Safety’s possession. 66. Barley that fills County Grain Co-op’s silo is fungible if the barley is a. naturally alike, by agreement, or by trade usage b. fundamentally different. c. fun, good, and edible. d. rotting due to a fungus caused by a leaky roof and a delay in shipping. 67. Beef, Inc., raises calves to sell. Beef breeds its cows in April, and the cows calve in February of the following year. In January, Cold Cuts, Inc., contracts with Beef to buy fifty calves. Identification 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 Cold takes possession of the calves. 68. 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. Speedster physically delivers the goods. d. Runners pays for the goods. 69. Outdoor Outfitters Store contracts to buy fifty tents from Pitched Camp, Inc. Unless the contract states otherwise, this is assumed to be a. a bailment. b. a destination contract. c. a shipment contract. d. a warehouse receipt. 70. Grocers Mart buys one hundred cases of berries from Hilltop Farms. The parties agree that the berries will be transported “F.O.B. Hilltop Farms” via Refrigerated Trucking Company. Refrigerated’s truck is lost in a fire with the berries inside, following an accident. The loss of the berries is suffered by a. Grocers. Powered by Cognero
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Chapter 16: Sales and Lease Contracts b. Hilltop. c. Refrigerated. d. all of the parties as owners in common in equal measure. 71. 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 have possession of the goods by a document of title. These parties are a. bailees. b. buyers. c. lessees. d. sellers. 72. 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. 73. Organic Café orders five gallons of Pure-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. 74. Garden & Field stores order a specific assortment of rose bulbs from Hybrid Flora Company. Hybrid mistakenly ships a selection of annuals, which Garden & Field rejects and returns via Intra-State Transport, Inc. During the return, the annuals are lost. The loss is suffered by a. Garden & Field. b. Hybrid Flora. c. Intra-State Transport. d. consumers by increases in the prices of other goods and shipping. 75. Candy Corporation orders Double Chocolate Bars from Edible Distribution Company. Edible identifies the goods. Before they are shipped to Candy, an insurable interest in the goods exists in a. Candy only. b. Edible only. c. both Candy and Edible. d. neither Candy nor Edible. 76. 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. Powered by Cognero
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Chapter 16: Sales and Lease Contracts c. the goods are in existence d. there is no risk of loss.
Indicate one or more answer choices that best complete the statement or answer the question. 77. Under The United Nations Convention on Contracts for the Sale of International Goods, an offer will be irrevocable if (choose all applicable answers) a. the offeror states orally that the offer is irrevocable b. the contract is in writing c. the offeror reasonably relies on the offer as being irrevocable d. the price term is left open
78. Tune Products, Inc., offers to sell to Unlimited Sales Company one hundred MP3 players at $50 each, subject to certain specific delivery dates. Unlimited replies with a signed purchase order that reads, “Accept your offer for 100 Iappliances at $50 each. Must be delivered to our warehouse.” Tune does not respond or deliver the goods. Unlimited files a suit for breach of contract, to which Tune answers that there is no contract because Unlimited’s purchase order contained additional terms, and is not signed by Tune. Can Unlimited recover? Explain. 79. Quality Computer Company agrees to sell one hundred servers to Social Media Networks, Inc. The servers, had especial requirements to have certain amounts of memory, and should 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’s memory requirement. A few hours later, the servers are destroyed in a fire at Social Media Networks’s distribution center. Will Quality Computer succeed in a suit against Social Media Networks for the cost of the goods?
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Chapter 16: Sales and Lease Contracts Answer Key 1. False 2. True 3. True 4. False 5. False 6. False 7. True 8. True 9. False 10. True 11. True 12. False 13. False 14. False 15. True 16. True 17. False 18. False 19. False 20. True 21. True 22. True 23. False 24. True 25. True Powered by Cognero
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Chapter 16: Sales and Lease Contracts 26. False 27. True 28. True 29. True 30. False 31. False 32. True 33. False 34. True 35. False 36. True 37. True 38. True 39. False 40. c 41. b 42. a 43. b 44. b 45. b 46. c 47. d 48. c 49. c 50. c 51. b Powered by Cognero
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Chapter 16: Sales and Lease Contracts 52. a 53. a 54. b 55. a 56. a, b, c 57. c 58. a 59. d 60. a 61. b 62. d 63. a, c, d 64. a, c 65. b 66. a 67. b 68. c 69. c 70. a 71. a 72. d 73. c 74. b 75. c 76. b Powered by Cognero
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Chapter 16: Sales and Lease Contracts 77. a, c 78. 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 Tune did not object within a reasonable time. If either or both of the parties is not a merchant, 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. Tune’s Statute of Frauds claim (that the purchase order was not signed by Tune) also fails. In 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, Tune received the signed writing, but did not object within the ten days. 79. 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. A buyer (or lessee) has an insurable interest in identified goods. The moment the contract goods are identified by the seller (or lessor), the buyer (or lessee) has a property interest in them. A seller has an insurable interest in goods as long as the seller retains title to the goods. Even after title passes to the buyer, the seller has a security interest in the goods.
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Chapter 17: Performance and Breach of Sales and Lease Contracts
Indicate whether the statement is true or false. 1. The obligation of commercial reasonableness underlies every sales and lease contract. a. True b. False 2. Under the UCC, good faith can never be disclaimed. a. True b. False 3. Under the UCC, because a contract for the sale of six freezers does not designate where the goods will be delivered, the place of delivery is the buyer’s place of business. a. True b. False 4. Tender can occur at any hour 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 5. Under the UCC, because a contract for the sale of six freezers does not designate where the goods will be delivered, the place of delivery is the buyer’s place of business. a. True b. False 6. Under a 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 7. In a destination contract, the seller agrees to deliver conforming goods to the buyer at a particular destination a. True b. False 8. 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 9. 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 10. When the time for performance under a contract expires, the right to cure also expires. a. True Powered by Cognero
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Chapter 17: Performance and Breach of Sales and Lease Contracts b. False 11. Unless the contract provides otherwise, the entire installment contract is breached only when one or more nonconforming installments substantially impair the value of the whole contract. a. True b. False 12. 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 13. 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 14. Destruction of goods that were identified in a contract can excuse both parties from performance a. True b. False 15. 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 16. Any use of delivered goods by the buyer—even for the limited purpose of testing them—constitutes acceptance. a. True b. False 17. 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 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 19. 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, and at the time the buyer learns of the breach. a. True b. False 20. If a breach occurs when the seller still possesses the identified goods, the seller must nevertheless deliver the goods to pursue a remedy. Powered by Cognero
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Chapter 17: Performance and Breach of Sales and Lease Contracts a. True b. False 21. 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 22. 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 23. 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 24. A buyer is required to cover, and a failure to do so, will bar the buyer from using any other remedies available under the UCC. a. True b. False 25. A buyer can revoke his or her acceptance if it were predicated on a reasonable assumption that the goods’ nonconformity would be cured, and the nonconformity was not cured. a. True b. False 26. 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 27. When the goods delivered are not as promised, the measure of recovery in the buyer’s suit for damages is the difference between the value of the goods as accepted, and the value if they had been delivered as warranted. a. True b. False 28. If a contract states that repair or replacement is the exclusive remedy, then it is, even if repair or replacement is not possible. a. True b. False 29. 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 Powered by Cognero
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Chapter 17: Performance and Breach of Sales and Lease Contracts 30. The statute of limitations to file actions under the UCC is three years after the cause of action accrues, or the breach occurs. a. True b. False 31. Warranties of title arise automatically in most sales contracts, and a thief breaches the warranty by selling stolen goods. a. True b. False 32. 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 33. A warranty against infringement guarantees that there are no encumbrances, or liens on the product. a. True b. False 34. 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 35. To create an express warranty, a reasonable buyer must regard a seller’s representation of fact—for example, on a product label—as part of the basis of the bargain. a. True b. False 36. Only expressions of fact can make up an express warranty. a. True b. False 37. 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 38. 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 39. A bar of soap is unmerchantable if stepping on it would cause its user to slip and fall. a. True b. False Powered by Cognero
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Chapter 17: Performance and Breach of Sales and Lease Contracts 40. For an implied warranty to be created, the buyer (or lessee) must have relied on the skill (or judgment) of the seller (or lessor) in selecting or furnishing suitable goods. a. True b. False 41. 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 42. Express and implied warranties do not displace each other because more than one warranty can cover the same goods in the same transaction. a. True b. False
Indicate the answer choice that best completes the statement or answers the question. 43. 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. 44. Fuel Connector Products, 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. 45. Elegant Carpets, Inc., agrees to sell a certain quantity of carpeting to Fantastic Floors stores under a shipment contract. Elegant Carpets must a. allow Fantastic Floors 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 Great States Trucking, a carrier. 46. Pine Mills Inc. agrees to sell a certain quantity of plywood to Quality Lumber Company under a destination contract. Pine Mills must a. allow Quality Lumber 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 Railway Transport, a carrier. 47. Business Rents LLC and Cartage Trucking Inc. enter into a contract for a lease of ten hydraulic lifts. Under the perfect Powered by Cognero
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Chapter 17: Performance and Breach of Sales and Lease Contracts 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. b. reasonably. c. in every way. d. substantially. 48. Precise Parts, Inc., and Quality Auto stores enter into a contract for a sale of auto parts that meet certain specifications. Precise Parts ships goods that do not comply. Quality Auto a. cannot reject the entire shipment. b. can reject the entire shipment. c. must accept the entire shipment. d. must reject the entire shipment. 49. 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. 50. On July 10, Bob’s Pet Supply Store orders fifty small dog collars from Canine Collars, Inc. to be delivered by July 15. On July 13, Canine Collars tenders fifty large dog collars. Bob’s rejects the shipment. Canine 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. 51. ABC Hardware Store orders one hundred power hand-drills from Best Tools Inc. When the hand-drills are delivered, they are all missing pieces. ABC rejects the shipment. To exercise a right to cure, Best Tools must (choose all applicable answers) a. promptly notify ABC of the intent to cure. b. make the cure within the contract time for performance. c. pick up the nonconforming tools before the end of the business day. d. enter into a new contract with ABC. 52. 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. 53. Beef 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 Powered by Cognero
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Chapter 17: Performance and Breach of Sales and Lease Contracts a. applies to both parties. b. no longer applies. c. applies only to Beef Burgers. d. applies only to Cattle Ranch. 54. Speedy Auto Parts orders two gross of tires from Tough Tread, Inc. Ten 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. 55. Pavers Inc. contracts to buy some heavy equipment from Earthmovers, Inc. Before either party performs, Earthmovers sells its assets to Excavation Corporation. On learning of the sale, Pavers is concerned about its contract with Earthmovers. Pavers should a. demand assurances 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. 56. 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. 57. Steel Buildings, Inc., agrees to sell four portable garages to Truck Service Center. Five days later, Truck Service refuses delivery and cancels the contract. Steel is entitled to a. force Truck Service to accept the garages. b. recover any damages from Truck Service but not resell the garages. c. resell the garages and recover any damages from Truck Service. d. resell the garages but not recover any damages from Truck Service. 58. Field Farm enters into a contract with Gourmet Restaurant for a sale of a certain quantity of specified vegetables. After Field ships the produce but before Gourmet receives it, the buyer declares bankruptcy. Field 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. 59. Builders Inc. and Concrete Supply Company enter into a contract for a sale of cement. Concrete delivers, but Builders does not pay. Concrete can recover as damages a. any profit lost minus any loss avoided. Powered by Cognero
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Chapter 17: Performance and Breach of Sales and Lease Contracts 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. 60. 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—there are no remedies 61. When the goods are unfinished at the time the buyer breaches the contract, the seller can (choose all applicable answers) a. cease manufacturing the goods, and resell them for scrap. b. complete the manufacturing process, resell, or dispose of the goods c. force the buyer to purchase the goods d. hold the buyer liable for any difference between the contract price and sales price. 62. Loading Ramps Inc. contracts to sell sixteen loading ramps to Moving Service Inc. Loading Ramps ships the ramps, which Moving Service accepts but does not pay for. Loading Ramps 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 Service. d. require Moving Service to revoke its acceptance of the ramps. 63. Real Stones, Inc., and Sparkling Jewelry Stores enter into a contract for a sale of gemstones. Real Stones does not 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. 64. 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. 65. 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. Powered by Cognero
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Chapter 17: Performance and Breach of Sales and Lease Contracts d. the appropriate state government agency. 66. 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. 67. Parties to a contract can change the statute of limitations as long as it falls between these guidelines (choose all applicable answers) a. no less than one year. b. no greater than one year. c. no longer than 3 years. d. no longer than 4 years 68. Text & Talk Corporation sells phones. Under most circumstances, Text & Talk will be presumed to have warranted that its title to the goods is a. the same as the manufacturer’s. b. none of the choices—a warranty of title is not presumed. c. good and valid. d. the best that money can buy. 69. Coal Mine Company buys an excavator from Dig Equipment Inc. Coal Mine is unaware that Equity Credit Company holds a lien against the excavator. If Equity repossesses the goods, Coal Mine can recover for breach of warranty from a. Dig. b. none of the parties. c. the maker of the excavator. d. Equity. 70. Blake, a salesperson for Custom Commercial Kitchens Inc., shows Dylan, a buyer for Eatery Inc., display items in Custom’s showroom, stating that any purchased equipment will match the display. This statement is a. an express warranty. b. an implied warranty. c. none of the choices. d. puffery. 71. Eliza buys a new motorcycle from Fast Bikes, Inc. The most important factor in determining whether an express warranty is created is whether a. Eliza expresses to Fast Bikes what she wants warranted. b. Eliza’s desire for the cycle becomes part of her motivation to deal. c. Fast Bikes expresses to Eliza what it expects of its customers. d. Fast Bikes’ promise becomes part of the basis of the bargain. 72. A statement by a salesperson that “this bike will never break—it is the best bike ever made,” will not lead to an Powered by Cognero
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Chapter 17: Performance and Breach of Sales and Lease Contracts express warranty because (choose all applicable answers) a. it is so clearly improbable. b. no reasonable person would rely on that. c. the salesperson was not an expert d. those words were only on a written advertisement, so no warranty is expected. 73. Home Redo, Inc., and Ivy enter into a contract for a sale of cabinets and countertops. Home Redo, 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 quality that money can buy. 74. Trucks & Trailers, Inc. (T&T), and United Express Service enter into a contract for a lease of trucks. T&T is a merchant who 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. 75. Ski Shop sells a pair of skis to Tami. When Tami uses the skis, they snap in two. The cause is something that Ski Shop did not know about and could not have discovered. This is a breach of a. the implied duty of inspection. b. the implied warranty of merchantability. c. an express warranty. d. none of the choices. 76. Riverside Mill and Standard Contractors enter into a contract for a sale of lumber. 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 is relying on the seller to select suitable goods. b. the buyer asks for it. c. the seller is a merchant who deals in goods of the kind sold. d. the seller knows that the product is fit for any purpose. 77. Cruisin’ Autos, Inc., sells cars to consumers. To avoid liability for oral express warranties, each sales agreement should note that a car is sold a. as is with no warranties b. in perfect condition. c. subject to warranties included in the written contract only. d. with no known defects. 78. 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. Powered by Cognero
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Chapter 17: Performance and Breach of Sales and Lease Contracts b. the implied warranty of merchantability. c. the implied warranty of title. d. none of the choices. 79. Brass Instruments, 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.
80. 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 is obligated to abide by the terms of the contract. The UCC permits a breaching party to “retract” a repudiation (subject to some limitations). This retraction can be done by any method that clearly indicates the party’s intent to perform. Once retraction is made, the rights of the repudiating party under the contract are reinstated. There can be no retraction, if since the time of the repudiation the other party has canceled (or materially changed position) or otherwise indicated that the repudiation is final. 81. 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 calls 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, who 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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Chapter 17: Performance and Breach of Sales and Lease Contracts Answer Key 1. True 2. True 3. False 4. False 5. False 6. False 7. True 8. True 9. True 10. False 11. True 12. False 13. True 14. True 15. True 16. False 17. False 18. True 19. True 20. False 21. False 22. False 23. False 24. False 25. True Powered by Cognero
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Chapter 17: Performance and Breach of Sales and Lease Contracts 26. False 27. True 28. False 29. True 30. False 31. True 32. False 33. False 34. False 35. True 36. True 37. True 38. True 39. False 40. True 41. True 42. True 43. b 44. a 45. d 46. b 47. c 48. b 49. a 50. b 51. a Powered by Cognero
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Chapter 17: Performance and Breach of Sales and Lease Contracts 52. b 53. b 54. c 55. a 56. a 57. c 58. d 59. c 60. c 61. b 62. a 63. c 64. c 65. a 66. c 67. b 68. c 69. a 70. a 71. d 72. a 73. b 74. a 75. b 76. c Powered by Cognero
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Chapter 17: Performance and Breach of Sales and Lease Contracts 77. c 78. a 79. a 80. 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. 81. 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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Chapter 18: Negotiable Instruments
Indicate whether the statement is true or false. 1. For a negotiable instrument to operate practically as a substitute for cash, it must be easily transferable and uncollectible. a. True b. False 2. A time instrument is payable immediately after it is issued. a. True b. False 3. A drawee’s signed agreement to pay a negotiable instrument when presented, is called a draft. a. True b. False 4. A trade acceptance is created when, as part of a deal to buy wheat from Moyo, Naruta signs a draft ordering the buyer to pay for the wheat within ninety days. a. True b. False 5. Any instrument that orders the drawee to pay a certain sum of money is a draft. a. True b. False 6. Checks are demand instruments, and payable upon demand. a. True b. False 7. A promissory note is not a debt, just evidence of a debt. a. True b. False 8. 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 9. 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 10. On an instrument, a mere reference to another writing—“As per contract”— does not render the instrument nonnegotiable. a. True b. False Powered by Cognero
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Chapter 18: Negotiable Instruments 11. To be negotiable, if an instrument is not payable on demand, it must be payable at a definite time. a. True b. False 12. 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 13. 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 14. 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 15. An instrument is not negotiable unless it is “payable to order or to bearer” at the time it is issued, or when it first comes into the possession of a holder. a. True b. False 16. A bearer instrument designates a specific payee. a. True b. False 17. If the numerical and written amounts on a check differ, the check is payable in the written amount. a. True b. False 18. Unlike an assignment, a transfer by negotiation can make it possible for a holder to receive more rights in the instrument than the prior possessor had. a. True b. False 19. If Elin delivers a check payable to her order to First Bank without signing it and receives cash, the transfer is an assignment, not a negotiation. a. True b. False 20. 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 Powered by Cognero
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Chapter 18: Negotiable Instruments 21. A check “payable to the order of Bethany” is indorsed in blank, if Bethany simply delivers it without signing it. a. True b. False 22. 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 23. 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 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. 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 due coursestatus. a. True b. False 26. The shelter principle promotes the marketability of instruments by permitting 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 27. Warranty liability arises in the negotiation of an instrument, even when the transferor does not sign it. a. True b. False 28. 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 29. In terms of requirements for holder-in-due-course (HDC) status, first a party must be a holder of a negotiable instrument. a. True b. False 30. Every party who signs a negotiable instrument is primarily liable for payment of that instrument when it comes due. a. True b. False Powered by Cognero
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Chapter 18: Negotiable Instruments 31. Generally, when an indorsement is unauthorized, the burden of loss falls on the first party to take the instrument. a. True b. False 32. 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 33. 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 34. Intentional cancellation of the holder, discharges all liability of all parties. a. True b. False
Indicate the answer choice that best completes the statement or answers the question. 35. 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. 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. 37. The most common type of draft is a a. promissory note. b. certificate of deposit. c. check. d. electronic draft. 38. Jane 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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Chapter 18: Negotiable Instruments 39. Karen writes on a piece of paper, “I owe you $600,” signs it, and gives it to Lou. 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. 40. Kelly signs an instrument in favor of Leo that states it is “subject to a certain agreement between Kelly and Mona.” 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 Kelly and Mona are not the same persons. 41. Opal 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. 42. 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. a trade. d. services equal in value to the market price of the car. 43. On behalf of Bubbly Drinks Company, Calvin signs an instrument in which he promises to deliver 100 cases of soda as payment to Dispatch & Delivery, Inc., on April 1. This instrument is a. negotiable. b. nonnegotiable, because soda 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 water. d. nonnegotiable, because it does not recite any consideration. 44. Ben signs a promissory note for $1,500 in favor of Community 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. 45. 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. Powered by Cognero
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Chapter 18: Negotiable Instruments d. nonnegotiable, because the exact payment date cannot be determined from the face of the instrument. 46. Fred has six nieces, ages five to sixteen. He writes an order instrument for $50 that states “Pay to the order of my niece.” The order 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. 47. Ana signs a check payable to Boz, who indorses the back, gives it to Credit Union, and receives cash. The transfer of the check from Boz to Credit Union is a. an assignment. b. a negotiation. c. a payment. d. a sale. 48. Rick negotiates a bearer instrument to Shane by delivery a. with an assignment of its rights under a contract. b. with any necessary indorsement. c. without anything more. d. with formal presentment in response to a demand by Shane. 49. Ryan negotiates an order instrument to Selina 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 Shane. 50. 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. 51. On the back of a check payable to Nero, he writes “Pay to Odell, without recourse” and signs it. This a. does not effect the check’s negotiability or any party’s liability. b. relieves Nero of liability on the check. c. relieves Odell of liability on the check. d. renders the check nonnegotiable. 52. Emily writes and signs a check payable to “Festival Cinema.” Georg, Festival’s manager, indorses the check “For deposit only.” This is a. a blank indorsement. b. a qualified indorsement. Powered by Cognero
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Chapter 18: Negotiable Instruments c. a restrictive indorsement. d. a special indorsement. 53. 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.
Indicate one or more answer choices that best complete the statement or answer the question. 54. These are ways in which an instrument can be defective, and not qualify someone for a holder in due course status a. it has been dishonored. b. is it overdue. c. it contains an unauthorized signature. d. it is missing one character or letter.
Indicate the answer choice that best completes the statement or answers the question. 55. At 1 A.M., in front of EZ Credit Corporation, which is closed, Frank buys a $500 promissory note for $50 from Greg. When presented with Frank’s demand for payment, Diane, the maker of the note, could successfully claim that Frank 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. 56. 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. 57. 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. 58. Len 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. Powered by Cognero
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Chapter 18: Negotiable Instruments c. an ordinary holder. d. an ordinary holder in due course. 59. Jill, in good faith and for value, gets from Kiley a negotiable bearer instrument. Jill does not know that Kiley stole the instrument. Jill is a. an HDC. b. not an HDC, because Kiley did not acquire the instrument for value. c. not an HDC, because Kiley did not acquire the instrument in good faith. d. not an HDC, because Kiley transferred the instrument without notice. 60. 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. all of the choices. 61. Kris transfers a note, on which Liu is the maker, to Mia, who takes it for value and in good faith. Mia knows that Kris breached the contract underlying the note, giving Liu a defense against payment. With respect to this note, Mia is a. a knowledgeable holder in due course. b. an ordinary holder. c. an ordinary holder in due course. d. a knowledgeable acceptor. 62. Duke signs a note “payable to the order of Equity Bank.” Unless Duke has a valid defense against payment, his liability on this note is a. impaired. b. primary. c. secondary. d. qualified.
Indicate one or more answer choices that best complete the statement or answer the question. 63. In order to have secondary liability on a negotiable instrument there must be (choose all applicable answers) a. an instrument properly and timely presented. b. that the instrument has two payees. c. that the instrument is dishonored. d. timely notice of dishonor given to the secondarily liable party
Indicate the answer choice that best completes the statement or answers the question. 64. Rubin writes a check drawn on his account at Clearwater Bank, and payable to the order of Gwyn. The bank does not pay the check. Rubin is a. absolved of liability on the check. b. liable to Gwyn for the amount of the check. c. liable to the bank for the amount of the check. Powered by Cognero
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Chapter 18: Negotiable Instruments d. entitled to payment of the amount of the check from Gwyn. 65. Logan is Mining Corporation’s agent and is authorized to write checks on Mining’s account in Northwest Bank. Logan writes a check “pay to the order of Oceanside Resort.” Logan signs the check “Mining Corporation, by Logan, agent.” Northwest Bank dishonors the check. Liability extends to a. Logan. b. Oceanside. c. Mining Corporation. d. no one.
Indicate one or more answer choices that best complete the statement or answer the question. 66. These are valid universal defenses against all holders including holders in due course (choose all applicable answers) a. forgery of signature b. material altercation c. illegality d. date not legible
Indicate the answer choice that best completes the statement or answers the question. 67. 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. Liability associated with the transfer of the note from Equity to Financial is a. none of the choices. b. contractual. c. signature. d. warranty. 68. Vera gives Will a $500 check as payment for a debt. Will crudely increases the amount of the check to $5,000 and deposits the check in his First Bank account. Vera is liable for the payment of $5,000 to a. no one. b. Will and First Bank. c. First Bank only. d. Will only. 69. Home Products, Inc., warrants its goods to be free of defects. Ian issues an instrument to Home Products for the purchase of a thermos that leaks. With respect to payment on the instrument, Ian a. is liable only to a subsequent holder of the instrument. b. has a universal defense against it. c. has a personal defense against it. d. cannot avoid it.
70. 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 Powered by Cognero
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Chapter 18: Negotiable Instruments when making the purchase. Doyle agrees. eMarket buys the stock when the price is $4,000but 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? 71. 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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Chapter 18: Negotiable Instruments Answer Key 1. False 2. False 3. False 4. True 5. True 6. True 7. True 8. False 9. False 10. True 11. True 12. True 13. False 14. True 15. True 16. False 17. True 18. True 19. True 20. False 21. False 22. True 23. True 24. False 25. False Powered by Cognero
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Chapter 18: Negotiable Instruments 26. False 27. True 28. True 29. True 30. False 31. True 32. True 33. False 34. True 35. b 36. b 37. c 38. a 39. b 40. b 41. a 42. b 43. b 44. d 45. a 46. d 47. b 48. c 49. b 50. a 51. b Powered by Cognero
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Chapter 18: Negotiable Instruments 52. c 53. d 54. a, b, c 55. b 56. c 57. d 58. c 59. a 60. a 61. b 62. b 63. a, c, d 64. b 65. c 66. a, b, c 67. d 68. a 69. c 70. 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. An incomplete instrument that 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. Material alteration isan alteration that is material if it changes the obligations of the parties in the instrument in any way. Material alterations include completing an incomplete instrument, adding words or numbers, or making any unauthorized changes that affect the obligation of a party[UCC 3–407(a)]. Powered by Cognero
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Chapter 18: Negotiable Instruments Making any change in theinstrument’s amount, date, or rate of interest—even if the change is only 1 percent—is material. It is not a material alteration, however, to correct the maker’s address orto change the figures on a check so that they agree with the written amount. Material alteration is a complete defense against an ordinary holder, but only a partial defense against an HDC. Thus, an ordinary holder can recover nothing on an instrument that has been materially altered. An HDC can enforce the instrument against the maker or drawer according to its original terms, but not for the altered amount. 71. 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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Chapter 19: International and Space Law
Indicate whether the statement is true or false. 1. A business firm is subject only to the laws of its home nation even when it maintains operations or otherwise does business in other nations. a. True b. False 2. Goods made by a U.S. business firm in a foreign manufacturing plant are not subject to taxes when the goods are imported into the United States. a. True b. False 3. International law is formed as result of international customs, treaties, agreements, and organizations. a. True b. False 4. Sovereign nations agree to be governed by international law to facilitate trade, commerce, and civilized discourse. a. True b. False 5. A treaty is an agreement or contract between two or more nations, that must be authorized and ratified by the supreme power of each nation. a. True b. False 6. International organizations may create uniform rules. a. True b. False 7. 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 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. 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 10. 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 Powered by Cognero
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Chapter 19: International and Space Law b. False 11. 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 12. 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 13. 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 14. There are two forms of exporting: indirect and direct. a. True b. False 15. 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 16. A company can export indirectly and thereby limit its involvement in an international market by making use of agency relationships. a. True b. False 17. 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 18. 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 19. 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 over all phases of the operation in the foreign country. a. True b. False 20. The parties to an international contract can indicate what court, jurisdiction, or tribunal will decide any disputes Powered by Cognero
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Chapter 19: International and Space Law arising under the contract. a. True b. False 21. 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 22. Nations impose laws to restrict or facilitate international business because business activities can affect national interests. a. True b. False 23. An export tax imposed by Congress would be unconstitutional. a. True b. False 24. Congress sets export quotas on various items, such as grain being sold abroad. a. True b. False 25. An allegation that certain imported goods infringe on a U.S. firm’s patents, should be investigated by the ExportImport Bank of the United States. a. True b. False 26. Countries restrict exports to protect national security, further foreign policy objectives, and conserve resources. a. True b. False 27. The purpose of a tariff is to indirectly cause some of their consumers to purchase more domestically manufactured goods. a. True b. False 28. 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 29. Regional trade agreements and associations help to minimize trade barriers among nations. a. True b. False 30. 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. Powered by Cognero
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Chapter 19: International and Space Law a. True b. False 31. U.S. antitrust laws can protect foreign consumers and competitors from violations committed by U.S. citizens and companies. a. True b. False 32. 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 33. 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 34. The Outer Space Treaty declares that internationally recognized political boundaries extend from Earth into the farthest reaches of space. a. True b. False 35. 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 36. No weapons of mass destruction are permitted in space. a. True b. False 37. 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 38. 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 39. The U.S. government does not generally regulate private spaceports and the launch and reentry of private spacecraft. a. True b. False 40. U.S. law allows U.S. citizens, including private companies, to engage in the commercial exploration and exploitation Powered by Cognero
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Chapter 19: International and Space Law of space resources. a. True b. False
Indicate the answer choice that best completes the statement or answers the question. 41. A body of law—formed as a result of international customs, treaties, and organizations—that governs relations among and between nations is a. space law. b. universal law. c. international law. d. national law. 42. A __________ is formed by two nations to govern their commercial exchanges (or other relations) with one another. a. unilateral agreement b. bilateral agreement c. multilateral agreement d. international custom 43. Comida de Chile S.A., an export company in Chile, and Deli Source Inc., an import firm 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. 44. 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. 45. 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. 46. 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. Powered by Cognero
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Chapter 19: International and Space Law c. the doctrine of sovereign immunity. d. expropriation. 47. 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. 48. Habitable Premises 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. a confiscation. b. the act of state doctrine. c. the doctrine of sovereign immunity. d. an expropriation. 49. Coffee Company, a U.S. firm, owns property in the Dominican Republic. When the Dominican government seizes the property, the company asks a U.S. court to order the property’s return. The court rules that the Dominican Republic 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. 50. 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. 51. Under the doctrine of sovereign immunity, because the law is jurisdictional, the ______ has the burden of showing that a defendant is not entitled to sovereign immunity. a. defendant b. plaintiff c. foreign nation d. United States 52. 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. Powered by Cognero
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Chapter 19: International and Space Law d. direct exporting. 53. Sufficient business develops in France for Graphic Comics Inc., a U.S. firm, to appoint Comics Graphique Ltd., a French firm, to act as Graphic’s marketing representative in France, where they will put together ad campaigns to help drum up more business for Graphic. This is a. direct exporting. b. franchising. c. indirect exporting. d. licensing. 54. 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. 55. Opti-Med Inc., a U.S. firm, signs a contract with Pharma Ltd., a Canadian firm, to give Pharma the right to sell OptiMed’s products in Canada. This is a. a distribution agreement. b. indirect exporting. c. direct exporting. d. licensing. 56. 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. Agri wants to avoid import-export regulations. c. Agri will thereby avoid jurisdictional and contract-law issues. d. Agri prefers to limit its involvement in Chinese markets. 57. 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. 58. Burger Heaven, a U.S. firm, makes a deal with a Canadian firm, Donny’s Diners, that allows Donny’s to use Burger Heaven’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.
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Chapter 19: International and Space Law 59. Restful Hotel Corporation, a U.S. firm, establishes a wholly owned subsidiary in Singapore. As a parent corporation, with respect to the subsidiary, Restful 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
Indicate one or more answer choices that best complete the statement or answer the question. 60. Market Maker, Inc., a U.S. firm, can license a foreign manufacturing company to use its (choose all applicable answers) a. patented intellectual property. b. trade secrets. c. trademarked brand. d. bank account.
Indicate the answer choice that best completes the statement or answers the question. 61. The United States owns part of the operation, and the rest is owned either by local owners in the foreign country, or by another foreign entity ______. a. subsidiary b. licensed business c. joint venture d. domestic firm 62. In international business, franchising involves a. a license. b. a distribution agreement. c. a subsidiary. d. direct exporting. 63. 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. This means that ________ is already decided. a. the length of the dispute b. which court will decide the disputes c. which laws will be used in the dispute d. what type of resolution will be used 64. 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. Powered by Cognero
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Chapter 19: International and Space Law 65. _____ are used to stimulate some exports and thereby aid domestic businesses. a. Tariffs b. Restrictions c. Incentives and subsidies d. Quotas 66. 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. 67. 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. 68. The United States taxes each barrel of imported oil at a flat rate. This is a. an antidumping duty. b. a dumping duty. c. a quota. d. a tariff. 69. The government of Japan sets a limit on the amount of rice that can be imported from the United States. This is a. a dumping duty. b. an antidumping duty. c. a quota. d. a tariff. 70. 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. 71. Any conspiracy that has a substantial effect on U.S. commerce is within the reach of the _____. a. World Trade Organization Act b. European Union Act c. Sherman Act d. U.S. Free Trade Agreement Act 72. Suisse Internationale, a Swiss maker of athletic equipment, enters into a price fixing agreement with Total World Powered by Cognero
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Chapter 19: International and Space Law 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. 73. Nakeya and other foreign citizens allege that environmental destruction is being 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 due to lack of jurisdiction. 74. 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. 75. Blue 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, Blue Space 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. 76. 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. 77. Star Flights Inc. launches exploratory and 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 no matter the circumstances. 78. 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. Powered by Cognero
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Chapter 19: International and Space Law c. assert sovereignty over celestial bodies. d. declare exclusive international jurisdiction over space locations.
79. 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? 80. 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? 81. Various regional trade agreements and associations work to reduce trade barriers among nations. Discuss at least two of these in detail.
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Chapter 19: International and Space Law Answer Key 1. False 2. False 3. True 4. True 5. True 6. True 7. False 8. True 9. False 10. True 11. True 12. True 13. False 14. True 15. True 16. True 17. True 18. False 19. False 20. True 21. False 22. True 23. True 24. True 25. False Powered by Cognero
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Chapter 19: International and Space Law 26. True 27. True 28. True 29. True 30. True 31. True 32. False 33. False 34. False 35. True 36. True 37. True 38. True 39. False 40. True 41. c 42. b 43. d 44. a 45. c 46. a 47. a 48. d 49. c 50. b 51. b Powered by Cognero
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Chapter 19: International and Space Law 52. b 53. c 54. c 55. a 56. a 57. d 58. a 59. a 60. a, b, c 61. c 62. a 63. b 64. a 65. c 66. b 67. c 68. d 69. c 70. a 71. c 72. c 73. b 74. c 75. d 76. d Powered by Cognero
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Chapter 19: International and Space Law 77. c 78. b 79. 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 a 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 a 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. 80. 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 a 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 its 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. 81. The World Trade Organization. Most of the world’s leading trading nations are members of the World Trade Organization (WTO), which was established in 1995. Its mission was to minimize trade barriers among nations, each member country is required to grant normal trade relations (NTR) status to other member countries. This means that each member must treat other members at least as well as it treats the country that receives its most favorable treatment with regard to imports or exports. The European Union (EU) arose out the 1957 Treaty of Rome, which created the Common Market, a free trade zone comprising the nations of Belgium, France, Italy, Luxembourg, the Netherlands, and West Germany. Today, the EU is a single integrated trading unit made up of twenty-seven European nations. Replacing the North American Free Trade Agreement, the United States-Mexico-Canada Agreement (USMCA) created a regional trading unit consisting of Mexico, Canada, and the United States. The goal of the USMCA is to reduce tariffs among these three countries on substantially all goods, and to make trade between the three countries as equitable as possible. The Central America-Dominican Republic-United States Free Trade Agreement (CAFTA-DR) was formed by Costa Rica, Powered by Cognero
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Chapter 19: International and Space Law the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, and the United States. Its purpose is to reduce tariffs and improve market access among all of the signatory nations. Legislatures in all seven countries have approved the CAFTA-DR, despite significant opposition in certain nations. The United States ratified its first free trade agreement with South Korea in 2011. This agreement, called the Republic of Korea-United States Free Trade Agreement (KORUS FTA), is aimed at eliminating 95 percent of each nation’s tariffs on industrial and consumer exports. KORUS was expected to boost U.S. exports and benefit U.S. automakers, farmers, ranchers, and manufacturers. To date, however, exports have not increased as much as predicted, and the agreement is likely to be renegotiated.
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Chapter 20: Banking in the Digital Age
Indicate whether the statement is true or false. 1. Because checks serve as a substitute for cash, they can facilitate financial record keeping. a. True b. False 2. 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 3. If a brokerage house handles a check for payment or collection, the check is covered by UCC Article 4. a. True b. False 4. Debit cards represent the most common type of negotiable instrument. a. True b. False 5. When a bank draws a check on itself, the check is a negotiable instrument at the moment it is issued. a. True b. False 6. 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 7. 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 8. The contractual rights and duties of the bank and the customer depend on the nature of the transaction. a. True b. False 9. When a bank wrongfully dishonors a check, it is liable to the customer for any resulting damages. a. True b. False 10. 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 Powered by Cognero
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Chapter 20: Banking in the Digital Age 11. 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 12. A bank is not obligated to pay an uncertified check presented for payment more than six months from its date. a. True b. False 13. If a bank pays a stale check in good faith, but without consulting the customer, the bank has a right to charge the customer’s account for the amount. a. True b. False 14. A customer may postdate a check for whatever date they want, and hold the bank liable if they cash it before that date. a. True b. False 15. 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 16. A customer has a right to stop payment on a check even if it has been certified. a. True b. False 17. 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 18. 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 19. 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 20. A bank may contractually shift to its customer the risk of forged checks created electronically, or otherwise by the use of non-manual signatures. a. True b. False Powered by Cognero
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Chapter 20: Banking in the Digital Age 21. To avoid liability for negligence, a customer must examine monthly bank statements and canceled checks promptly, with reasonable care, and report any forged signatures to the bank. a. True b. False 22. Whoever takes an instrument with a forged indorsement, cannot become a holder because a forged indorsement does not transfer title. a. True b. False 23. A customer’s negligence cannot shift the loss when payment is made on a check with an altered amount. a. True b. False 24. Under the Check Clearing for the 21st Century Act (Check 21, which is the subject of this chapter’s Landmark in the Law feature), a bank must credit a customer’s account as soon as the bank receives the funds. a. True b. False 25. The bank on which a check is drawn is the depositary bank. a. True b. False 26. 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 27. 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 28. Checks received after a certain time can be deferred for posting until the next banking day. a. True b. False 29. Electronic banking has many difficulties. a. True b. False 30. There are many types of Electronic Fund Transfer (EFT) services available by banks. a. True b. False 31. Unauthorized use of an EFT system constitutes a federal felony, and fines up to $10,000 and up to 10 years in prison. Powered by Cognero
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Chapter 20: Banking in the Digital Age a. True b. False 32. Because the speed of check-processing time is increasing, to avoid overdrafts, an accountholder needs to verify that funds are available to cover a check when it is written. a. True b. False 33. 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 34. A paper check must be presented for payment—it cannot be retained at its place of deposit, with only its digital image (or description) presented as proof. a. True b. False 35. Electronic banking makes it easier to issue a stop-payment order. a. True b. False 36. Fewer records are available with electronic banking to prove or disprove that a transaction occurred. a. True b. False
Indicate the answer choice that best completes the statement or answers the question. 37. Ken presents an instrument that states “pay to the order of Laura” to Metro Bank for payment. The most common type of negotiable instrument, this is a. a substitute check. b. a check. c. an electronic fund transfer. d. a payment via a mobile device.
Indicate whether the statement is true or false. 38. Online payment systems are not yet among the most common types of electronic fund transfer systems. a. True b. False
Indicate the answer choice that best completes the statement or answers the question. 39. With respect to processing checks for payment, the Uniform Commercial Code governs the relationships of banks with a. their customers. Powered by Cognero
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Chapter 20: Banking in the Digital Age b. the Federal Reserve. c. only other banks. d. all of the choices.
Indicate whether the statement is true or false. 40. If any part of a commercial electronic fund transfer is covered by the Electronic Fund Transfer Act, the entire transaction is excluded from the UCC Article 4A a. True b. False
Indicate the answer choice that best completes the statement or answers the question. 41. 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.
Indicate whether the statement is true or false. 42. Commercial wire transfers are governed by the EFTA. a. True b. False
Indicate the answer choice that best completes the statement or answers the question. 43. Beca signs a check “pay to the order of City College” drawn on Beca’s account in Delta Bank to pay her tuition. Beca is a. the joint signer. b. the drawee. c. the drawer. d. the payee.
Indicate whether the statement is true or false. 44. Electronic banking has reduced the number of possibilities for tampering with a person’s private banking information. a. True b. False
Indicate the answer choice that best completes the statement or answers the question. 45. 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. the negotiator. b. the drawee. Powered by Cognero
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Chapter 20: Banking in the Digital Age c. the drawer. d. the payee. 46. Tomas signs a check “pay to the order of University Bookstore” drawn on his account in Verity Bank to pay for his textbooks. The bookstore deposits the check in its account in West Bank. Like most checks, this check is a. virtual cash. b. digital cash. c. a special type of draft. d. a type of electronic fund transfer. 47. Mara has a checking account with North Bank. Mara signs a check “payable to Ovid” drawn on Mara’s account. North Bank is a. the obligor. b. the drawee. c. the drawer. d. the payee. 48. Elmore 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. 49. Corky pays Debit 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 Debit Bank. c. Debit Bank only. d. Corky, Debit Bank, and Electric Company. 50. When a drawee bank certifies a check, it charges the drawer’s account _____ with the amount of the check, and transfers those funds to its own certified check account. a. within a business day b. immediately c. within 48 hours d. whenever the drawer requests 51. Ally writes a check to Beri, on Ally’s account at Community Bank. The bank dishonors the check even though Ally has sufficient funds in her account. The bank is liable to a. Ally. b. Beri. c. the payee on Ally’s next check. d. no one. Powered by Cognero
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Chapter 20: Banking in the Digital Age 52. 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. 53. 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. 54. Quinn signs a check “pay to the order of Ronda,” drawn on Quinn’s account in Suburban Bank. Quinn 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. 55. Ray signs a check “pay to the order of Stella,” drawn on Ray’s account in Town Bank. He later orders the bank not to pay the check (a stop order), but the bank pays it over his order. Subsequent checks written on the account “bounce.” Most likely liable for the costs to Ray is a. any party to whom a subsequent check was written. b. Ray. c. Stella. d. Town Bank. 56. 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. 57. 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 Bank 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.
Indicate one or more answer choices that best complete the statement or answer the question. Powered by Cognero
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Chapter 20: Banking in the Digital Age 58. 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. The bank has the option to (choose all applicable answers) a. cash the check. b. consult Emma. c. refuse to cash the check. d. ask Dallas what he would prefer.
Indicate the answer choice that best completes the statement or answers the question. 59. 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. 60. Teri writes a check for $1,000 drawn on United Bank, payable to Vida. Vida presents the check for payment to United Bank, which dishonors it. The party most likely liable to Vida is a. Teri in a civil suit. b. Teri in a criminal prosecution. c. United Bank in a civil suit. d. none of the choices. 61. Dan signs a check “pay to the order of Eton” drawn on Dan’s account in Fidelity 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. 62. Shane issues a check drawn on Thrifty Bank to Farm Supply Store to pay for a rototiller. Later, Shane discovers a defect in the device and orders Thrifty to stop payment on the check. Shane does not renew the order, and the bank clears the check eight months later. The bank a. must recredit Shane’s account b. must obtain funds from Farm Supply to cover the check. c. must substitute acceptable goods. d. need not recredit Shane’s account. 63. Gillis writes a check to Harley as payment for a game player, but soon discovers it is broken. He 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. Powered by Cognero
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Chapter 20: Banking in the Digital Age 64. 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. 65. Faye forges Greta’s signature on a check “payable to the order of Faye,” drawn on Greta’s account in 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. 66. 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. 67. 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. 68. 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. 69. 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. 70. If a bank exercises reasonable care in cashing a check, they can use _____ as a defense against liability for cashing an altered check. Powered by Cognero
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Chapter 20: Banking in the Digital Age a. customer negligence b. indorser negligence c. statute of limitations d. UCC 71. 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.
Indicate one or more answer choices that best complete the statement or answer the question. 72. _____ are banks that are involved in the collection process of checks. a. Depository banks b. Payor banks c. Intermediary banks d. Dishonoring banks
Indicate the answer choice that best completes the statement or answers the question. 73. Finance Bank receives a check drawn on the account of Enterprise Industries, 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. 74. When processing a check, Platinum Bank encodes information, such as the amount of the item. Platinum thereby warrants to any subsequent bank (or payor) a. the item has been returned to the drawer. b. the item is insufficient. c. the check has been processed manually. d. the encoded information is correct. 75. 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. 76. 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 Powered by Cognero
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Chapter 20: Banking in the Digital Age a. $5. b. $50. c. $500. d. $5,000. 77. Maya uses e-banking consisting of funds and payments 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. digitized payments. c. checks. d. none of the choices.
78. 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’s 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? 79. 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 most of the loss due to the theft? Explain.
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Chapter 20: Banking in the Digital Age Answer Key 1. True 2. True 3. False 4. False 5. True 6. True 7. False 8. True 9. True 10. False 11. False 12. True 13. True 14. False 15. True 16. False 17. False 18. False 19. True 20. True 21. True 22. True 23. False 24. True 25. False Powered by Cognero
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Chapter 20: Banking in the Digital Age 26. True 27. True 28. True 29. True 30. True 31. True 32. True 33. False 34. False 35. False 36. True 37. b 38. False 39. a 40. True 41. b 42. False 43. c 44. False 45. d 46. c 47. b 48. a 49. c 50. b 51. a Powered by Cognero
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Chapter 20: Banking in the Digital Age 52. d 53. b 54. b 55. d 56. d 57. b 58. b, c 59. c 60. a 61. d 62. d 63. a 64. b 65. d 66. d 67. b 68. c 69. c 70. a 71. d 72. a, b, c 73. d 74. d 75. d 76. c Powered by Cognero
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Chapter 20: Banking in the Digital Age 77. b 78. 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 can recover from Nick as well. 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, 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. 79. Yes, Megan is entitled to a recredit of her account for 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. If a customer voluntarily gives the debit card to another, who then uses it improperly, the protections just mentioned do not apply. In this situation, Megan promptly notified USA, so her liability will be no more than $50.
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Chapter 21: Security Interests and Creditors’ Rights
Indicate whether the statement is true or false. 1. 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 2. 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 3. Every interest in personal property that guarantees the payment (or performance) of an obligation is a security interest. a. True b. False 4. A party who owes payment (or performance) of a secured obligation is a secured party. a. True b. False 5. A debtor must have title to collateral to give a secured party a security interest in the property. a. True b. False 6. 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 7. Attachment ensures that a security interest between a debtor, and a secured party is effective. a. True b. False 8. A security agreement must contain a description of the collateral that reasonably identifies it. a. True b. False 9. The secured party must give something of value to the debtor in the form of money. a. True b. False 10. The method by which a secured party obtains a priority interest in a debtor’s collateral is enhancement. a. True b. False 11. A secured party perfects a claim by filing a financing statement with the debtor. Powered by Cognero
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Chapter 21: Security Interests and Creditors’ Rights a. True b. False 12. Improper filing of a financing statement can render a security interest unperfected. a. True b. False 13. With a binding agreement to extend credit, a secured party can obtain a security interest. a. True b. False 14. Consideration to support a simple contract is not sufficient value to support the acquisition of a security interest. a. True b. False 15. 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 16. 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 17. 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 18. The UCC’s classification or definition of collateral does not affect where or how to perfect a security interest. a. True b. False 19. A security interest can cover only property in which the debtor has present rights. a. True b. False 20. Retail Store, Inc., can give Secure Loan Company a security interest in future inventory to be acquired by the debtor. a. True b. False 21. A floating lien is a security interest retained in collateral even when the collateral changes in character, classification, or location. a. True b. False Powered by Cognero
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Chapter 21: Security Interests and Creditors’ Rights 22. When two conflicting security interests are unperfected, the last to get attached has priority. a. True b. False 23. When a security interest is perfected, it has priority over any other perfected security interests. a. True b. False 24. The last security interest to be perfected, is the first in priority over any other perfected security interests. a. True b. False 25. Individual debtors file their financing statements in the state where the collateral is located. a. True b. False 26. The phrase perfected on attachment means that these security interests are automatically perfected when the creditor takes possession of the collateral. a. True b. False 27. A financing statement is effective for ten years from the date of filing. a. True b. False 28. A secured party may be liable to a debtor for failing to comply with the debtor’s request for confirmation of the amount of the unpaid debt. a. True b. False 29. 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 30. 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 31. 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 32. Most liens have little practical use, because liens generally do not take priority over other claims to the same property. Powered by Cognero
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Chapter 21: Security Interests and Creditors’ Rights a. True b. False 33. A small-amount mechanic’s lien typically stays on record until the property, against which it has been filed, is sold and then the lien is paid out of the sale proceeds. a. True b. False 34. An artisan’s lien remains in existence as long as the lienholder maintains possession of the property, and the lien is terminated once possession is voluntarily surrendered, unless the surrender is only temporary. a. True b. False 35. 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 36. A writ of execution is an order that directs the sheriff to seize (levy), and sell any of the debtor’s nonexempt real or personal property. a. True b. False 37. Federal law provides a minimal framework to protect debtors from losing all their income in order to pay judgment debts. a. True b. False 38. 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 39. The guarantor can be required to pay the obligation only after the principal debtor defaults, a. True b. False 40. 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
Indicate the answer choice that best completes the statement or answers the question. 41. 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. This is the concept of a. bad faith. Powered by Cognero
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Chapter 21: Security Interests and Creditors’ Rights b. fiduciary duty. c. a secured transaction. d. a fair debt collection practice. 42. Secure 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. 43. Reese applies for a credit card at Sell-Mart. The application gives Sell-Mart a security interest in any goods that Reese buys with the card until she pays for them in full. In this situation, the secured party is a. Reese. b. Sell-Mart. c. the credit card. d. the goods that are bought with the credit card. 44. 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. 45. To create an enforceable security interest between Finance Corporation and Global Trade Inc. with 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. 46. To create an enforceable security interest between Mortgage Bank and Nations Property Company with 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. 47. Owen is given value by Payday Sales Company 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. one of the requirements. Powered by Cognero
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Chapter 21: Security Interests and Creditors’ Rights 48. Loan Company has a security interest against Manufacturing Inc. that is enforceable. In other words, with respect to the collateral, Loan’s rights are said to a. attach. b. ensure. c. perfect. d. process. 49. ____________ means to sign, execute, or adopt any symbol on an electronic record that verifies that the person signing has the intent to adopt or accept the record. a. Assign b. Retain c. Authenticate d. Authorize 50. 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’s default by a. b. c. d. 51. The payment of Cathy’s debt to Debt Collector LLC is guaranteed by Cathy’s personal property. Debt Collector 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. 52. Lending Bank files a financing statement regarding a transaction with Metro Company. 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. Lending’s name. d. Metro’s name. 53. Bayside Marina borrows funds from Credit Union secured by Bayside’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 of local official. c. a secured party. d. a debtor. 54. A continuation statement must be filed within this amount of time to extend a financing statement’s effectiveness. a. 3 months Powered by Cognero
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Chapter 21: Security Interests and Creditors’ Rights b. 6 months c. 1 year d. 18 months 55. Kelly’s Autos, Inc., borrows funds from Loan Company under a security agreement. Later, Kelly’s buys new vehicles to add to its inventory. Loan Company has a security interest in the new vehicles a. if the security agreement included an after-acquired property clause. b. if the lender has not yet filed a financing statement. c. if Kelly’s bought the new vehicles with the lender’s funds. d. none of the choices. 56. 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. 57. Capital, Inc., holds a security interest in Discount Retail Company’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. a right of redemption. d. a right to subrogation. 58. 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. 59. Credit Financing, Inc., and Debt Lending Company hold security interests in property owned by Fleet Cartage, Inc. 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 or attachment. d. the float of the liens. 60. 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. Powered by Cognero
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Chapter 21: Security Interests and Creditors’ Rights d. a trustee in bankruptcy. 61. Credit Corporation holds a perfected security interest in Dental 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. 62. Bonds Bank assigns to Capital Invest 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. 63. Rollover 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. a security interest. b. a termination statement. c. a confirmation request. d. an amendment. 64. Reg borrows funds from Suburban Bank secured by Reg’s house. Reg 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. 65. 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. 66. After proper disposition of the collateral, if a secured party has not collected all the debtor owes, unless otherwise agreed, the debtor normally is liable for any deficiency, and the creditor can obtain _____ to enforce. a. an assignment b. a deficiency judgment c. a lien d. a proceed sale
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Chapter 21: Security Interests and Creditors’ Rights 67. 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. 68. Rancho 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. Rancho’s personal property. b. Rancho’s real estate. c. the $5,000 owed on the contract. d. property held by a third party. 69. 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. 70. 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. 71. 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. 72. Business Sales Inc.’s debt to Cartage Company is past due. Cartage brings a legal action against Business Sales 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. 73. Brewery Company’s debt to Credit Service is past due. Credit obtains a judgment against Brewery, but the firm refuses to pay. Credit asks the court to order the seizure of Brewery’s property. This is a request for a. an artisan’s lien. Powered by Cognero
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Chapter 21: Security Interests and Creditors’ Rights b. a mechanic’s lien. c. a writ of attachment. d. a writ of execution. 74. The only things that can be garnished are the following (choose all applicable answers) a. wages. b. bank account funds. c. pensions. d. child support. 75. To make a sale to Gourmet Inc., Hill Valley Commodities asks Gourmet’s outside accountant Ina to co-sign a credit application. According to the terms, if Gourmet defaults, Hill Valley can look to her for payment without first pursuing legal remedies against Gourmet. Tina is a. a surety. b. a lienor. c. a guarantor. d. a creditor. 76. Barth borrows funds from City Bank to pay his tuition. His mother Debi co-signs the credit application. After the loan agreement is signed, Barth agrees to a higher rate of interest without telling Debi. She is 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. 77. Consumer Credit Inc. (CCI) lends $1,000 to Dave. Eve acts as Dave’s surety. If Eve pays the loan, she gets a. any right that Dave had against CCI. b. any right that Dave or CCI had against her. c. any right that CCI had against Dave. d. none of the choices. 78. A surety has _____ priority when it comes to the debt at hand. a. secondary b. primary c. co-liability d. no liability
79. The roof in Rosalyn’s house springs a leak. She contracts with Shelter Roofing & Restoration Company to repair the roof and fix the damage to the house. Rosalyn pays 10 percent of the price in advance. Shelter Roofing does the work, but Rosalyn refuses to pay the rest of the price. What can Shelter Roofing do, and how is it done? 80. Rashi is a student at State University. In need of funds to pay for tuition and books, Rashi asks Tiempo 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. Umberto, a well-known businessperson and a friend of Rashi’s family, calls Tiempo and agrees to pay Powered by Cognero
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Chapter 21: Security Interests and Creditors’ Rights the loan if Rashi cannot. Because of Umberto’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 Tiempo to extend the loan for three months. The lender agrees, raising the interest rate for the extended period. Umberto 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 Tiempo assert a claim against Umberto on the debt?
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Chapter 21: Security Interests and Creditors’ Rights Answer Key 1. True 2. True 3. True 4. False 5. False 6. False 7. True 8. True 9. False 10. True 11. False 12. True 13. True 14. False 15. False 16. True 17. True 18. False 19. False 20. False 21. True 22. False 23. False 24. False 25. False Powered by Cognero
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Chapter 21: Security Interests and Creditors’ Rights 26. True 27. False 28. True 29. False 30. True 31. False 32. False 33. False 34. True 35. False 36. False 37. True 38. False 39. False 40. False 41. c 42. d 43. b 44. b 45. d 46. a 47. d 48. a 49. b 50. b 51. d Powered by Cognero
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Chapter 21: Security Interests and Creditors’ Rights 52. b 53. a 54. b 55. a 56. a 57. a 58. d 59. c 60. b 61. b 62. b 63. b 64. c 65. c 66. b 67. a 68. b 69. a 70. a 71. a 72. c 73. d 74. a 75. a 76. a Powered by Cognero
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Chapter 21: Security Interests and Creditors’ Rights 77. c 78. b 79. Shelter Roofing can place a mechanic’s lien on Rosalyn’s house. State law governs mechanic’s liens. Under that law, if a property owner in Rosalyn’s situation does not pay what he or she owes, the house can be sold to satisfy the debt. The only requirements are that the lien be filed within a specific time from the time of the work, depending on the applicable statute. Notice of the foreclosure and sale of the house must be given to Rosalyn in advance. The proceeds from the sale are used to pay the debt and the costs of the proceedings, with any surplus paid to Rosalyn. 80. Tiempo cannot hold Umberto liable for two reasons.
First, Umberto’s agreement is a guaranty contract to answer for the debt of another. The contract with the lender provided that Umberto would pay if Rashi could not; therefore, Umberto 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 Umberto’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, Umberto has a defense against Tiempo’s claim that would prevail even if the guaranty contract had been in writing.
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Chapter 22: Bankruptcy
Indicate whether the statement is true or false. 1. Bankruptcy relief is provided under state, not federal, law. a. True b. False 2. 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 3. Bankruptcy proceedings can be heard in any federal court. a. True b. False 4. Businesses must be technically insolvent to file for bankruptcy relief. a. True b. False 5. Anyone obligated to a creditor can declare bankruptcy. a. True b. False 6. 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 7. Debts that remain after a liquidation are not discharged, and the debtor retains his or her obligation to pay them. a. True b. False 8. A debtor cannot defend against an involuntary bankruptcy petition because that would be contrary to the definition of involuntary. a. True b. False 9. 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 10. Any person—including individuals, but not partnerships or corporations—may be a debtor under Chapter 7. a. True b. False Powered by Cognero
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Chapter 22: Bankruptcy 11. 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 12. 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 13. 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 14. 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 15. 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 16. 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 17. Child support payments will cease once an automatic stay is in place in a bankruptcy proceeding. a. True b. False 18. In a Chapter 7 proceeding, after-acquired property by the debtor can become part of the bankruptcy estate if it is acquired within 12 months. a. True b. False 19. In a Chapter 7 proceeding, unsecured creditors’ claims are subordinate to the claims of secured creditors. a. True b. False 20. 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 Powered by Cognero
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Chapter 22: Bankruptcy 21. 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 22. 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 23. Recent back taxes are not dischargeable in a Chapter 7 bankruptcy a. True b. False 24. 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 25. Any debtor who is eligible for bankruptcy relief under Chapter 7 is eligible under Chapter 11. a. True b. False 26. If all classes of creditors accept the debtor’s Chapter 11 plan, the court cannot refuse to confirm it. a. True b. False 27. 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 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. A reorganization plan under a Chapter 11 bankruptcy, must have a repayment plan that will be executed within 7 years. a. True b. False 30. Voluntary petitions may be filed to initiate Chapter 7 or Chapter 11, but not Chapter 13, bankruptcies. a. True b. False 31. 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. Powered by Cognero
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Chapter 22: Bankruptcy a. True b. False 32. In a Chapter 13 proceeding, the debtor retains possession of his or her assets. a. True b. False 33. Under normal circumstances, only the debtor may file a plan under Chapter 13. a. True b. False 34. Under Chapter 13, a plan may provide for the payment of all of the debtor’s obligations in full. a. True b. False 35. 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 36. A court cannot dismiss a debtor’s petition under Chapter 13 even if the circumstances indicate bad faith. a. True b. False 37. Under Chapter 13, all debts are dischargeable. a. True b. False
Indicate the answer choice that best completes the statement or answers the question. 38. 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. 39. 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. 40. All bankruptcy proceedings are held in a. federal bankruptcy courts. b. state bankruptcy courts. Powered by Cognero
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Chapter 22: Bankruptcy c. special cross-jurisdictional debtors courts. d. local small-claims courts. 41. 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. 42. 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. 43. 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. 44. 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. 45. 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. 46. 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. 47. 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. Powered by Cognero
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Chapter 22: Bankruptcy c. $15,775. d. $157,750. 48. 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. 49. 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. 50. 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. 51. 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. 52. Ann files a petition in bankruptcy under Chapter 7. Brian takes control over her property and reduces it to money for distribution. Brian 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. 53. 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. 54. 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. Powered by Cognero
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Chapter 22: Bankruptcy c. the automatic stay. d. the creditors’ meeting. 55. 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. 56. 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. 57. 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. 58. 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. 59. 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. 60. Under a Chapter 11 bankruptcy, the debtor can remain in business under a a. trustee b. debtor in possession c. an owner with liability d. a debtor to a bank 61. 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. Powered by Cognero
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Chapter 22: Bankruptcy d. the debtor’s assets are liquidated to pay tax claims. 62. 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. 63. 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. 64. 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. 65. 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. 66. 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. 67. 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.
68. 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 Powered by Cognero
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Chapter 22: Bankruptcy 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. 69. Shippers Dispatch Corporation 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?
Indicate one or more answer choices that best complete the statement or answer the question. 70. A debtor’s voluntary petition for a Chapter 7 bankruptcy may be dismissed for (choose all applicable answers) a. failure to provide necessary documents. b. the debtor goes out and buys a new car. c. if the debtor has been convicted of a crime. d. the debtor fails to pay child support obligations. 71. 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. a copy of the debtor’s income tax returns. d. a statement indicating that the debtor understands basic economics. 72. The following property is exempt from a Chapter 7 bankruptcy petition a. reasonable necessaries. b. tools of one’s trade. c. a vehicle per person. d. pensions. 73. Under Chapter 7, once the proceeds have been distributed, those obligations of the debtor are discharged. These remaining ones will not be discharged a. taxes accruing within the last three years. b. claims based on the debtor’s willful or malicious conduct or fraud. c. credit card debt. d. domestic-support obligations. 74. 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. has a lot of creditors. 75. Under Chapter 7 and Chapter 11 a. only the bank can bring the action. b. petitions can be filed voluntarily or involuntarily. Powered by Cognero
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Chapter 22: Bankruptcy c. the same principles govern the entry of the order for relief. d. the automatic stay provision applies. 76. Under Chapter 13, a repayment plan must provide for a. the turnover of the debtor’s future income, as necessary. b. full payment of all claims, without exception. c. the same treatment of each claim within a particular class of claim. d. which items the debtor wishes to not pay.
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Chapter 22: Bankruptcy Answer Key 1. False 2. False 3. False 4. False 5. True 6. False 7. False 8. False 9. False 10. False 11. False 12. False 13. True 14. True 15. False 16. True 17. False 18. False 19. True 20. False 21. False 22. True 23. True 24. True 25. True Powered by Cognero
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Chapter 22: Bankruptcy 26. False 27. False 28. True 29. False 30. False 31. True 32. True 33. True 34. True 35. True 36. False 37. False 38. c 39. c 40. a 41. b 42. c 43. b 44. a 45. d 46. a 47. c 48. c 49. b 50. a 51. a Powered by Cognero
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Chapter 22: Bankruptcy 52. c 53. b 54. d 55. b 56. a 57. d 58. b 59. a 60. b 61. c 62. c 63. c 64. d 65. b 66. b 67. a 68. 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. 69. 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. Powered by Cognero
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Chapter 22: Bankruptcy 70. a, c, d 71. b, c 72. a, b, d 73. a, b, d 74. a, b, c 75. b, c, d 76. a, c
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Chapter 23: Agency Relationships in Business
Indicate whether the statement is true or false. 1. In an agency relationship, one party called the principal agrees to represent or act for another called the agent. a. True b. False 2. By using agents, a principal can conduct multiple business operations simultaneously in various locations. a. True b. False 3. Using an agent provides benefits to a principal, but can also result in liability imposed on the principal. a. True b. False 4. 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 5. Agency relationships cannot exist outside an employment, so agency law has a narrower reach than employment law. a. True b. False 6. 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 7. An independent contractor is, by definition, an employee. a. True b. False 8. A truck driver who drives a company truck on a regular basis is most likely an employee. a. True b. False 9. A property owner who hires a realtor to sell a property thereby enters into an agency relationship with an employee for a limited time. a. True b. False 10. The greater the employer’s control over the work, the more likely it is that the worker is an employee. a. True b. False 11. Independent contractors are exempt from federal overtime laws. Powered by Cognero
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Chapter 23: Agency Relationships in Business a. True b. False 12. Employees are protected under antidiscrimination laws, and independent contractors are not. a. True b. False 13. 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 14. A person who cannot legally enter into a certain contract directly can do so indirectly through an agent. a. True b. False 15. Any person can be an agent, regardless of whether he or she has the capacity to contract. a. True b. False 16. It is not illegal for a licensed professional to employ an unlicensed agent to perform professional acts. a. True b. False 17. An agency relationship can arise by ratification, which involves a determination of intent expressed by words or conduct. a. True b. False 18. 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 19. 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 20. In some situations, the courts find an agency relationship where there is no formal agreement. a. True b. False 21. 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 Powered by Cognero
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Chapter 23: Agency Relationships in Business b. False 22. If an agent has represented himself or herself as possessing special skills, the agent is expected to use them. a. True b. False 23. 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 24. 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 25. 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 26. A principal has a duty to pay an agent in a timely manner the customary compensation for services rendered. a. True b. False 27. A principal must reimburse an agent for reasonable expenses incurred during the performance of the agent’s duties. a. True b. False 28. 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 29. 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 30. Actual authority in an agency relationship arises from what a principal makes clear to a third party. a. True b. False 31. The principal is bound by the agent’s unauthorized act, unless the principal negates it. a. True b. False Powered by Cognero
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Chapter 23: Agency Relationships in Business 32. A principal can ratify an agent’s unauthorized acts in part or in whole. a. True b. False 33. 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 34. When an agent, acting within the scope of his or her authority, contracts with a third party, in no circumstance is the agent liable to the third party. a. True b. False 35. 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 36. 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 37. A principal may be liable for an agent’s or an employee’s tort, with the exception of negligence, which is an unintentional tort for which the agent or employee is vicariously liable. a. True b. False 38. Time commuting to and from work is considered part of the employment. a. True b. False 39. 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 40. Both parties to an agency relationship have the power and the right to terminate the relationship at any time. a. True b. False
Indicate the answer choice that best completes the statement or answers the question. 41. 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. Powered by Cognero
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Chapter 23: Agency Relationships in Business b. an agent and a principal. c. a principal. d. none of the choices. 42. 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. 43. 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. 44. 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. 45. These things would indicate an employer/employee relationship and not an independent contractor (choose all applicable answers) a. employer provides tools for the job. b. paying every two weeks, c. the worker can work whenever they wish. d. the supervisor has a say in what the worker does 46. Diamonds & Gold LLC hires Elle to buy gems and precious metals from various sources on its behalf. In this relationship, Diamonds is a. an employee. b. an independent contractor. c. a principal. d. an agent. 47. 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. Powered by Cognero
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Chapter 23: Agency Relationships in Business 48. Kit hires Lanie to manage Kit’s Cattle Ranch. Lanie agrees to act on Kit’s behalf, subject to Kit’s control, and Kit trusts Lanie to so act. Their relationship is a. an employee and an agent. b. none of the choices. c. an employer and an independent contractor. d. a principal and an agent. 49. 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. 50. Denny, a certified public accountant and an investor, and Ethel, an insurance salesperson and a realtor, may create an agency relationship for a. a business purpose only. b. any legal purpose. c. any purpose. d. no purpose. 51. 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. none of the choices. 52. Rosa introduces Sal to her friend Trey as “my associate.” Sal purports to act as Rosa’s agent in a business transaction with Trey. If Rosa is liable for Sal’s actions, it will be because their relationship is a. a nullified agency. b. an agency by estoppel. c. an agency by operation of law. d. not an agency relationship. 53. Lucy is married to Marco. Lucy buys food for their children’s lunches and charges the cost to Marco’s account. This is an agency by a. agreement. b. estoppel. c. operation of law. d. none of the choices. 54. Energy Company employs Fred to negotiate the purchase of mineral rights for future mining projects. Fred secretly buys some of the property and sells it to Energy at a profit. Fred has breached Powered by Cognero
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Chapter 23: Agency Relationships in Business a. the duty of performance. b. the duty of loyalty. c. no duty. d. the duty of notification. 55. Bern, a salesperson at a Carpet & Tile store, tells Dan, a customer, “Buy your flooring here, and I’ll install it for less than the store would charge.” Dan buys carpeting, which Bern installs for half the store’s price. Bern keeps the money. With respect to the store, Bern has breached a. no duty. b. the duty of loyalty. c. the duty of performance. d. the duty of obedience. 56. Larry is an agent for Mary. She gives him clear instructions to enter into contracts on her behalf only on Mondays, Wednesdays, or Fridays. He enters into a contract on her behalf on Tuesday. Larry has breached a. no duty. b. the duty of loyalty. c. the duty of performance. d. the duty of obedience. 57. Emmett, an agent for Fridley, signs an agreement with Glover on Fridley’s behalf but neglects to tell him that the agreement requires the payment of a certain tax. The government prosecutes Fridley for failing to pay the tax. He is a. liable, because notice to Emmett is notice to Fridley. b. liable, because notice to Glover is notice to Fridley. c. not liable, because Emmett did not notify Fridley of the tax. d. not liable, because Glover did not tell Fridley about the tax. 58. Curly Fries Inc. grants its agent Dian an exclusive territory in which to sell its products. The company cannot compete with Dian in that territory under the duty of a. none of the choices. b. cooperation. c. indemnification. d. reimbursement. 59. 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. 60. Suva is an agent for Tax Accountants, Inc. On the firm’s behalf and at its request, Suva pays Uzo for specially coded software. Suva’s right to obtain the amount of the payment from Tax Accountants arises under the duty of a. none of the choices. Powered by Cognero
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Chapter 23: Agency Relationships in Business b. compensation. c. indemnification. d. reimbursement. 61. 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. 62. 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. 63. Darla serves in a representative capacity for Ellen’s Botanicals. To accomplish the objectives of this relationship, Darla’s authority can be implied by a. by contradiction. b. by custom. c. by any subjective measure. d. none of the choices. 64. 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. 65. Based on Nan’s conduct, Odel reasonably believes that Poppy has the authority to act on Nan’s behalf even though Poppy does not have the actual authority to do so. In this circumstance, Poppy has a. apparent authority. b. express authority. c. implied authority. d. no authority. 66. 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. Powered by Cognero
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Chapter 23: Agency Relationships in Business 67. Without authorization, Lars contracts on behalf of Mina to have Nemo paint Mina’s Boutique. If Mina decides to ratify the contract, she must affirm a. all of the contract. b. any part of the contract, with Lars liable to Nemo for the difference. c. any part of the contract before performance begins. d. any part of the contract at any time. 68. Bey indicates that he is acting as an agent on behalf of an unidentified client—Cuisine LLC—when he 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. 69. Erin indicates that she is acting as an agent on behalf of an unidentified client—Flight Services Inc.—when she enters into a contract with Go Airlines. Liability to Go for nonperformance of the contract may be imposed on a. none of the choices. b. Erin and Flight Services. c. Erin only. d. Flight Services only. 70. Luis hires Mieko to act as his agent to buy Ngoc’s Southeast Asian Café. Luis tells Mieko to reveal only that she is buying the restaurant on behalf of a third party, without telling Ngoc’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. 71. Ira serves in a representative capacity for Jett. Key is injured through Ira’s negligence. Jett may be liable to Key if Ira’s conduct occurred a. due to a propensity Jett 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. 72. An employer could be held liable for all actions of an employee acting within the scope of employment under the ______ theory. a. negligence b. responsibility c. respondeat superior d. misrepresentation 73. 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 Powered by Cognero
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Chapter 23: Agency Relationships in Business 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. 74. An employer would be liable for all conduct of their employee (even negligence) under this theory a. respondeat superior b. cooperation c. strict liability d. loyalty 75. Vera is a purchasing agent for Wild-Caught Fish Inc., with the authority to buy a sea fisher’s catch up to a certain quantity. After the fish is bought, 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 Vera did business. d. following published notice. 76. Miklos employs Nathalie to handle a list of financial transactions on Miklos’s behalf. This power will terminate on a. any transaction causing a loss to Miklos. b. Miklos’s death or incapacity. c. Miklos’s sixty-fifth birthday. d. Nathalie’s handling of one of each stipulated transaction. 77. Bob contracts with Jane to buy her car for $2500. Jane’s neighborhood has a massive fire, and her car has extensive smoke damage. The contract with Bob will be dismissed because of a. misrepresentation b. impossibility c. breach of contract. d. bankruptcy 78. Fara 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 Fara 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. 79. 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. Powered by Cognero
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Chapter 23: Agency Relationships in Business
80. 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-to-day 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-perproject 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? 81. Yoshi contracts with Zach to buy a certain pub, Aficionado’s, for Yoshi, who asks Zach not to reveal her identity. Zach makes a deal with Burcet, the owner of the pub, and makes a down payment. Yoshi fails to pay the rest of the price, and does not pay Zach for his services. Does Zach have any recourse against Yoshi? If so, on what basis and to what extent? 82. Jerry works for ABC Company as a salesperson. He is in charge of going out and getting clients, selling the products with his sales pitch, and presenting and completing the contracts with the clients. He also follows up with the clients to see that they are happy. When COVID-19 hit and downsizing occurred, Jerry was laid off. He went to the unemployment office to file for unemployment and ABC Company denied his employment status, saying he was an independent contractor. What things must be looked into to see if Jerry was an employee, or an independent contractor?
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Chapter 23: Agency Relationships in Business Answer Key 1. False 2. True 3. True 4. False 5. False 6. True 7. False 8. True 9. False 10. True 11. True 12. True 13. False 14. False 15. True 16. False 17. True 18. False 19. False 20. True 21. False 22. True 23. False 24. False 25. False Powered by Cognero
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Chapter 23: Agency Relationships in Business 26. True 27. True 28. True 29. False 30. False 31. False 32. False 33. True 34. False 35. False 36. False 37. False 38. False 39. True 40. False 41. a 42. a 43. c 44. b 45. a 46. c 47. b 48. d 49. c 50. b 51. a Powered by Cognero
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Chapter 23: Agency Relationships in Business 52. b 53. c 54. b 55. b 56. d 57. a 58. b 59. c 60. d 61. b 62. c 63. b 64. a 65. a 66. a 67. a 68. d 69. b 70. d 71. c 72. c 73. a 74. c 75. a 76. b Powered by Cognero
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Chapter 23: Agency Relationships in Business 77. b 78. d 79. d 80. 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. 81. Zach can seek to hold Yoshi liable for breach of contract, and Yoshi may be liable for whatever damages Zach has to pay to Burcet, and more. With respect to the contract with Burcet, 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, Yoshi 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, Yoshi may owe an amount for Zach’s disbursements, including the down payment, and other expenses, as well. 82. In determining whether a worker has the status of an employee or an independent contractor, the courts often consider the following questions: 1. How much control can the employer exercise over the details of the work? If an employer can exercise considerable control over the details of the work, this indicates employee status. The employer’s degree of control is perhaps the most important factor weighed by the courts in determining employee status. 2. Is the worker engaged in an occupation or business distinct from that of the employer? If so, this points to independentcontractor status. 3. Is the work usually done under the employer’s direction, or by a specialist withoutsupervision? If the work is usually done under the employer’s direction, this indicates employee status. 4. Does the employer supply the tools at the place of work? If so, this indicates employee status. 5. For how long is the person employed? If the person is employed for a long, continuous period, this indicates employee status. 6. What is the method of payment—by time period or at the completion of the job?Regular payment by time period, such as once a month, indicates employee status. 7. What degree of skill is required of the worker? Independent contractors are more likely to be highly skilled, or to have unique skills than to be unskilled, so these types of skills may indicate independent-contractor status. For instance, employers are required to pay certain taxes, such as Social Security and unemployment insurance taxes, for employees but not for independent contractors. Sometimes, workers may benefit from having employee status—for tax purposes and to be protected under certain employment laws, for instance. As mentioned earlier, federal statutes governing employment discrimination apply only when an employer-employee relationship exists. The Internal Revenue Service (IRS) has established its own criteria for determining whether a worker is an independent contractor or an Powered by Cognero
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Chapter 23: Agency Relationships in Business employee. The most important factor in this determination is the degree of control the business exercises over the worker.
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Chapter 24: Employment, Immigration, and Labor Law
Indicate whether the statement is true or false. 1. Private employers are generally free to hire and fire workers at will. a. True b. False 2. The discharge of an employee may in some circumstances give rise to a tort action of wrongful discharge. a. True b. False 3. Most of the states and the federal government have enacted statutes to protect employees who report wrongdoing from employer retaliation. a. True b. False 4. A whistleblower is an employee who publicly reveals a co-worker’s unsafe or illegal activity. a. True b. False 5. An employment contract cannot protect an employee from discharge without good cause. a. True b. False 6. 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 7. 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 8. 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 9. The Walsh-Healey Act applies to all employment contracts. a. True b. False 10. The Davis-Bacon Act applies to child labor. a. True b. False Powered by Cognero
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Chapter 24: Employment, Immigration, and Labor Law 11. 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 12. 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 13. 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 14. Federal wage-hour requirements apply to all employers engaged in interstate commerce, or in producing goods for interstate commerce, and in certain other businesses. a. True b. False 15. 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 16. To avoid reinstating a key employee after taking family or medical leave, an employer must show that the leave would cause “substantial injury” to the employer. a. True b. False 17. 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 18. 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 19. Employers must continue health insurance coverage for those employees taking FMLA, the same as if they were working. a. True b. False 20. 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. Powered by Cognero
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Chapter 24: Employment, Immigration, and Labor Law a. True b. False 21. 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 22. To receive benefits under a state workers’ compensation law, an employee injured on the job must promptly sue the employer. a. True b. False 23. Workers compensation laws cover all employees within that state. a. True b. False 24. 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 the workers’ compensation law. a. True b. False 25. To pay for social insurance programs administered by the Social Security Administration, employers, employees, and the unemployed must contribute. a. True b. False 26. Medicare is a government insurance program available to those sixty years and older. a. True b. False 27. ERISA covers social security programs of employers. a. True b. False 28. To be eligible for unemployment compensation, a worker must be willing and able to work. a. True b. False 29. 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 30. If an employer does not pay unemployment taxes, the government can place a lien on the business’s property to secure the debt. Powered by Cognero
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Chapter 24: Employment, Immigration, and Labor Law a. True b. False 31. The Consolidated Omnibus Budget Reconciliation Act (COBRA) allows workers to continue their health insurance coverage after they are no longer eligible for their employer’s policy. The employer pays for the COBRA. a. True b. False 32. The Affordable Care Act (ACA) applies to businesses that employ at least fifty workers, for at least thirty hours a week. a. True b. False 33. 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 34. 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 35. 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 36. The permissibility of a private employer’s drug testing, may hinge on whether the testing is reasonable. a. True b. False 37. An employer is prohibited from intercepting and monitoring all communications made on electronic devices by employees during business hours. a. True b. False 38. An employee must complete Form I-9, Employment Eligibility Verification, within three days of the commencement of employment. a. True b. False 39. The Immigration Act limits the number of legal immigrants entering the United States. a. True b. False 40. The National Labor Relations Act established the right of private-sector employees to form unions and to strike. Powered by Cognero
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Chapter 24: Employment, Immigration, and Labor Law a. True b. False 41. 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 42. A Union Shop employer requires all employees to join the union within a certain amount of time upon starting their employment. a. True b. False 43. Under a strike, the workers are still paid their wages and benefits. a. True b. False
Indicate the answer choice that best completes the statement or answers the question. 44. Food Market Company employs workers, including Gina, at six locations in two states. Food Market’s discharge of Gina outside 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. 45. Health Clinic Inc. has no written employment manual or oral discharge policy, it 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. exemplary of the doctrine b. an exception based on contract theory. c. in direct conflict with the doctrine. d. an exception based on a statute. 46. 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. 47. 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. Powered by Cognero
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Chapter 24: Employment, Immigration, and Labor Law c. an exception based on public policy. d. an exception based on a statute. 48. 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. 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 his parents. d. deliver newspapers. 50. Elin is thirteen years old. Under the Fair Labor Standards Act, she cannot a. work in an agriculture job. b. work in a hazardous occupation. c. work for her parents. d. deliver newspapers. 51. 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. 52. 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. 53. 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. 54. The Family and Medical Leave Act requires certain employers to provide eligible employees with family or medical leave for the following reasons (choose all applicable answers) a. to care for a newly adopted child. Powered by Cognero
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Chapter 24: Employment, Immigration, and Labor Law 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. 55. 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. 56. 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. 57. 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. 58. 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. 59. 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. 60. 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. Powered by Cognero
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Chapter 24: Employment, Immigration, and Labor Law c. injuries that arise in the course of employment, regardless of fault. d. periods of unemployment, subject to eligibility requirements. 61. Rico works for Street Tacos Inc. ______ is the basis for Rico’s contribution under the Federal Insurance Contribution Act was to help pay for hisretirement benefits, that will partially make up for his loss of income once on retirement. 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. 62. A key provision of ERISA concerns _______,which gives an employee a legal right to receive pension benefits at some future date when the employee stops working. a. unemployment b. vesting c. social security d. government pension plan 63. 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. 64. 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. employer provided group health plans. c. random drug tests. d. lie-detector tests. 65. 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. their business associates. b. its employees. c. its clients and others who communicate with the employees. d. the general public. 66. Assembly Corporation 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 illegal for a U.S. employer to (choose all applicable answers) 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. require verification of identity for employees Powered by Cognero
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Chapter 24: Employment, Immigration, and Labor Law 67. 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.” 68. 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 immigrants (choose all applicable answers) 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. if they are illegal and necessary. 69. 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 United Nations. 70. 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. 71. 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. act in a hostile matter towards their employer. 72. The Labor-Management Reporting and Disclosure Act (LMRDA) also outlawed ________ agreements, in which employers voluntarily agree with unions not to handle, use, or deal in goods produced by nonunion employees working for other employers. a. union shops b. closed shops c. hot cargo d. right to work 73. In order to have a union election the Food Workers Union, formed from employees of the Frozen Food Company, must show that _____ of the total workers support the formation of a union. a. twenty percent. Powered by Cognero
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Chapter 24: Employment, Immigration, and Labor Law b. twenty-five percent. c. thirty percent d. fifty percent. 74. Good faith in collective bargaining between a union and an employer includes (choose all applicable answers) 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. 75. Baristas Union petitions the National Labor Relations Board for an election on organizing a union among the employees of the 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. 76. Flower Workers Union represents the employees of Garden Variety Inc. The company requires 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. Taft-Hartley Act. 77. 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. The Taft-Hartley Act. 78. 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. 79. These are characteristics of good faith bargaining (choose all applicable answers) a. excessive delay tactics. b. making reasonable proposals. c. being willing to compromise. d. shifting positions on disputed contract terms.
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Chapter 24: Employment, Immigration, and Labor Law 80. 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? 81. Discuss three of the situations that a leave under the Family Medical Leave Act may be taken (be specific). Explain what is allowed in terms of length of leave, benefits, etc. under the FMLA.
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Chapter 24: Employment, Immigration, and Labor Law Answer Key 1. True 2. True 3. False 4. False 5. False 6. True 7. False 8. False 9. False 10. False 11. False 12. False 13. False 14. True 15. True 16. True 17. False 18. False 19. True 20. False 21. False 22. False 23. False 24. True 25. False Powered by Cognero
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Chapter 24: Employment, Immigration, and Labor Law 26. False 27. False 28. False 29. False 30. True 31. False 32. True 33. False 34. False 35. False 36. True 37. True 38. True 39. True 40. True 41. True 42. True 43. False 44. a 45. a 46. c 47. b 48. a 49. b 50. b 51. a Powered by Cognero
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Chapter 24: Employment, Immigration, and Labor Law 52. b 53. a 54. a 55. b 56. a 57. c 58. c 59. a 60. c 61. b 62. b 63. a 64. d 65. b 66. a 67. b 68. a 69. d 70. a 71. a 72. c 73. c 74. b 75. b 76. d Powered by Cognero
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Chapter 24: Employment, Immigration, and Labor Law 77. a 78. a 79. b 80. 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. However, that defense would not likely be successful here. 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. An employee’s acceptance of workers’ compensation benefits bars the employee from suing for injuries caused by the employer’s negligence. By barring lawsuits for negligence, workers’ compensation laws also prevent employers from raising common law defenses to negligence, such as contributory negligence and assumption of risk. However, a worker may sue an employer who has intentionally injured the worker. 81. The FMLA requires employers who have fifty or more employees to provide employees with up to twelve weeks of unpaid family or medical leave during any twelve-month period. The FMLA expressly covers private and public (government) employees who have worked for their employers for at least a year. An eligible employee may take up to twelve weeks of leave within a twelve-month period for any of the following reasons: 1. to care for a newborn baby within one year of birth; 2. to care for an adopted or foster child within one year of the time the child is placed with the employee; 3. to care for the employee’s spouse, child, or parent who has a serious health condition; 4. if the employee suffers from a serious health condition and is unable to perform the essential functions of the job; and 5. for any qualifying exigency (nonmedical emergency) arising out of the fact that the employee’s spouse, son, daughter, or parent is a covered military member on active duty. For instance, an employee can take leave to arrange for childcare, or to deal with a financial or legal matters when a spouse is being deployed overseas. When an employee takes FMLA leave, the employer must continue the worker’s health care coverage on the same terms, as if the employee had continued to work. On returning from FMLA leave, most employees must be restored to their original position, or to a comparable position (with nearly equivalent pay and benefits). Employers generally are required to notify employees when an absence will be counted against authorized leave under the act. If an employer fails to provide such notice, and the employee consequently suffers an injury because of the lack of notice, the employer may be sanctioned.
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Chapter 25: Employment Discrimination
Indicate whether the statement is true or false. 1. 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 2. 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 3. Title VII of the Civil Rights Act prohibits job discrimination on the basis of income. a. True b. False 4. When Title VII applies to an employer, any employee—including an undocumented worker—can bring an action for employment discrimination. a. True b. False 5. The Equal Employment Opportunity Commission (EEOC) investigates every claim of employment discrimination. a. True b. False 6. 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 7. 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 8. 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 9. 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 10. 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. Powered by Cognero
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Chapter 25: Employment Discrimination a. True b. False 11. 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 12. 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 13. An employer can require employees to participate in such religious activity as weekly prayer meetings with other employees. a. True b. False 14. An employer cannot classify jobs as male or female but can refuse to promote employees based on their gender. a. True b. False 15. Under federal law, the definition of gender discrimination has not been expanded to include discrimination based on pregnancy. a. True b. False 16. 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 17. If a plaintiff continues to work for their employer while receiving discriminatory wages, the time period for filing a complaint is basically unlimited. a. True b. False 18. Adverse employment decisions based on gender identity are necessarily a form of gender discrimination, and therefore illegal. a. True b. False 19. 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 Powered by Cognero
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Chapter 25: Employment Discrimination 20. 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 21. Sexual harassment can occur when a pattern of sexually offensive conduct runs throughout a workplace and the employer takes no steps to prevent it. a. True b. False 22. 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 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. Employees may be sexually harassed by members of the same sex. a. True b. False 25. An employer can possibly avoid liability for sexual harassment by taking prompt remedial action. a. True b. False 26. 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 27. 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 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. 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 Powered by Cognero
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Chapter 25: Employment Discrimination 30. 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 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. The Americans with Disabilities Act defines disability to include a physical or mental impairment that causes “undue hardship.” a. True b. False 33. For obesity to qualify as a disability under the Americans with Disabilities Act, it must involve a physical impairment. a. True b. False 34. Under the Americans with Disabilities Act, employees with disabilities must reasonably accommodate the needs of their employers. a. True b. False 35. 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 36. The ADA does not require that employers accommodate the needs of job applicants or employees with disabilities, who are not otherwise qualified for the work. a. True b. False 37. 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 38. A business necessity is a defense against employment discrimination based on the genuine requirements of a business. a. True b. False 39. Affirmative action programs are often found to be unconstitutional because they deprive members of protected classes of equal protection. a. True Powered by Cognero
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Chapter 25: Employment Discrimination b. False 40. A state does not have the inherent power to ban affirmative action within that state. a. True b. False
Indicate one or more answer choices that best complete the statement or answer the question. 41. Federal employment discrimination laws restrict the ability of employers to discriminate against workers on the basis of a. experience. b. gender. c. education. d. race.
Indicate the answer choice that best completes the statement or answers the question. 42. 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. 43. 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. 44. 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.
Indicate one or more answer choices that best complete the statement or answer the question. 45. Sara believes that she was rejected for a position at Tour Agency on the basis of her race. Sara files a suit against Tour under the Civil Rights Act. To establish a prima facie case of employment discrimination, Sara must argue which of the following 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. Powered by Cognero
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Chapter 25: Employment Discrimination
Indicate the answer choice that best completes the statement or answers the question. 46. Giso 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. 47. 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. 48. 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. 49. 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. 50. 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. 51. Bob works for ABC Corporation and is a practicing Muslim. He tells his employer that he must have off every Saturday for religious reasons. Saturday is their busiest day. In order for ABC to be able to terminate Bob, they must a. prove that an attempt to accommodate here would be unreasonable b. prove that ABC Corporation is not a religious organization c. prove that Bob has never gone to church d. prove that Bob’s social media posts are not about religion Powered by Cognero
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Chapter 25: Employment Discrimination 52. 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. 53. Mena, a female, and Neil, a male, are employees of Operation Business Corporation. Mena regularly e-mails sexually explicit images to Neal via Operation’s network. Neil finds this offensive. This is most likely a. hostile work environment harassment. b. none of the choices. c. quid pro quo harassment. d. a constructive discharge. 54. For an employer to be held liable for a supervisor’s sexual harassment, the supervisor normally must have taken _____ against the employee. a. hostile actions b. tangible employment action c. teasing and joking d. legal action 55. Olive is a supervisor for Pasta!, a restaurant. Qua is a Pasta! employee. The owner announces that some employees will be discharged. Olive tells Qua 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. 56. 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. 57. 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. 58. Mechanical Engineering 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 Powered by Cognero
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Chapter 25: Employment Discrimination a. the employee’s previous employer. b. a company supervisor. c. a competitor. d. any of the choices. 59. 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.
Indicate one or more answer choices that best complete the statement or answer the question. 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. back pay. b. reinstatement. c. fines. d. damages.
Indicate the answer choice that best completes the statement or answers the question. 61. 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. 62. 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. 63. Resort Company 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. Powered by Cognero
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Chapter 25: Employment Discrimination 64. 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. 65. Bib replaces Chloe in her job at Data Sales Corporation. To succeed with an age-discrimination claim against Data, 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. 66. 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. 67. The Americans with Disabilities Act applies to workplaces with at least a. fifteen workers. b. five workers. c. ten workers. d. one worker. 68. 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. 69. 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. 70. 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. Powered by Cognero
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Chapter 25: Employment Discrimination b. Ivy, Jerold, and Kim. c. none of the choices. d. only Ivy and Kim. 71. _____ are considered to have a disability under the Americans with Disability Act (ADA). a. Those using illegal drugs b. Those addicted to pain killers c. Former drug addicts d. Addicts that are also alcoholics
Indicate one or more answer choices that best complete the statement or answer the question. 72. 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. employers with no veteran employees.
Indicate the answer choice that best completes the statement or answers the question. 73. 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. 74. 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. 75. An affirmative action plan may be found to be unconstitutional because it a. does not attempt to remedy past discrimination. b. does not make use of quotas or preferences. c. has not succeeded in remedying discrimination. d. has succeeded and subsequently been eliminated.
76. 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 Powered by Cognero
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Chapter 25: Employment Discrimination population completed high school, compared with only one-fourth of those in the minority groups. Sweet Air has an allwhite cleaning crew. Has Sweet Air violated the Civil Rights Act? Explain. 77. Veronica 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. Veronica has had the job longer than other employees. Veronica applies for a promotion to a supervisory position that requires constant communication with others in the field. Wind Power does not promote Veronica on the ground that Veronica is hearing impaired. Wind Power acknowledges that Veronica is otherwise qualified, but asserts that it “needs someone who does not have a hearing problem.” Veronica 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? 78. Sara applied for a position at the Acme Corporation. She knows that she is qualified for the position, but she has a feeling they are looking for a man to fill the opening. After the interview, she is not hired. What must Sara show in order to prove a violation of the Civil Rights Act? What if Sara was pregnant?
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Chapter 25: Employment Discrimination Answer Key 1. True 2. False 3. False 4. True 5. False 6. True 7. True 8. False 9. False 10. True 11. False 12. False 13. False 14. False 15. False 16. False 17. True 18. True 19. True 20. False 21. True 22. True 23. True 24. True 25. True Powered by Cognero
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Chapter 25: Employment Discrimination 26. True 27. False 28. True 29. False 30. False 31. False 32. False 33. True 34. False 35. False 36. True 37. False 38. True 39. False 40. False 41. b, d 42. a 43. d 44. a 45. a, b, c 46. c 47. b 48. a 49. a 50. a 51. a Powered by Cognero
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Chapter 25: Employment Discrimination 52. a 53. a 54. b 55. d 56. b 57. b 58. b 59. b 60. a, b, c 61. a 62. a 63. d 64. c 65. b 66. a 67. a 68. a 69. d 70. b 71. c 72. a, b, c 73. b 74. c 75. a 76. 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 Powered by Cognero
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Chapter 25: Employment Discrimination
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. 77. 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. 78. Employers are prohibited from classifying jobs as male or female, and from advertising positions as male or female unless they can prove that the gender of the applicant is essential to the job. In addition, employers cannot have separate male and female seniority lists, and cannot refuse to promote employees based on gender. Generally, to succeed in a suit for gender discrimination, a plaintiff must demonstrate that gender was a determining factor in the employer’s decision to fire or refuse to hire or promote her or him. The Pregnancy Discrimination Act expanded Title VII’s definition of gender discrimination to include discrimination based on pregnancy. Women affected by pregnancy, childbirth, or related medical conditions must be treated the same as other persons with similar ability to work. For instance, an employer cannot discriminate against a pregnant woman by withholding benefits available to others under employee benefit programs. An employer is required to reasonably accommodate a worker who is pregnant. In the following case, an employer accommodated many of its employees who had lifting restrictions due to disabilities. The employer refused to accommodate a pregnant employee with a similar restriction. An employer must continue to reasonably accommodate to medical conditions of an employee related to pregnancy and childbirth, even after the pregnancy has ended.
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Chapter 26: Sole Proprietorships and Franchises
Indicate whether the statement is true or false. 1. 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 2. Anyone who does business without creating a separate business organization has a franchise. a. True b. False 3. In a sole proprietorship, the owner is not the business. a. True b. False 4. Anyone who does business must create a separate business organization. a. True b. False 5. The law considers all new businesses to be sole proprietorships. a. True b. False 6. The proprietor pays only personal income taxes on a sole proprietorship’s profits. a. True b. False 7. In a sole proprietorship, the proprietor bears the burden of any liabilities incurred by the business enterprise. a. True b. False 8. In a sole proprietorship, creditors may go after personal assets of the owner in order to satisfy business debts. a. True b. False 9. 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 10. Limited legal liability can be an advantage for a small business wishing to raise capital. a. True b. False 11. A proprietor’s opportunity to raise capital for a sole proprietorship is limited. Powered by Cognero
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Chapter 26: Sole Proprietorships and Franchises a. True b. False 12. 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 13. 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 14. The Franchise Rule requires a franchisor to establish and enforce rules with respect to its franchisees. a. True b. False 15. The Franchise Rule requires a franchisor to provide potential earnings figures to its prospective franchisees. a. True b. False 16. 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 17. 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 18. State regulation of franchising is often aimed at protecting franchisees from unfair practices. a. True b. False 19. 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 20. 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 21. Case law governing franchising emphasizes the importance of good faith and fair dealing. Powered by Cognero
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Chapter 26: Sole Proprietorships and Franchises a. True b. False 22. Because each type of franchise relationship is similar, franchise contracts tend to be similar. a. True b. False 23. Some franchising agreements can include not only the price of the franchise license, but also some advertising and administrative costs. a. True b. False 24. A franchise contract cannot give exclusive territorial rights to a certain geographic area to a franchisee, due to antitrust laws. a. True b. False 25. A franchisor can mandate retail prices for the goods that a franchisee sells. a. True b. False 26. 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 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. 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 29. The duration of a franchise is a matter set by state law, not to be otherwise determined between the parties. a. True b. False 30. 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 31. After notice of termination, a franchisee must be given a reasonable time to wind up the business. Powered by Cognero
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Chapter 26: Sole Proprietorships and Franchises a. True b. False 32. 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 33. 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 34. A court may decide that a franchisor has wrongfully terminated a franchise if the franchisor’s decision was arbitrary. a. True b. False 35. 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 36. 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
Indicate the answer choice that best completes the statement or answers the question. 37. Bob is considering starting a sole proprietorship. Some advantages to this type of business entity include (choose all applicable answers) a. tax implications for filing. b. flexibility of ownership c. profit distribution. d. liability. 38. 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. 39. 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. Powered by Cognero
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Chapter 26: Sole Proprietorships and Franchises b. a corporation. c. a franchisee. d. a sole proprietorship. 40. 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. 41. 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. 42. 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. 43. Sara wants to start a sole proprietorship and wants to know of the disadvantages of doing so (choose all applicable answers) a. tax liability. b. personal assets at risk. c. lack of continuity. d. flexibility in ownership. 44. 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. 45. 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. Powered by Cognero
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Chapter 26: Sole Proprietorships and Franchises 46. 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 for all obligations incurred. 47. Bev owns and operates City Delivery Service as a sole proprietorship. When she dies, the business will automatically a. dissolve. b. transfer to Bev’s heirs. c. reform with its employees as the owners. d. transfer to its creditors. 48. Maeve sells New Energy, a sole proprietorship that makes and sells solar panels, to Omar. 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. 49. 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. 50. 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. 51. 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. 52. Sam 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. 53. Instead of setting up a business to market her own products, Rita considers entering into a distributorship franchise Powered by Cognero
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Chapter 26: Sole Proprietorships and Franchises 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. 54. 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. federal tax laws b. federal antitrust laws. c. the Federal Trade Commission’s Franchise Rule. d. the Petroleum Marketing Practices Act. 55. Spicy Sauces, 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. 56. 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. 57. 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. 58. 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. 59. 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 may provide (choose all applicable answers) a. no earnings figures. b. hypothetical earnings figures. Powered by Cognero
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Chapter 26: Sole Proprietorships and Franchises c. projected earnings figures. d. contractual projected earnings 60. 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. 61. 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. their customer database. 62. 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. 63. 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. 64. 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. 65. Riki contracts to buy a franchise from Sushi Company. 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. Flo. c. Sushi. d. Sushi customers. Powered by Cognero
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Chapter 26: Sole Proprietorships and Franchises 66. 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. Hook’s losses. 67. 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. 68. Pay-More Convenience Stores, Inc., is a franchisor. Randy operates a Pay-More franchise. Seth is one of Randy’s employees. As a franchisor, if Pay-More 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-More, Randy, or Seth. 69. 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. 70. 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. 71. 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 to its business operation. c. focus on the right of Bob to be dealt with fairly. d. underscore the interest of consumers in affordability. 72. Made in the USA Clothing Inc. gives notice to Neely that it is terminating their franchise arrangement. Winding up the Powered by Cognero
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Chapter 26: Sole Proprietorships and Franchises 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.
73. 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? 74. 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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Chapter 26: Sole Proprietorships and Franchises Answer Key 1. True 2. False 3. False 4. False 5. False 6. True 7. True 8. True 9. False 10. True 11. True 12. True 13. True 14. False 15. False 16. False 17. True 18. True 19. False 20. True 21. True 22. False 23. True 24. False 25. False Powered by Cognero
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Chapter 26: Sole Proprietorships and Franchises 26. True 27. True 28. False 29. False 30. False 31. True 32. True 33. True 34. True 35. False 36. True 37. a 38. a 39. d 40. c 41. d 42. b 43. b 44. a 45. d 46. d 47. a 48. d 49. a 50. a 51. c Powered by Cognero
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Chapter 26: Sole Proprietorships and Franchises 52. b 53. a 54. c 55. c 56. c 57. c 58. d 59. a 60. b 61. a 62. b 63. b 64. a 65. c 66. a 67. b 68. d 69. a 70. c 71. a 72. d 73. 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 Powered by Cognero
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Chapter 26: Sole Proprietorships and Franchises 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. 74. 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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Chapter 27: All Forms of Partnership
Indicate whether the statement is true or false. 1. One of the essential elements of a general partnership is a right to participate in the control of a business. a. True b. False 2. A single person carrying on a business for profit, with control over its operation, can form a partnership. a. True b. False 3. The Uniform Partnership Act governs the operation of partnerships in spite of a different agreement among the partners. a. True b. False 4. One of the essential elements of a partnership is good faith. a. True b. False 5. In many instances, agency law governs the relationships among partners. a. True b. False 6. 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 7. Among three partners, unless they agree otherwise, unanimous consent is required to manage the business of the partnership. a. True b. False 8. Generally, the law recognizes a partnership as an independent entity. a. True b. False 9. At the option of the partners, a partnership can be a pass-through entity or a taxpaying entity. a. True b. False 10. When there is no formal, written partnership agreement, an agreement to form a partnership is unenforceable. a. True b. False 11. 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. Powered by Cognero
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Chapter 27: All Forms of Partnership a. True b. False 12. 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 13. 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 14. 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 15. 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 16. Property acquired by a partnership is the property of the partnership, and not of the partners individually. a. True b. False 17. Every act of a partner concerning partnership business binds the firm. a. True b. False 18. 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 19. 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 20. 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 21. In most states, in a dispute on a partnership matter, a third party cannot sue an individual partner, but must file an Powered by Cognero
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Chapter 27: All Forms of Partnership action against the entire firm. a. True b. False 22. 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 23. Regardless of the partners’ consent or agreement, the voluntary dissociation of a partner begins the dissolution of the partnership. a. True b. False 24. A partner always has the power to dissociate from the partnership. a. True b. False 25. A partner always has the right to dissociate from the partnership. a. True b. False 26. 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 27. 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 28. A court can order the dissolution of a partnership if the business can only be operated at a loss. a. True b. False 29. During the winding up stage of dissolution, no party can make a claim on the partnership assets. a. True b. False 30. 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 31. A limited liability partnership allows professionals to avoid personal liability for the malpractice of other partners. Powered by Cognero
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Chapter 27: All Forms of Partnership a. True b. False 32. In a limited partnership, every partner has full responsibility for the management of the partnership and its obligations. a. True b. False 33. In a limited partnership, every partner has full responsibility for the management of the partnership and its obligations. a. True b. False 34. A limited partnership is more formal and has more requirements of formation than a limited liability partnership. a. True b. False 35. In a limited partnership, a general partner assumes no liability for partnership debts beyond the amount of capital contributed. a. True b. False 36. In some states, limited partners cannot withdraw from a limited partnership. a. True b. False 37. Upon dissolution of a limited partnership, the claims of the partnership’s creditors come first before any distribution of assets or return of capital. a. True b. False 38. 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
Indicate the answer choice that best completes the statement or answers the question. 39. Olav starts Power Cells to make and sell batteries. Later, Olav contracts with Quinn to invest additional capital in the firm in exchange for 25 percent of the profits. Olav and Quinn agree that Olav will continue to control the business. Olav and Quinn are not partners in Power Cells because a. they do not share the profits equally. b. their agreement does not provide for the sharing of losses. c. Olav started the firm before Quinn agreed to invest additional capital. d. they do not have joint control over the business. 40. Gwen and Hugo do business as Gwen & Hugo Civil Engineers, a partnership. This firm is governed by the Uniform Partnership Act Powered by Cognero
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Chapter 27: All Forms of Partnership 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. 41. In determining whether a partnership exists, courts usually look for these essential elements, which are implicit in the UPA’s definition of a general partnership (choose all applicable answers) a. an equal right to be involved in the management of the business. b. one partner is manager, and one is a silent partner. c. a sharing of profits and losses. d. a joint ownership of the business. 42. 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. 43. Amber owns and operates Bistro Café in space leased in a building owned by Cindy. 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 Cindy are a. not partners, because Cindy 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. 44. 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. good faith. 45. Obie operates Pizza Place. 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 Place. b. not partners, because the pay includes an hourly wage. c. not partners, because the pay includes tips. d. partners in a partnership. 46. 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. Powered by Cognero
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Chapter 27: All Forms of Partnership 47. 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. 48. 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. 49. 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. Ted is the senior partner. With respect to management decisions a. a majority of the partners must agree. b. Shan rules. c. Ted decides. d. unanimous consent is required. 50. 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. 51. A partner creditor may use the ______to attach the partner’s interest in the partnership (their proportionate share of any profits that are distributed), to satisfy their obligation on the debt. a. notice of estoppel b. charging order c. inspection notice d. fiduciary duty 52. The following are way that a partner can breach their duty of loyalty to the partnership (choose all applicable answers) a. usurping a partnership business opportunity. b. disclosing trade secrets. c. misusing partnership property. d. speaking to a reporter about the partnership. 53. Rosa is a partner in Silver Dragon, a partnership consisting of the owners of a restaurant. Silver Dragon incurs debt for new dining tables and chairs. With respect to this debt, Rosa is a. not liable. Powered by Cognero
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Chapter 27: All Forms of Partnership 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. 54. 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. To her firm, Beth is liable for a breach of the duty of a. care. b. accounting. c. loyalty. d. none of the choices. 55. 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. 56. 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. right to ask for disclosure of the books. 57. 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. 58. 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. duty of contract. 59. 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. nothing. b. all of the obligations, jointly and severally. c. all of the obligations, jointly but not severally. d. only the contractual obligations. Powered by Cognero
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Chapter 27: All Forms of Partnership 60. 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. limited to $10,000. d. unlimited. 61. 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’s legal existence. c. Glen’s liability for all of Home Builders’s debts. d. Glen’s wrongful dissociation and liability for any damages. 62. 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. 63. 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. 64. 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. 65. 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. 66. Bev is one of three partners in Commercial Custodial. With respect to Bev’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. Powered by Cognero
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Chapter 27: All Forms of Partnership c. the buyout price paid by the firm for the interest. d. one-third of the value of the interest. 67. 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. 68. Cal, Dex, and Erin agree to be partners in Fajitas, 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. 69. 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. malpractice of other partners. c. their own and other partners’ wrongful acts. d. criminal acts. 70. 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. 71. 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. 72. 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. 73. Brent and Char are limited partners in Dental Center, a partnership. In terms of the firm’s books and information Powered by Cognero
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Chapter 27: All Forms of Partnership 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. 74. 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. 75. 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. 76. 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.
77. Sebastian was the manager of Thai Bistro, a restaurant specializing in Southeast Asian foods. Sebastian 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.” Sebastian 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? 78. 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?
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Chapter 27: All Forms of Partnership Answer Key 1. True 2. False 3. False 4. False 5. True 6. True 7. False 8. True 9. False 10. False 11. False 12. True 13. False 14. False 15. False 16. True 17. True 18. False 19. False 20. False 21. True 22. True 23. False 24. True 25. False Powered by Cognero
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Chapter 27: All Forms of Partnership 26. True 27. False 28. True 29. False 30. True 31. True 32. False 33. False 34. True 35. False 36. False 37. False 38. False 39. d 40. a 41. a 42. c 43. a 44. d 45. a 46. d 47. d 48. b 49. a 50. a 51. b Powered by Cognero
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Chapter 27: All Forms of Partnership 52. b 53. d 54. d 55. a 56. a 57. b 58. c 59. b 60. a 61. d 62. c 63. a 64. b 65. c 66. c 67. c 68. b 69. b 70. a 71. d 72. a 73. d 74. c 75. a 76. d Powered by Cognero
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Chapter 27: All Forms of Partnership 77. 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 nonpartner’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 Sebastian 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 Sebastian 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. 78. 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 [UPA 807].
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).
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Chapter 28: Limited Liability Companies and Special Business Forms
Indicate whether the statement is true or false. 1. Choosing a business organizational form that limits its owners’ liability may lead to greater profits for the firm. a. True b. False 2. 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 3. 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 4. A limited liability company is an aggregate of its members, not a separate legal entity. a. True b. False 5. A limited liability company can be formed in one state and do business in another. a. True b. False 6. 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 7. To form a limited liability company, articles of organization must be filed with an attorney’s office. a. True b. False 8. 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 9. A limited liability company is a citizen only of the state in which it was formed. a. True b. False 10. 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 Powered by Cognero
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Chapter 28: Limited Liability Companies and Special Business Forms 11. 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 12. 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 13. 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 14. 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 15. A limited liability company with only one member is automatically taxed like a partnership. a. True b. False 16. Organizing as a limited liability company prevents the firm from attracting foreign investors. a. True b. False 17. 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 18. The members of a limited liability company have considerable flexibility in managing the business of the firm. a. True b. False 19. The management of a limited liability company must include at least one of the members. a. True b. False 20. 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 21. The members of a limited liability company should protect their interests by creating a written operating agreement. Powered by Cognero
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Chapter 28: Limited Liability Companies and Special Business Forms 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. 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 24. 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 25. 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 26. 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 27. Death of a member of a limited liability company dissociates them from the company. a. True b. False 28. 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 29. 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 30. 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 31. When a limited liability company is dissolved, the members may preserve the assets for a reasonable time to optimize Powered by Cognero
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Chapter 28: Limited Liability Companies and Special Business Forms their return during the winding up process. a. True b. False 32. 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 33. Like partners, unless otherwise agreed, joint venturers have an equal voice in controlling a venture-related project. a. True b. False 34. 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 35. 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 36. The beneficiaries of a business trust are personally liable for the trust’s debts and obligations. a. True b. False 37. 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 38. A cooperative can be incorporated. a. True b. False
Indicate the answer choice that best completes the statement or answers the question. 39. 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. 40. In most situations, with respect to a limited liability company’s debts, the firm’s members are shielded from a. all personal liability. Powered by Cognero
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Chapter 28: Limited Liability Companies and Special Business Forms 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.” 41. When courts ignore the corporate structure of a company and hold the shareholders personally liable when it is required to achieve justice it is a. court jurisdiction. b. piercing the corporate veil. c. group liability. d. corporate and several liability.
Indicate one or more answer choices that best complete the statement or answer the question. 42. A limited liability company can choose to be taxed as a. a partnership. b. a corporation. c. a sole proprietorship. d. an individual.
Indicate the answer choice that best completes the statement or answers the question. 43. 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. 44. 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. 45. 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. 46. 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. Powered by Cognero
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Chapter 28: Limited Liability Companies and Special Business Forms d. pierce Interstate’s “corporate veil” to hold Hans liable on the contract. 47. 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.” 48. 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. 49. 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. 50. 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. 51. 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. 52. 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. 53. Loren, Marie, and Nina form a syndicate to buy a professional soccer franchise. This syndicate could be set up as Powered by Cognero
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Chapter 28: Limited Liability Companies and Special Business Forms a. a joint venture. b. a corporation. c. a sole proprietorship. d. a limited liability company. 54. 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. 55. 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. 56. 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. 57. 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. 58. 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. form a joint venture. c. elect to apply the principles of partnership law to their firm. d. expressly adopt the corporate form of business organization. 59. 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. Powered by Cognero
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Chapter 28: Limited Liability Companies and Special Business Forms d. reinvested in the business until the dispute is resolved.
Indicate one or more answer choices that best complete the statement or answer the question. 60. Operating agreements typically contain (choose all applicable answers) a. whether any formal meetings will be required or held. b. how profits are divided. c. whose offices are located where. d. how voting rights are apportioned. 61. The following are events that can cause a person to be dissociated from a limited liability corporation. (choose all applicable answers) a. expulsion by other members. b. death. c. gossiping about the LLC. d. incompetence.
Indicate the answer choice that best completes the statement or answers the question. 62. 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. 63. 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. 64. 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. 65. 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. Powered by Cognero
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Chapter 28: Limited Liability Companies and Special Business Forms c. corporations. d. partnerships. 66. 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. 67. 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. 68. 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. 69. 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. 70. 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. 71. 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. Powered by Cognero
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Chapter 28: Limited Liability Companies and Special Business Forms 72. 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. 73. 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. 74. 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. 75. 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. 76. 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.
77. 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? How do they differ? 78. 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 Powered by Cognero
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Chapter 28: Limited Liability Companies and Special Business Forms Business Media and DangerZoners formed? To whom, if anyone, is Business Media liable? To whom, if anyone, is DangerZoners liable? 79. Jerry and Sue want to form a business for their pet-sitting. They are looking at the different options available, and are pretty certain they want to form a limited liability company (LLC). Discuss the pros and cons of an LLC, and what is required to form one.
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Chapter 28: Limited Liability Companies and Special Business Forms 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. False 13. True 14. True 15. False 16. False 17. False 18. True 19. False 20. True 21. True 22. False 23. False 24. False 25. True Powered by Cognero
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Chapter 28: Limited Liability Companies and Special Business Forms 26. True 27. True 28. False 29. True 30. True 31. True 32. True 33. True 34. False 35. False 36. False 37. True 38. True 39. c 40. c 41. b 42. a, b 43. c 44. c 45. c 46. b 47. b 48. b 49. c 50. d 51. a Powered by Cognero
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Chapter 28: Limited Liability Companies and Special Business Forms 52. a 53. b 54. b 55. a 56. a 57. a 58. a 59. b 60. a, b, c 61. a, b, d 62. a 63. c 64. c 65. d 66. b 67. c 68. b 69. d 70. b 71. a 72. b 73. c 74. b 75. a 76. d Powered by Cognero
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Chapter 28: Limited Liability Companies and Special Business Forms 77. 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. A joint stock company is a true hybrid of a partnership and a corporation. It has many characteristics of a corporation in that (1) its ownership is represented by transferable shares of stock, (2) it is managed by directors and officers of the company or association, and (3) it can have a perpetual existence. Most of its other features, however, are more characteristic of a partnership, and it is usually treated like a partnership. Like a partnership, a joint stock company is formed by agreement (not statute). Property is usually held in the names of the members, who are called shareholders, and they have personal liability. In a joint stock company, however, shareholders are not considered to be agents of one another, as they are in a partnership. A business trust resembles a corporation in many respects. Beneficiaries of the trust, for instance, are not personally responsible for the trust’s debts or obligations. In fact, in a number of states, business trusts must pay corporate taxes. Members of incorporated cooperatives have limited liability, as do shareholders of corporations and members of LLCs. Cooperatives that are unincorporated are often treated like partnerships, and members have joint liability for the cooperative’s acts. 78. 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. Joint venturers owe each other the same fiduciary duties, including the duty of loyalty, that partners owe each other. A joint venturer can be held personally liable for the venture’s debts (because joint venturers 79. LLCs share many characteristics with corporations. Like corporations, LLCs are creatures of the state. In other words, they must be formed and operated in compliance with state law. Like shareholders in a corporation, the owner of an LLC—called a member—enjoys limited liability [ULLCA 303]. Members of LLCs are shielded from personal liability in most situations. In other words, the liability of members is normally limited to the amount of their investments. The members of an LLC, like the shareholders in a corporation can lose their limited personal liability in certain circumstances. For instance, when an individual guarantees payment of a business loan to the LLC, that individual is personally liable for the business’s obligation. In addition, if an LLC member fails to comply with certain formalities, such as by commingling personal and business funds, a court can impose personal liability. Under various principles of corporate law, courts may hold the owners of a business liable for its debts. On rare occasions, for instance, courts ignore the corporate structure (“pierce the corporate veil”) to expose the shareholders to personal liability when it is required to achieve justice. Similarly, courts will sometimes pierce the veil of an LLC to hold its members personally liable. Courts have reserved piercing the veil of an LLC for circumstances that are clearly extraordinary. There must normally be some flagrant disregard of the LLC formalities, as well as fraud or malfeasance on the part of the LLC member. Like corporations, LLCs are legal entities apart from their members. As a legal person, an LLC can sue or be sued, enter into contracts, and hold title to property. To form an LLC, articles of organization must be filed with a central state agency—usually the secretary of state’s office. Typically, the articles must include the name of the business, its principal address, the name and address of a registered agent, the members’ names, and information on how the LLC will be managed [ULLCA 203]. A key advantage of the LLC is that the liability of Powered by Cognero
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Chapter 28: Limited Liability Companies and Special Business Forms members is limited to the amount of their investments. Another advantage of the LLC is its flexibility in regard to taxation. An LLC that has two or more members can choose to be taxed either as a partnership or as a corporation. A corporate entity normally must pay income taxes on its profits, and the shareholders must then pay personal income taxes on any of those profits that are distributed as dividends. An LLC that wants to distribute profits to its members may prefer to be taxed as a partnership to avoid the “double taxation” that is characteristic of the corporate entity. If an LLC’s members want to reinvest profits in the business rather than distribute the profits to members, they may prefer to be taxed as a corporation. Corporate income tax rates also may be lower than personal tax rates.
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Chapter 29: Corporations
Indicate whether the statement is true or false. 1. 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 2. A corporation is an artificial being—intangible, invisible, and existing only in the contemplation of the law. a. True b. False 3. 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 4. A corporation is recognized under U.S. law as a person. a. True b. False 5. Shareholders’ assumption of personal liability, as guarantors, for the obligations of a corporation can enable the firm to obtain credit. a. True b. False 6. Because a corporation may be liable for the misconduct of its employees, the firm needs to be careful about whom it hires and how much to monitor and supervise them. a. True b. False 7. A corporation must pass on all profits to the shareholders as dividends. a. True b. False 8. 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 9. A public corporation is the same thing as a publicly held corporation. a. True b. False 10. Because the management of a close corporation can resemble that of a sole proprietorship, the firm need not meet all of the specific requirements set forth in state statutes for corporations. a. True Powered by Cognero
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Chapter 29: Corporations b. False 11. An S Corporation must have no more than fifty shareholders. a. True b. False 12. A shareholder in a professional corporation generally cannot be held liable for torts committed by other professionals at the firm, including malpractice and breaches of duty to the firms’ clients. a. True b. False 13. A benefit corporation is designed to make a profit and thereby provide long-term shareholder benefit. a. True b. False 14. 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 15. If the procedures for incorporation are not followed precisely, others may be able to challenge the existence of the corporation. a. True b. False 16. 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 17. The primary document needed to incorporate a business is the articles of incorporation because the articles serve as a primary source of authority for the firm’s organization and functions. a. True b. False 18. 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 19. Corporate bylaws and resolutions of the corporation’s board of directors provide guidelines but cannot grant or restrict corporate powers. a. True b. False 20. 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. Powered by Cognero
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Chapter 29: Corporations a. True b. False 21. Because bonds do not represent debt, they need never be repaid. a. True b. False 22. Issuing securities is the only way for a new corporation to raise capital. a. True b. False 23. Preferred stock is capital that is provided to new business ventures by professional outside vendors. a. True b. False 24. 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 25. When it comes to managing a corporation, the corporation relies on its board of directors and officers. a. True b. False 26. If a board attempts to manipulate the shareholders’ election of a director to reduce the shareholders’ influence, they can challenge the election in court. a. True b. False 27. 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 28. Directors and officers whose failure to exercise due care results in harm to the corporation or the shareholders can be held liable for negligence unless the business judgment rule applies. a. True b. False 29. When directors and officers do not act in the best interests of their corporations, the shareholders may sue them on the company’s behalf. a. True b. False 30. A director of a corporation must disclose if they have a personal interest in any contract, and also abstain from voting on that issue. Powered by Cognero
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Chapter 29: Corporations a. True b. False 31. To participate in a shareholders’ meeting, a shareholder must present a proxy. a. True b. False 32. Shareholders exercise ownership control through the power of their votes. a. True b. False 33. Cumulative voting gives each shareholder a vote in proportion to the amount of shares they hold. a. True b. False 34. 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 35. 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 36. If a shareholder’s derivative suit is successful, any damages recovered normally go into the corporation’s treasury. a. True b. False 37. A breach of fiduciary duties by those who own a close corporation normally constitutes what is known as oppressive conduct. a. True b. False 38. All forms of business organizations limit the liability of their owners. a. True b. False 39. When deciding which form of business organization to choose, businesspersons normally take into account tax considerations. a. True b. False
Indicate the answer choice that best completes the statement or answers the question. 40. Nevis and Olsen want to do business as a corporation—Pastries & Pies Inc. The procedure for forming this firm is Powered by Cognero
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Chapter 29: Corporations prescribed by a. city or county codes. b. none of the choices. c. federal administrative rules. d. state law. 41. A corporation is recognized in legal forums as a a. legal entity. b. company. c. legal person. d. legal company. 42. A corporation formed in one state and doing business in another is referred to as a a. alien corporation. b. S corporation. c. foreign corporation. d. domestic corporation. 43. Integrated Devices, Inc., is a private, for-profit corporation that is owned by seven shareholders who are members of the same family. Integrated is a. an S corporation. b. a close corporation. c. a benefit corporation. d. a public corporation and a private corporation. 44. AI Medical, Inc., is a private, for-profit corporation that is owned by six shareholders who are not members of the same family but are personally known to one another. They also serve as the directors and officers. To prevent a majority shareholder from dominating the firm, the corporation may a. require more than a majority of directors approve any board action. b. depart from all formalities required by traditional corporate law. c. reorganize into a sole proprietorship or partnership. d. hold special shareholders’ or directors’ meetings on an annual basis. 45. Spices & Seasonings Inc. is a private, for-profit corporation that is owned by eight shareholders who are not members of the same family but are personally known to one another. To avoid management problems caused by sharing control with someone the shareholders do not know or like, the firm could a. restrict the transferability of its shares to outside persons. b. depart from all formalities required by traditional corporate law. c. reorganize into a sole proprietorship or partnership. d. hold special shareholders’ or directors’ meetings on an annual basis. 46. Oil Industries Inc. is a private, for-profit corporation that is owned by five shareholders who are members of the same family. Po, the majority shareholder, misappropriates company funds. The shareholders whose interests are injured by Po’s misconduct should a. have their shares appraised and be paid the fair market value for them. Powered by Cognero
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Chapter 29: Corporations 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. 47. Health Food Inc. coordinates the purchase, sale, and delivery of organic products. The stated corporate purpose is to make a profit and to have a material positive impact on society and the environment. Health Food is a. a nonprofit corporation. b. not a corporation. c. a benefit corporation. d. a private corporation. 48. Burgers & Brew Inc. prepares its articles of incorporation. The articles are likely to include a. the corporation’s name. b. the number of shares the corporation is authorized to issue. c. all of the choices. d. the corporation’s registered agent. 49. Paper & Scissors Inc. wants to incorporate. 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. 50. The corporation’s internal rules of management are the a. articles of incorporation. b. amendments. c. bylaws. d. shareholder statement. 51. EZ Hauling holds itself out to customers as being a corporation but makes no attempt to incorporate. In this circumstance, EZ Hauling is most likely a. a corporation by estoppel. b. a de facto corporation. c. a de jure corporation. d. ultra vires. 52. 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. 53. Ruiz owns Solar Corporation. Ruiz commingles his personal interests with the corporation’s interest to the extent that the firm has no separate identity. This most likely warrants Powered by Cognero
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Chapter 29: Corporations a. an adoption of new corporate bylaws. b. a recognition of de facto corporate status. c. a pierce of the corporate veil. d. a fundamental change to the articles of incorporation. 54. Kay and Leo form Metro Delivery Inc. Responsibility for all policymaking decisions necessary to the management of corporate affairs rests with Metro’s a. board of directors. b. officers. c. incorporators. d. shareholders. 55. Global Enterprises Inc. competes in many product, service, and geographic markets. Global’s board consists of a large number of directors. The firm faces myriad complex business issues. To avoid its governance from becoming unwieldy, the company can delegate some of its functions to a. its incorporators. b. an executive committee. c. its shareholders. d. a quorum. 56. Owen is a director of Packaging Company. As a director, Owen’s rights 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-dealing. 57. Blue Sky Drones Inc. has three directors, a president, two vice presidents, a secretary, and a treasurer. Carol is a Blue Sky director. In most states, Carol can also hold a corporate office a. if she was one of the firm’s incorporators. b. under any circumstances. c. if she resigns as director. d. if the shareholders consent. 58. Orin is a corporate officer for Pacific Trade Inc. In this capacity, Orin a. authorizes major corporate policy decisions. b. manages corporate day-to-day operations. c. makes executive personnel decisions. d. makes and announces financial decisions. 59. Roz, a director of Soy Inc., is specially trained in petroleum trading. Soy’s board approves several deals in which the company pays too much for soybeans. Roz approves all the deals without first reviewing them. Roz is most likely liable for breach of a. the duty of care. b. the business judgment rule. c. the duty of loyalty. Powered by Cognero
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Chapter 29: Corporations d. none of the choices. 60. Buck is a director on the board of Construction Corporation. The board delegates work to Don, Construction’s president, and other corporate officers. Buck fails to reasonably supervise the work. He 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. 61. 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. 62. Gil is an officer for HVAC Corporation. Due to Gil’s choice of a certain supplier, HVAC’s costs are somewhat higher than they might have been if a different supplier had been chosen. Gil is most likely liable for a. breach of trust and confidence. b. breach of the business judgment rule. c. negligence or mismanagement. d. nothing. 63. Paul is a director on the board of Quality Tire Corporation. As a director, Paul may not a. act in accord with his 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. 64. Daisy is a director of Extraction Corporation. She opposes an offer to merge Extraction 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. breach of contract. 65. Ben is a director of Creation Corporation, an architectural firm. Without informing Creation, Ben goes into business with Design, Inc., a Creation competitor. Ben is liable for breach of a. the duty of care. b. the business judgment rule. c. the duty of loyalty. d. breach of contract. 66. Roy is a director of Sales Service Inc. Sales enters into a contract with TeleCenter Corporation in which Roy has a personal interest. Roy must Powered by Cognero
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Chapter 29: Corporations 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. only disclose the information if someone at Sales asks. 67. Guy is a director of Healthcare Corporation. Guy attempts to use his best judgment in guiding corporate management but makes a few honest mistakes. His best defense against liability for these mistakes is a. business success insurance. b. the business judgment rule. c. the duty of loyalty. d. none of the choices. 68. Ned and Olga are shareholders of Pizza Pies Inc. Ned’s written authorization to Olga to vote Ned’s shares at a shareholders’ meeting is a. a fundamental change. b. a cumulative vote. c. a proxy. d. a quorum requirement. 69. Erin, a shareholder of Finance Inc., demands the right to inspect corporate books and 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. 70. Don is a shareholder of Energy Renew Inc. When the directors fail to undertake an action to redress a wrong suffered by the firm, Don files a suit on its behalf. Don’s suit is a. a preemptive right. b. a shareholder’s derivative suit. c. the duty of a majority shareholder. d. unethical and illegal. 71. Huan is a shareholder of Insulation Inc. When the directors fail to undertake an action to redress a wrong suffered by the firm, Huan files a suit on its behalf. Any damages recovered by the suit will go to the firm’s a. shareholders, excluding Huan. b. treasury. c. directors. d. shareholders, including Huan. 72. Brad is a shareholder of Cloud Servers Inc. He will be deemed to have a fiduciary duty to Cloud and its minority shareholders if he has a sufficient number of shares to a. assert a preemptive right. b. bring a shareholder’s derivative suit. Powered by Cognero
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Chapter 29: Corporations c. exercise actual control over the corporation. d. participate in a cumulative vote. 73. Avery wants to go into business as Boom! to make and market fireworks. When deciding which form of business organization would be most appropriate, Avery 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. 74. 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.
75. Mitch is a director and officer of Numero Uno, Inc. Mitch makes a marketing decision that results in a dramatic decrease in profits for Numero Uno and its shareholders. The shareholders accuse Mitch of breaching his fiduciary duty to the corporation. What is Mitch’s best defense against this accusation? Later, the Numero Uno board considers a resolution for the firm to compete with One-of-a-Kind Corporation. Mitch is a director and shareholder of One-of-a-Kind. What is Mitch’s responsibility in this situation? 76. 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? 77. Bob and Sally are both shareholders of XYZ Corporation. The annual shareholders’ meeting is coming up, and they want to know how many “votes” they each have. What things must they look at to determine how much control each of them have, and if there are different types of shareholders.
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Chapter 29: Corporations Answer Key 1. True 2. True 3. False 4. True 5. True 6. True 7. False 8. False 9. False 10. False 11. False 12. True 13. False 14. False 15. True 16. True 17. True 18. True 19. False 20. False 21. False 22. False 23. False 24. True 25. True Powered by Cognero
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Chapter 29: Corporations 26. True 27. True 28. True 29. True 30. True 31. False 32. True 33. True 34. True 35. True 36. True 37. True 38. False 39. True 40. d 41. c 42. c 43. b 44. a 45. a 46. a 47. c 48. c 49. c 50. c 51. a Powered by Cognero
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Chapter 29: Corporations 52. b 53. c 54. a 55. b 56. a 57. b 58. b 59. a 60. a 61. a 62. d 63. d 64. c 65. c 66. c 67. b 68. c 69. c 70. b 71. b 72. c 73. b 74. a 75. The best defense in this context is the business judgment rule. As long as a director or officer does what is necessary to be informed, and acts in good faith, in what he or she considers to be the best interests of the corporation, and with the care that an ordinarily prudent person would use in similar circumstances, he or she is not liable simply because a decision has a negative result. As for the resolution involving a different corporation, a director cannot support a business that Powered by Cognero
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Chapter 29: Corporations competes directly with a corporation on the board of which the director sits. The director’s fiduciary duty requires him to fully disclose the conflict of interest. Most likely, the director in these circumstances will have to resign from one of the boards. 76. 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. Knowledge 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. 77. Shareholders’ meetings must occur at least annually. In addition, special meetings can be called to deal with urgent matters. A corporation must notify its shareholders of the date, time, and place of an annual (or special shareholders’) meeting at least ten days, but not morethan sixty days, before the meeting date. It is usually not practical for owners of only a few shares of stock of publicly traded corporations to attend shareholders’ meetings. Therefore, the law allows stockholders toeither vote in person, or appoint another person as their agent to vote their shares at the meeting. The agent’s formal authorization to vote the shares is called a proxy. Shareholders exercise ownership control through the power of their votes. Corporate business matters are presented in the form of resolutions, which shareholders vote to approve or disapprove. Each common shareholder is entitled to one vote per share. The articles ofincorporation can exclude or limit voting rights, particularly for certain classes of shares. For instance, owners of preferred stock usually are denied the right to vote. For shareholders to act during a meeting, a quorum must be present. Generally, a quorum exists when shareholders holding more than 50 percent of the outstanding shares are present, but state laws often permit the articles of incorporation to set higher or lower quorum requirements. Normally, a majority vote of the shares represented at the meeting is required to pass resolutions. At times, more than a simple majority vote is required, either by a state statute orby the corporate articles. Extraordinary corporate matters, such as a merger, consolidation, or dissolution of the corporation, require approval by a higher percentage of all corporate shares entitled to vote. Most states permit, and some require, shareholders to elect directors by cumulative voting. This voting method is designed to allow minority shareholders to be represented on the board of directors. With cumulative voting, each shareholder is entitled to a total number of votes equal to the number of board members to be elected, multiplied by the number of voting shares the shareholder owns. The shareholder can cast all of these votes for one candidate or split them among several candidates. All candidates stand for election at the same time. Before a shareholders’ meeting, a group of shareholders can agree in writing to vote their shares together in a specified manner. Such agreements, called shareholder voting agreements, usually are held to be valid and enforceable. As noted earlier, a shareholder can also appoint a voting agent, and thus vote by proxy.
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Chapter 30: Investor Protection, Insider Trading, and Corporate Governance
Indicate whether the statement is true or false. 1. Stocks represent corporate debt. a. True b. False 2. Providing investors with more information helps them make buying and selling decisions about securities. a. True b. False 3. All security transactions must be registered with the SEC. a. True b. False 4. The purpose of the Securities Act of 1933 is to regulate a security’s investment price. a. True b. False 5. 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 6. An investment contract in a franchise, does not qualify as a security. a. True b. False 7. Crowdfunding can be exempt from the registration requirements of the Securities Act of 1933. a. True b. False 8. Small-business issues can use a registration and reporting system that requires simpler forms than the full registration system. a. True b. False 9. A well-known seasoned investor has less flexibility in filing registration statementsand using free-writing prospectuses than other issuers. a. True b. False 10. Securities can be sold before the effective date of the registration statement without restrictions. a. True b. False 11. Most securities can be resold without registration. Powered by Cognero
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Chapter 30: Investor Protection, Insider Trading, and Corporate Governance 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. Most private, small-business, noninvestment company offers of securities are exempt from the registration requirements. a. True b. False 14. Misrepresenting facts in a registration statement or prospectus is known as pufferyand does not violate the Securities Act of 1933. a. True b. False 15. 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 16. The Securities Exchange Act of 1934 provides for continuous periodic disclosures by certain publicly held companies. a. True b. False 17. 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 18. 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 19. To fall under sanctions under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, scienter must exist. a. True b. False 20. There does not have to be any economic loss for there to be a violation of the 1934 Securities Act. a. True b. False 21. A contract for the sale of corporate assets would constitute a material fact for purposes of disclosure under SEC Rule Powered by Cognero
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Chapter 30: Investor Protection, Insider Trading, and Corporate Governance 10b-5: a. True b. False 22. 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 23. Only the Securities and Exchange Commission can sue violators of Section 10(b) and Rule 10b-5. a. True b. False 24. 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 25. The Securities Exchange Act of 1934 applies to all cases involving the trading of securities, except in private transactions. a. True b. False 26. Securities must be registered under the Securities Act of 1933 for the Securities Exchange Act of 1934 to apply. a. True b. False 27. 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 28. An insider must actually 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 29. A short-swing profit is any profit earned by the purchase and sale, or sale and purchase, of the same security within a 12-month period. a. True b. False 30. 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 Powered by Cognero
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Chapter 30: Investor Protection, Insider Trading, and Corporate Governance 31. State securities laws apply mainly to intrastate transactions. a. True b. False 32. Issuers of securities offerings must comply with either federal or state securities laws, but not both. a. True b. False 33. Federal securities laws take priority over state securities laws. a. True b. False 34. 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 35. Private parties may also sue violators of Section 10(b) and Rule 10b-5. a. True b. False 36. Under corporate law, a corporation must have a board of directors elected by the shareholders. a. True b. False 37. Public companies with a market capitalization, or public float (price times total shares publicly owned), of less than $50 million no longer need to have an auditor report on management’s assessment of internal controls. a. True b. False
Indicate the answer choice that best completes the statement or answers the question. 38. 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. 39. Under the Securities Act of 1933, securities can 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. 40. Fabrication Corporation is a public company whose shares are traded in the public securities markets. Under the Securities Act of 1933, Fabrication is required to: Powered by Cognero
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Chapter 30: Investor Protection, Insider Trading, and Corporate Governance 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. 41. 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. 42. 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. 43. Home Meals 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. 44. 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. 45. 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 the 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. 46. 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. Powered by Cognero
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Chapter 30: Investor Protection, Insider Trading, and Corporate Governance b. negative publicity, but no criminal prosecution or civil suit. c. only government prosecution. d. only a private investor’s suit. 47. 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. 48. Which of these would not fall under an exemption transaction under the Securities Act: a. insurance policies, endowments, and annuity contracts. b. bank and financial institution securities. c. government-issued securities. d. securities of for-profit education institutions. 49. 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. 50. A __________________ is a written disclosure document that describes the security being sold, the financial operations of the issuing corporation, and the investment risk attaching to the security. a. prospectus b. registration statement c. proxy statement d. well-known issuer 51. 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. 52. 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. Powered by Cognero
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Chapter 30: Investor Protection, Insider Trading, and Corporate Governance d. the untrue statements were not material. 53. 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. 54. 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. 55. 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. 56. 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. 57. 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. 58. 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. Powered by Cognero
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Chapter 30: Investor Protection, Insider Trading, and Corporate Governance d. two months to sell it. 59. For either criminal or civil sanctions to be imposed, ________must exist-that is, the violator must have had an intent to defraud or knowledge of engaging in misconduct. a. criminal intent b. scienter c. private trading d. misrepresentation 60. 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. 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 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. Every state has its own corporate securities laws, or________, that regulate the offer and sale of securities within its borders. a. SEC regulations b. state statutes c. blue sky laws d. UCC laws 64. Federal security laws do not take ________ over state security laws. a. the back seat b. priority c. concurrent jurisdiction Powered by Cognero
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Chapter 30: Investor Protection, Insider Trading, and Corporate Governance d. exemption 65. Corporate governance involves __________ reporting of the corporation’s financial progress, so that managers can be evaluated. a. rated b. legal c. audited d. exempt 66. Under corporate law, a corporation must have a ___________ elected by the shareholders. a. president b. shareholder list c. proxy list d. board of directors. 67. 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 all except: a. antifraud provisions. b. registration provisions. c. disclosure requirements. d. wage provisions. 68. 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.” 69. 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. 70. Public companies with a market capitalization, or public float (price times total shares publicly owned), of less than ______________ no longer need to have an auditor report on management’s assessment of internal controls. a. 50 million b. 100 million c. 75 million d. 1 million 71. Spectrum Paints Inc. is a public company whose shares are traded in the public securities markets. Under the Powered by Cognero
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Chapter 30: Investor Protection, Insider Trading, and Corporate Governance 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. 72. All members of the corporate audit committee for public companies must be ________directors. a. inside b. proxy c. outside d. hired
73. 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? 74. Bob wants his company stock to finally go public. What steps does he need to take (assuming he has no exemption from registration)? Explain the process and what needs to be included.
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Chapter 30: Investor Protection, Insider Trading, and Corporate Governance Answer Key 1. False 2. True 3. False 4. False 5. True 6. False 7. True 8. True 9. False 10. False 11. True 12. True 13. True 14. False 15. True 16. True 17. True 18. True 19. True 20. False 21. True 22. True 23. False 24. True 25. False Powered by Cognero
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Chapter 30: Investor Protection, Insider Trading, and Corporate Governance 26. False 27. True 28. False 29. False 30. True 31. True 32. False 33. False 34. True 35. True 36. True 37. False 38. b 39. a 40. b 41. b 42. b 43. d 44. c 45. b 46. a 47. c 48. d 49. a 50. a 51. c Powered by Cognero
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Chapter 30: Investor Protection, Insider Trading, and Corporate Governance 52. d 53. b 54. d 55. c 56. c 57. a 58. b 59. b 60. d 61. a 62. a 63. c 64. b 65. c 66. d 67. d 68. a 69. a 70. c 71. c 72. c 73. Yes, assuming that Taylor did not know about the new method before it became public, 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, Powered by Cognero
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Chapter 30: Investor Protection, Insider Trading, and Corporate Governance 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. 74. Should include Section 5 of the Securities Act of 1933, which broadly provides that a security must be registered before being offered to the public unless it qualifies for an exemption. The issuing corporation must file a registration statement with the SEC, and must provide all investors with a prospectus. In principle, the registration statement and the prospectus supply sufficient information to enable unsophisticated investors to evaluate the financial risk involved. A prospectus is a written disclosure document that describes the security being sold, the financial operations of the issuing corporation, and the investment risk attached to the security. The prospectus also serves as a selling tool for the issuing corporation. The SEC allows an issuer to deliver its prospectus to investors electronically. The registration statement must be written in plain English and must fully describe the following: 1. the securities being offered for sale, including their relationship to the issuer’s other securities; 2. the corporation’s properties and business (including a financial statement certified by an independent public accounting firm); 3. the management of the corporation, including managerial compensation, stock options, pensions, and other benefits (any interests of directors or officers in any material transactions with the corporation must be disclosed); 4. how the corporation intends to use the proceeds of the sale; and 5. any pending lawsuits or special risk factors. The registration statement does not become effective until after it has been reviewed and approved by the SEC (unless it is filed by a well-known seasoned issuer, as will be discussed shortly). Once the SEC has reviewed and approved the registration statement and the waiting period is over, the registration is effective, and the post effective period begins. The issuer can now offer and sell the securities without restrictions. If the company issued a preliminary or free-writing prospectus to investors, it must provide those investors with a final prospectus either before, or at the time they purchase the securities. The issuer can require investors to download the final prospectus from a website, if it notifies them of the appropriate Internet address. All companies, both domestic and foreign, must file their registration statements electronically so that they can be posted on the SEC’s EDGAR (Electronic Data Gathering, Analysis, and Retrieval) database. The EDGAR database includes material on initial public offerings, proxy statements, corporations’ annual reports, registration statements, and other documents that have been filed with the SEC. Investors can access the database online to obtain information that they can use to make investment decisions.
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Chapter 31: Antitrust Law and Promoting Competition
Indicate whether the statement is true or false. 1. Consumers benefit when producers work to develop better products that can be sold at lower prices to beat the competition. a. True b. False 2. Proving an antitrust violation requires showing a misuse of market power. a. True b. False 3. 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 4. Antitrust legislation is based on a desire to limit economic competition. a. True b. False 5. Restraints of trade are laws that regulate economic competition. a. True b. False 6. 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 7. A market in which there is a single seller or a very limited number of sellers is a monopoly. a. True b. False 8. The power to control the market price of a product is market power. a. True b. False 9. Because commerce operates more efficiently when competitors cooperate, Section 1 of the Sherman Act permits rivals to consolidate market power. a. True b. False 10. 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 Powered by Cognero
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Chapter 31: Antitrust Law and Promoting Competition 11. 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 12. Any agreement that results in enhanced market power violates the antitrust laws. 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. To reduce marketing costs and raise prices, competitors can divide up marketing territories or customers without violating antitrust law. a. True b. False 15. Group boycotts are per se violations of Section 1 of the Sherman Act. a. True b. False 16. Horizontal restraints involve the entire chain production. a. True b. False 17. If the legitimate benefits outweigh the anticompetitive effects of a resale price maintenance agreement, the agreement may be held lawful. a. True b. False 18. 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 19. 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 20. Section 2 of the Sherman Act essentially condemns the act of monopolizing, not the possession of monopoly power. a. True b. False 21. A firm may be deemed a monopolist, even though it is not the only seller in a market, because what matters is size in Powered by Cognero
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Chapter 31: Antitrust Law and Promoting Competition relation to the market. a. True b. False 22. 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 23. 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 24. 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 25. 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 26. Every threat of monopolization is condemned as a violation of antitrust law, even if the alleged offender does not possess some degree of market power. a. True b. False 27. To violate Section 2 of the Clayton Act, all sellers must be engaged in interstate commerce. a. True b. False 28. Giving favorable credit terms would not be a violation of the Clayton Act. a. True b. False 29. 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 30. 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 Powered by Cognero
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Chapter 31: Antitrust Law and Promoting Competition 31. Under the Clayton Act, a business firm cannot merge with another unless the effect is to substantially lessen competition. a. True b. False 32. A merger between companies that compete with each other in the same market is a vertical merger. a. True b. False 33. Only the U.S. Department of Justice can prosecute violations of the Sherman Act. a. True b. False 34. Only the Federal Trade Commission can enforce the Clayton Act. a. True b. False 35. 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 36. 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
Indicate the answer choice that best completes the statement or answers the question. 37. 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. 38. Antirust legislation is based on society’s desire to a. increase prices. b. foster competition. c. consolidate market power. d. encourage restraints of trade. 39. 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. Powered by Cognero
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Chapter 31: Antitrust Law and Promoting Competition c. merely regulates and thereby promotes competition. d. suppresses or destroys competition. 40. Online Media Inc. bundles its products so that consumers are forced to pay for access to some sites that customers may not want, in order to obtain access to sites that customers 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. 41. 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.
Indicate one or more answer choices that best complete the statement or answer the question. 42. When applying the rule of reason to an activity that allegedly violates the antitrust laws, a court will consider (choose all applicable answers) 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.
Indicate the answer choice that best completes the statement or answers the question. 43. 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. 44. 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. 45. 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. Powered by Cognero
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Chapter 31: Antitrust Law and Promoting 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. 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. 47. 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. 48. 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. 49. 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.
Indicate one or more answer choices that best complete the statement or answer the question. 50. These are types of behavior that that are subject to sanction under Section 2 of the Sherman Act (choose all applicable answers) a. monopolization. b. price gouging. c. attempts to monopolize. d. trade associations.
Indicate the answer choice that best completes the statement or answers the question. 51. 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 Powered by Cognero
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Chapter 31: Antitrust Law and Promoting Competition 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. 52. 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. there are substitute sellers 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. 53. 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. 54. 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. 55. 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.
Indicate one or more answer choices that best complete the statement or answer the question. 56. Defenses to liability for price discrimination include (choose all applicable answers) a. cost justification. b. trade associations. c. meeting competitor’s prices. d. changing market conditions.
Indicate the answer choice that best completes the statement or answers the question. Powered by Cognero
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Chapter 31: Antitrust Law and Promoting Competition 57. Pump Makers Inc. makes pumps for fire trucks. It conditions shipments of its products to the client Quality Motors Corporation—a maker of fire trucks. The agreement mentions a requirement to the client, it needs to buy any 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. 58. 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 its purpose is to create a monopoly. 59. Road Tires Inc. conditions the sale of its products to Service Stores on the buyer’s agreement to buy Road’s tire-repair 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. 60. 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. 61. 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. 62. 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. 63. 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 & Powered by Cognero
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Chapter 31: Antitrust Law and Promoting Competition 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.
Indicate one or more answer choices that best complete the statement or answer the question. 64. The federal agencies that can enforce the antitrust laws include (choose all applicable answers) a. the U.S. Department of Justice. b. the Securities and Exchange Commission. c. the Consumer Financial Protection Bureau. d. The Federal Trade Commission
Indicate the answer choice that best completes the statement or answers the question. 65. 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.
Indicate one or more answer choices that best complete the statement or answer the question. 66. With respect to antitrust violations, the Federal Trade Commission does not enforce (choose all applicable answers) a. the Federal Trade Commission Act. b. the Clayton Act. c. the Sherman Act. d. any of the federal antitrust laws.
Indicate the answer choice that best completes the statement or answers the question. 67. 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. 68. 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. Powered by Cognero
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Chapter 31: Antitrust Law and Promoting Competition 69. 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. 70. 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. 71. 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.
72. 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? 73. Precision Parts Corporation and Aligned 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. Precision Parts and Aligned Gears agree that Precision Parts will no longer sell in Minnesota, and that Aligned Gears will no longer sell in North and South Dakota. Have Precision Parts and Aligned Gears violated any antitrust law? If so, which one? Explain. If they had divided their market by type of customer rather than geographic area, would the result be the same? Why, or why not?
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Chapter 31: Antitrust Law and Promoting Competition Answer Key 1. True 2. True 3. True 4. False 5. False 6. False 7. True 8. True 9. False 10. False 11. True 12. False 13. True 14. False 15. True 16. False 17. True 18. True 19. False 20. True 21. True 22. True 23. False 24. False 25. False Powered by Cognero
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Chapter 31: Antitrust Law and Promoting Competition 26. False 27. True 28. False 29. False 30. True 31. False 32. False 33. True 34. False 35. False 36. False 37. b 38. b 39. c 40. c 41. c 42. a, b, d 43. b 44. a 45. d 46. c 47. c 48. a 49. b 50. a, c 51. c Powered by Cognero
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Chapter 31: Antitrust Law and Promoting Competition 52. d 53. d 54. a 55. d 56. a, c, d 57. a 58. c 59. c 60. b 61. a 62. a 63. c 64. a, d 65. a 66. b, c 67. c 68. d 69. d 70. a 71. d 72. 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. Powered by Cognero
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Chapter 31: Antitrust Law and Promoting Competition The term monopoly generally is used to describe a market in which there is a single seller, or a very limited number of sellers. Whereas Section 1 focuses on agreements that are restrictive (that is, agreements that have a wrongful purpose), Section 2 addresses the misuse of monopoly power in the marketplace. Monopoly power exists when a firm has an extreme amount of market power—the power to affect the market price of its product. Both Section 1 and Section 2 seek to curtail market practices that result in undesired monopoly pricing and output behavior. For a case to be brought under Section 2, the “threshold” or “necessary” amount of monopoly power must already exist. We illustrate the different requirements for violating these two sections of the Sherman Act in Exhibit 31–1. 73. Precision Parts and Aligned Gears have violated antitrust law. The major antitrust law they have violated is the Sherman Act, Section 1. Precision Parts and Aligned 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. The term horizontal restraint is encountered frequently in antitrust law. A horizontal restraint is any agreement that in some way restrains competition between rival firms competing in the same market. Horizontal restraints may include price fixing, group boycotts, market divisions, and trade associations. It is a per se violation of Section 1 of the Sherman Act for competitors to divide up territories or customers. The same violation would take place if the two firms divided up their customers by class rather than region. They might agree that Precision would sell only to institutional purchasers (such as governments and schools) in all three states, Aligned only to wholesalers and retailers. The result would be the same. In arranging for the distribution of its products, a manufacturing firm often wishes to insulate dealers from direct competition with other dealers selling the product. To do so, it may institute territorial restrictions or attempts to prohibit wholesalers or retailers from reselling the product to certain classes of buyers, such as competing retailers.
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Chapter 32: Consumer and Environmental Law
Indicate whether the statement is true or false. 1. A business that cannot provide scientific evidence to support its marketing claims may be held liable for deceptive advertising. a. True b. False 2. Advertising will be deemed deceptive if it includes a claim that omits a material fact about a product. a. True b. False 3. 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 4. Generally, online ads—unlike other ads—can be less than truthful, and not every claim must be substantiated. a. True b. False 5. 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 6. Bait and switch advertising is where a retailer lures customers in with a very good deal, and then is “out” of that product but offers more expensive products in its place. a. True b. False 7. 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 8. 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 9. The Telephone Consumer Protection Act (TCPA) prohibits telephone solicitation using an automatic telephone dialing system, or a prerecorded voice. a. True b. False 10. The Telemarketing Sales Rule (TSR) applies to any offer—domestic or foreign—made to consumers in the United States. Powered by Cognero
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Chapter 32: Consumer and Environmental Law a. True b. False 11. A cooling-off law under the Federal Trade Commission (FTC) allows consumers of certain transactions to cancel their transactions within five days. a. True b. False 12. 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 13. The Energy Policy and Conservation Act (EPCA) requires automakers to attach an information label to every new car that includes the fuel economy estimate for the vehicle. 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. Labels on fresh and frozen fruits and vegetables must indicate where the food originated so that consumers can know if the food was imported. a. True b. False 16. All restaurant chains with thirty or more locations are now required to post the caloric content of the foods on their menus, so that customers will know how many calories the food items contain. a. True b. False 17. There is a significant distinction between regulating the information dispensed about a product, and regulating the product’s actual content. a. True b. False 18. The Federal Food, Drug, and Cosmetic Act (FDCA) protects consumers against contaminated and misbranded food and drugs. a. True b. False 19. 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 Powered by Cognero
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Chapter 32: Consumer and Environmental Law 20. The government cannot remove a product from the market simply because it is considered imminently hazardous. a. True b. False 21. The Consumer Product Safety Act created the Consumer Product Safety Commission (CPSC) which conducts research about the safety of individual products, and maintains data about the risks associated with various products. a. True b. False 22. Drop-side cribs have contributed to the deaths of many infants. The Consumer Product Safety Commission has the authority to ban such products from being sold. a. True b. False 23. The healthcare reforms (Obamacare) provided patients to free services including well check-ups, cancer screenings, and chiropractic care. a. True b. False 24. The Truth-in-Lending Act (TILA) 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 25. 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 26. Credit can be denied solely on the basis of national origin. a. True b. False 27. A credit card company must provide sixty days’ advance notice to consumers, before changing its credit card terms. a. True b. False 28. A credit cardholder is not liable for any unauthorized charges made before the time the creditor is notified that the card is lost. a. True b. False 29. 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 Powered by Cognero
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Chapter 32: Consumer and Environmental Law 30. Creditors that use information from credit-reporting agencies cannot be held liable for violations of the Fair Credit Reporting Act. a. True b. False 31. Congress passed the Fair and Accurate Credit Transactions (FACT) Act to help combat identity theft. a. True b. False 32. A debt-collection agency can always contact a debtor at his or her place of employment. a. True b. False 33. 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 34. 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 35. 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 36. 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 37. The primary responsibility for preventing and controlling air pollution rests with the federal government. a. True b. False 38. Because the government knows CO2 pollution causes climate change, a young generation might succeed in a suit alleging that by failing to address this cause, the government is violating their constitutional rights. a. True b. False 39. Because point-source water pollution control is based on a permit system, the permits are the key to enforcement. a. True b. False Powered by Cognero
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Chapter 32: Consumer and Environmental Law 40. Selling a site where hazardous wastes were disposed of, relieves the sellerand the buyerof liability for the clean-up, as does merging with or buying a corporation that has not violated Superfund. a. True b. False 41. To minimize potential liability under Superfund, a business can conduct its own regular environmental compliance audits of its operations. a. True b. False
Indicate the answer choice that best completes the statement or answers the question. 42. Sources of consumer, environmental protection, and the public means to implement and enforce those provisions that exist at the level of a. the federal government only. b. the federal and state governments only. c. the state and local governments only. d. the federal, state, and local governments. 43. Consumer Staples, Inc., includes in its advertising inconspicuous exaggerations, vague generalities, and puffery about its products. The firm may be subject to sanctions for a. the obvious exaggerations. b. the vague generalities. c. the puffery. d. inconspicuous exaggerations 44. Brew House Coffee Company sells coffee and related beverages. The company’s ad contends that ambitious businesspersons “Drink Us & Rise Up in the Corporate World!’ ” The Federal Trade Commission would consider this ad a. false and misleading. b. impermissibly vague and general. c. a deceptive half-truth. d. mere puffery. 45. Lawn Company and Mowers, Inc., make yard tools. Both companies use only steel produced in the United States. Lawn’s ad claims, “We use only U.S. steel, while our competitor uses inferior foreign steel!” For purposes of the application of advertising standards under the Federal Trade Commission Act, this statement is most likely a. an obvious exaggeration. b. puffery. c. deceptive about a competitor d. a half-truth. 46. An ad for Running Shoes, Inc., states that its footwear is “The Athlete’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. Powered by Cognero
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Chapter 32: Consumer and Environmental Law d. nothing due to mere puffery. 47. EZ Workout, Inc., advertises online their product Fit Step—an exercise machine. 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. reasonably avoidable. c. substantiated. d. Deceptive. 48. If the FTC proves an advertisement is unfair or deceptive, it may issue a _____ to stop the advertising. a. injunction order b. cease and desist c. amendment d. complain
Indicate one or more answer choices that best complete the statement or answer the question. 49. The Lanham Act protects trademarks. The act also covers false advertising claims. To state a successful claim for false advertising under this act, a business must establish which of the following elements (choose all applicable answers a. direct causation of the injury by the false or deceptive advertising. b. a loss of business from buyers who were deceived by the advertising. c. that the advertising got them new customers. d. that the advertising made them angry. 50. The Federal Trade Commissions (FTC’s) Telemarketing Sales Rule (TSR) requires a telemarketer to identify the following in a sales call (choose all applicable answers) a. the total costs of the goods being sold. b. the city where they are located. c. the product being sold. d. the seller’s name.
Indicate the answer choice that best completes the statement or answers the question. 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. calling the customer back.
Indicate one or more answer choices that best complete the statement or answer the question. 52. Because the quality and safety of food are so important to consumers, several statutes deal specifically with food labeling. The Fair Packaging and Labeling Act requires that food product labels identify (choose all applicable answers) a. the net quantity of contents. Powered by Cognero
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Chapter 32: Consumer and Environmental Law b. the product. c. the name of the CEO. d. the packager or distributor.
Indicate the answer choice that best completes the statement or answers the question. 53. Corner Market sells groceries. Deli & Drug Store sells groceries and fills prescriptions. The party with the chief responsibility to prevent unsafe food and drugs from being sold is a. Corner Market and Deli & Drug. b. Deli & Drug only. c. the Federal Trade Commission. d. the Food and Drug Administration. 54. 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. The Environmental Protection Agency. c. the Federal Trade Commission. d. the Food and Drug Administration. 55. Cutting Edge, Inc., makes and sells tools. One of the tools is believed to be hazardous. The firm may be required to a. export the tool and sell it only abroad. b. increase the price to cover the cost of any injuries or damage. c. reduce the price to indicate the hazard to consumers. d. remove the tool from the market.
Indicate one or more answer choices that best complete the statement or answer the question. 56. The new health care reforms (Obamacare) succeeded in doing the following (choose all applicable answers) a. ended lifetime limits on healthcare coverage. b. gave patients access to preventative services for free. c. allowed persons 24 or younger to remain on their parent’s policies. d. covered all prescription costs.
Indicate the answer choice that best completes the statement or answers the question. 57. 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. 58. Equity Lending Company extends credit to consumers. Equity applies a variety of requirements to determine applicants’ qualifications for credit, the amount, the interest rate, and other terms. Under the Equal Credit Opportunity Powered by Cognero
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Chapter 32: Consumer and Environmental Law Act, the lender cannot base its credit decisions on an applicant’s a. credibility. b. financial awareness. c. occupation. d. gender. 59. Mary receives an unsolicited credit card in the mail and tosses it on her desk. Without Mary’s permission, her roommate Nan uses the card to buy a new laptop for $1,800. Mary is liable for a. $1,800. b. $500. c. $50. d. none of the choices. 60. Bea 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. 61. 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. 62. 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. 63. 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. 64. Regional Disposal Center operates a recycling plant. Stan and other citizens file a suit, alleging injuries from the plant. To succeed, they must show that the defendant failed to use reasonable care if the suit is based on a. a negligence theory. b. a nuisance theory. Powered by Cognero
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Chapter 32: Consumer and Environmental Law c. any theory. d. a strict liability theory. 65. 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. 66. 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. 67. 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. 68. Smelter, 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. 69. 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. 70. 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. Powered by Cognero
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Chapter 32: Consumer and Environmental Law 71. Blue Water Power Corporation wants to begin operations that include the discharge of waste into navigable waters. Under the Clean Water Act, Blue Power 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. 72. Centre 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. 73. 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. 74. Hi-Yield, Inc., makes an 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. 75. Before being transported, hazardous waste produced by the operations of Fabrication, 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. Fabrication Inc. 76. 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.
77. Mouth-Waterin’ Treats Company wants to sell its candy in a normal-sized package labeled “Gigantic Size.” NuFabrics, Inc., wants to advertise its sweaters as having “That Wool Feel,” but does not want to specify on labels that the Powered by Cognero
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Chapter 32: Consumer and Environmental Law sweaters are 100 percent polyester. Can these firms market their products as they would like? If not, why not? 78. 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?
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Chapter 32: Consumer and Environmental Law Answer Key 1. True 2. True 3. False 4. False 5. True 6. True 7. True 8. False 9. True 10. True 11. False 12. False 13. True 14. False 15. True 16. False 17. True 18. True 19. True 20. False 21. True 22. True 23. False 24. False 25. True Powered by Cognero
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Chapter 32: Consumer and Environmental Law 26. False 27. False 28. False 29. True 30. False 31. True 32. False 33. True 34. True 35. True 36. True 37. False 38. True 39. True 40. False 41. True 42. d 43. d 44. d 45. c 46. d 47. c 48. b 49. a, b 50. a, c, d 51. a Powered by Cognero
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Chapter 32: Consumer and Environmental Law 52. a, b, d 53. d 54. a 55. d 56. a, b 57. c 58. d 59. d 60. d 61. d 62. c 63. c 64. a 65. b 66. b 67. c 68. a 69. d 70. a 71. b 72. a 73. a 74. b 75. d 76. a Powered by Cognero
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Chapter 32: Consumer and Environmental Law 77. 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. Generally, deceptive advertising involves a claim that would mislead a reasonable consumer. Vague generalities and obvious exaggerations (that a reasonable person would not believe to be true) are permissible. These claims are known as puffery. 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-and-desist order. The agency might also impose a counter advertising sanction, requiring a seller to issue ads—in print, on radio, and on television—to inform the public about the misinformation. Other sanctions are also possible. 78. 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. Under the common law doctrine of nuisance, persons may be held liable if they use their property in a manner that unreasonably interferes with others’ rights to use or enjoy their own property. In these situations, the courts commonly balance the harm caused by the pollution against the costs of stopping it. Courts have often denied injunctive relief on the ground that the hardships that would be imposed on the polluter and on the community, are relatively greater than the hardships suffered by the plaintiff. An injured party may sue a business polluter under the negligence and strict liability theories discussed in the torts chapter. A negligence action is based on a business’s alleged failure to use reasonable care toward a party whose injury was foreseeable and was caused by the lack of reasonable care. For instance, employees might sue an employer whose failure to use proper pollution controls that contaminated the air and caused the employees to suffer respiratory illnesses.
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Chapter 33: Liability of Accountants and Other Professionals
Indicate whether the statement is true or false. 1. 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 2. In general, professionals should discharge their professional responsibilities to the best of their ability. a. True b. False 3. The importance of abiding by the standards of a profession is shown whenever an incident happens that highlights professional failures to adhere to those standards. a. True b. False 4. 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 5. 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 6. In performing professional services, an accountant is subject to the standard of the ordinarily prudent person. a. True b. False 7. Negligence cases against professionals often focus on the standard of care exercised by the professional. a. True b. False 8. 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 9. 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 10. 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 Powered by Cognero
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Chapter 33: Liability of Accountants and Other Professionals b. False 11. 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 12. 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 13. An accountant facing a claim of negligence, has several possible defenses, including that this negligence was not the proximate cause of the client’s losses. a. True b. False 14. Under rules of professional conduct that proscribe fraud, state authorities can discipline professionals for engaging in such misconduct. a. True b. False 15. An attorney’s commission of a crime constitutes professional misconduct without anything else. a. True b. False 16. A professional may be held liable for actual fraud,when the professional intentionally misstates a material fact to mislead a client. a. True b. False 17. A professional can be held liable for constructive fraud whether or not he or she acted with fraudulent intent. a. True b. False 18. An auditor who accepts a client’s explanation regarding financial irregularities, despite contradictory evidence, could be considered grossly negligent. a. True b. False 19. 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 20. 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 to a corporate officer or director meets this standard. Powered by Cognero
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Chapter 33: Liability of Accountants and Other Professionals a. True b. False 21. 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 22. 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 23. 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 24. 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 25. 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 26. The Ultramares privity requirement may be satisfied without the establishment of an accountant-client relationship. a. True b. False 27. 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 28. The Public Company Accounting Oversight Board oversees the audit of public companies that are subject to securities laws in order to protect public investors. a. True b. False 29. An accounting firm can lawfully perform both auditing and non-auditing services for the same company at the same time, because the firm could be exposed to potentially massive liability. a. True b. False Powered by Cognero
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Chapter 33: Liability of Accountants and Other Professionals 30. The Sarbanes Oxley Act makes it unlawful for a Registered Public Accounting Firm (RPAF) to provide auditing services to a corporation if the corporation’s chief executive officer, chief financial officer, chief accounting officer, or controller was previously employed by the auditor and participated in any capacity in the audit of the corporation, during the one-year period preceding the date that the audit began. a. True b. False 31. 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 32. 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 33. The Sarbanes-Oxley Act increased government oversight of public accounting practices by creating the Public CompanyAccounting Oversight Board, which reports to the Securities and Exchange Commission. a. True b. False 34. 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 35. 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 36. 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 37. may be subject to criminal penalties for anyviolations of U.S. securities laws. a. True b. False 38. 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 39. Penalties for aiding or assisting in the preparation of false tax returns are limited to one penalty per taxpayer, per tax Powered by Cognero
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Chapter 33: Liability of Accountants and Other Professionals year. a. True b. False 40. Once an attorney-client relationship arises, to encourage openness and trust, all communications between the parties are privileged. a. True b. False 41. 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
Indicate the answer choice that best completes the statement or answers the question. 42. 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. 43. 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 unless negligent. 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. 44. 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. 45. Dena, an accountant, contracts to perform services for Equipment Maker, Inc. Dena acted in good faith and conformed to generally accepted accounting principlesbut made 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. 46. The following are defenses an accountant may use if they are charged with negligence (choose all applicable answers) a. the negligence was not the proximate cause of the client’s losses. Powered by Cognero
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Chapter 33: Liability of Accountants and Other Professionals b. the client was also negligent. c. the negligence was not that bad. d. the accountant was not negligent. 47. “A reasonably competent general practitioner of ordinary skill, experience, and capacity” is the normal standard of performance expected of a. a physician. b. an accountant. c. an attorney. d. a client. 48. 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. 49. 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. 50. 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. 51. 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. he was not negligent. d. any negligence on the accountant’s part was only contributory. 52. 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. Powered by Cognero
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Chapter 33: Liability of Accountants and Other Professionals d. the International Professional Standards Board. 53. Regarding a professional, malpractice is a. competence. b. repetition. c. preparation. d. negligence. 54. Lou, an attorney, allows a statute of limitations to lapse on a claim by his client, Metal Fabrication Company, 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. 55. 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. 56. 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. 57. 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. 58. Liability arises because the professional has a duty to the client, and violates that duty by making a a. minor misrepresentation b. material misrepresentation c. slip of the tongue d. privity of contract 59. 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. Powered by Cognero
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Chapter 33: Liability of Accountants and Other Professionals 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. 60. 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. 61. 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. 62. 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 the accountant and the bank were not in privity. 63. Beth is an accountant whose clients include Concessions, Inc. If Beth 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. 64. 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. 65. 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. Powered by Cognero
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Chapter 33: Liability of Accountants and Other Professionals d. no one—the papers should be destroyed immediately after use. 66. 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. housecleaning services. c. appraisal services. d. financial systems design. 67. 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 on 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. 68. 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. 69. 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. 70. 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. 71. 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. generally intended to profit on stock trades, not only Teo’s. c. is an otherwise competent accountant. Powered by Cognero
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Chapter 33: Liability of Accountants and Other Professionals d. had no knowledge that the statement was false. 72. Under the Sarbanes-Oxley Act, if an accountant’s false (or misleading) certified audit statement is used in a securities filing, theaccountant may be held criminally liable. The accountant may be fined _____, imprisoned for up to twenty years, or both. a. 10 million dollars b. 5 million dollars c. 20 million dollars d. 50 million dollars. 73. 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. 74. 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. 75. A tax preparer’s liability is limited to how many penalties per taxpayer, per tax year. a. 1 b. 2 c. 3 d. 5 76. 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. 77. 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. 78. Leisure, Inc.’s accountant is Mel, and the firm’s attorney is Nola. All states protect, as privileged information, Powered by Cognero
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Chapter 33: Liability of Accountants and Other Professionals Leisure’s communications with a. Mel and Nola. b. Mel only. c. Nola only. d. none of the choices.
79. 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 fell into serious financial trouble, but neither Finola’s reports nor her opinion letters indicated this situation. Relying on Finola’s portrayal of Global Trade’s financial situation, the firm borrowed a large sum of money to build a new shipping facility. In lending Global Trade the money, Harbor City Bank relied 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? 80. 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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Chapter 33: Liability of Accountants and Other Professionals Answer Key 1. False 2. True 3. True 4. True 5. False 6. False 7. True 8. False 9. True 10. False 11. True 12. False 13. True 14. True 15. False 16. True 17. True 18. True 19. False 20. False 21. False 22. True 23. False 24. True 25. False Powered by Cognero
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Chapter 33: Liability of Accountants and Other Professionals 26. False 27. True 28. True 29. False 30. True 31. False 32. False 33. True 34. False 35. False 36. True 37. False 38. True 39. True 40. True 41. True 42. a 43. a 44. b 45. d 46. b 47. c 48. a 49. a 50. b 51. c Powered by Cognero
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Chapter 33: Liability of Accountants and Other Professionals 52. b 53. d 54. a 55. a 56. b 57. b 58. b 59. d 60. b 61. c 62. c 63. c 64. a 65. a 66. b 67. c 68. a 69. b 70. d 71. d 72. b 73. a 74. a 75. a 76. a Powered by Cognero
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Chapter 33: Liability of Accountants and Other Professionals 77. c 78. c 79. 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 she knew that the bank was relying on her work 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 this exercise would clearly be held liable. Accountants will not be liable for violating Section 18 if they acted in good faith in preparing the financial statement. To demonstrate good faith, they must showthat they had no knowledge that the financial statement was false (and misleading). In addition,they must have had no intent to deceive, manipulate, defraud, or seek an unfair advantageover another party. 80. 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. Like accountants, attorneys may be held liable under the common law to third parties who rely on legal opinions to their detriment. Generally, an attorney is not liable to a nonclient unless there is fraud (or malicious conduct) by the attorney. The liability principles stated in the Restatement (Third) of Torts, however, may apply to attorneys as well as to accountants. The confidentiality of attorney-client communications is protected by law, which confers a privilege on such communications. This privilege exists because of the client’s need to fully disclose the facts of the case to the attorney. To encourage frankness, confidential attorney-client communications relating to representation are normally held in strictest confidence, and protected by law. The attorney and the attorney’s employees may not discuss the client’s case with anyone—even under court order—without the client’s permission. The client holds the privilege, and only the client may waive. In a few states, accountant-client communications are privileged by state statute. In these states, accountant-client communications may not be revealed even in court, or in court-sanctionedproceedings without the client’s permission. The majority of states, however, abide by the common law, which provides that, if a court so orders, accountants must disclose information about their clients to the court. Physicians and other professionals may similarly be compelled to disclose in court information given to them in confidence by patients or clients. Powered by Cognero
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Chapter 34: Personal Property and Bailments
Indicate whether the statement is true or false. 1. The law protects a person’s rights and interests in anything with an ascertainable value that is subject to ownership. a. True b. False 2. The distinction between real and personal property is important because how property is acquired and is determined by its classification. a. True b. False 3. The distinction between real and personal property is important because how property is acquired is determined by its classification. a. True b. False 4. Establishing ownership rights is more complicated for personal property than for real property. a. True b. False 5. Real property can be converted to personal property by detaching it. a. True b. False 6. Personal property can be converted into real property by being permanently attached to it. a. True b. False 7. Personal property that is affixed to real property in a permanent way, such as tile installed in a house, is known as an appendix. a. True b. False 8. The gift of a large portion of a person’s assets can indicate fraud. a. True b. False 9. Sometimes, a person can become an owner of personal property merely by possessing it. a. True b. False 10. Digital goods, including virtual goods, are personal property with real value. a. True b. False 11. Consideration is one of the necessary elements for an effective gift. Powered by Cognero
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Chapter 34: Personal Property and Bailments a. True b. False 12. A promise to make a gift tomorrow, or next year is a gift. a. True b. False 13. The delivery of documents that represent the rights to property can be sufficient to transfer that property to the recipient. a. True b. False 14. A gift that is inter vivos is also called a deathbed gift. a. True b. False 15. Accession occurs when someone acquires title to a valuable piece of personal property by assuming a position of power. a. True b. False 16. 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 17. 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 18. Simply finding property and holding onto it gives the finder all legal rights in it. a. True b. False 19. A finder of mislaid property obtains title to the goods. a. True b. False 20. A finder of mislaid property has no obligation to return the property to the true owner. a. True b. False 21. A finder of lost property has title above everyone else including the original owner. a. True b. False Powered by Cognero
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Chapter 34: Personal Property and Bailments 22. Estray statutes encourage the return of found property to its owner by making it possible for the finder to acquire title to it. a. True b. False 23. On the completion of a bailment, the bailee may dispose of the property at will. a. True b. False 24. Many bailments do not include all of the elements of a contract. a. True b. False 25. A transfer of personal property without an agreement for its return (or disposal) is not a bailment. a. True b. False 26. Either physical or constructive delivery can result in the bailee’s exclusive possession, and control over bailed property. a. True b. False 27. A bailment cannot arise without the bailor’s voluntary delivery of the property to the bailee. a. True b. False 28. 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 29. Ordinary bailments are distinguished according to which party receives a benefit from the bailment. a. True b. False 30. A bailee has no right to limit his or her liability for loss (or damage to) of the bailed goods, because it would contravene public policy. a. True b. False 31. 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 32. In a bailment for the sole benefit of the bailor, the bailee need not exercise even a slight degree of care in preserving Powered by Cognero
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Chapter 34: Personal Property and Bailments the bailed property. a. True b. False 33. 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 34. 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 35. Failure to give up possession at the time the bailment ends could result in an action for conversion or negligence. a. True b. False 36. 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 37. 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 38. With respect to bailed goods, common carriers are absolutely—strictly—liable. a. True b. False 39. 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
Indicate the answer choice that best completes the statement or answers the question. 40. 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. 41. Ogle owns a phone, a tablet, and a patent on an app. Ogle’s intangible property includes Powered by Cognero
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Chapter 34: Personal Property and Bailments a. the phone. b. the tablet. c. the patent. d. None are intangible. 42. Fifi, 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. her thoughts
Indicate one or more answer choices that best complete the statement or answer the question. 43. An example of real property that has converted to personal property would be (choose all applicable answers) a. marble that has been mined. a. marble that has been mined. b. oil that has been drilled out. c. trees still on the property. d. apples on the apple trees. 44. Production can be a way to acquire ownership of personal property. Examples of this would include (choose all applicable answers) a. blogs written by the author. b. a custom-made table made by a craftsman. c. a book written by the author. d. applesauce made from local apples.
Indicate the answer choice that best completes the statement or answers the question. 45. 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 who Ada does not know well. This gift may lack the required element of a. acceptance. b. delivery. c. donative intent. d. dominion. 46. 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. 47. Earl buys a fishing license and goes fishing. He catches a trout, cleans it, cooks it, and eats it. Earl’s acquisition of the Powered by Cognero
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Chapter 34: Personal Property and Bailments trout is by a. possession. b. accession. c. confusion. d. production. 48. 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. The government. 49. 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. 50. While hiking on Mountain Trail, Ness’s camera falls from his pocket. He fails to notice its loss for a mile and gives up trying 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. the government. 51. 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. 52. 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. 53. 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. Powered by Cognero
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Chapter 34: Personal Property and Bailments c. lost property. d. mislaid property. 54. Before going on a business trip, Gina leaves the key to her apartment with Harry. She checks her suitcase at the airport and boards the plane. A bailment is created when Gina a. delivers the key to Harry. b. checks her suitcase. c. boards the plane. d. takes the key on the plane. 55. 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 of a future bailment here is a. Buto. b. the backpack. c. a seat on the bus. d. the bus. 56. 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. 57. 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. 58. 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. the stock. 59. 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 which Diego forgot. 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. 60. After agreeing to rent a car from Drive-a-Round, Inc., Eden is given the keys to one of the agency’s cars by Fess, a Powered by Cognero
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Chapter 34: Personal Property and Bailments Drive-a-Round 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. 61. 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. 62. 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. sell the grain. 63. 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. 64. The identity 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. who wins in a lawsuit. 65. 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. 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. lend the car to John. 67. On Demi’s authorization, Engine Work, Inc., repairs her car. She refuses to pay for the job. Engine Work can Powered by Cognero
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Chapter 34: Personal Property and Bailments 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. sell the car. 68. 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. 69. Carrier, Inc., agrees to pick up two truckloads of housewares for Discount Corporation, and store the contents to be delivered later. After Carrier unloads the goods at its warehouse, some of them disappear from the loading dock. A court will presume that a. Carrier was negligent. b. Discount was negligent. c. the goods were stolen through no fault of Carrier. d. the warehouse is in a high-crime area. 70. Delivery Service, Inc., agrees to pick up a truckload of merchandise for Exporters Corporation, and store the contents to be delivered later. Delivery’s obligation to deliver the load to Exporters is excused if the contents are a. any of the choices. b. lost through no fault of Delivery. c. stolen through no fault of Delivery. d. claimed by a third party with a superior claim. 71. 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. 72. 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. retailers. 73. In a bailment, strict liability applies for any loss or damage to bailed goods to a. common carriers. b. warehouse companies. c. ordinary bailees. Powered by Cognero
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Chapter 34: Personal Property and Bailments d. watch repair shops.
Indicate one or more answer choices that best complete the statement or answer the question. 74. Hotel operators can limit their liability for any loss or damage to their guests’ personal property (choose all applicable answers) 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. never.
75. 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. 76. 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?
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Chapter 34: Personal Property and Bailments Answer Key 1. True 2. True 3. True 4. False 5. True 6. True 7. False 8. True 9. True 10. True 11. False 12. False 13. True 14. False 15. False 16. True 17. False 18. False 19. False 20. False 21. False 22. True 23. False 24. True 25. True Powered by Cognero
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Chapter 34: Personal Property and Bailments 26. True 27. False 28. True 29. True 30. False 31. True 32. False 33. True 34. False 35. True 36. True 37. True 38. True 39. True 40. b 41. c 42. a 43. a, b 44. a, b, c 45. c 46. d 47. a 48. b 49. a 50. b 51. c Powered by Cognero
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Chapter 34: Personal Property and Bailments 52. a 53. a 54. b 55. b 56. a 57. c 58. a 59. a 60. b 61. c 62. b 63. a 64. a 65. c 66. c 67. a 68. a 69. a 70. a 71. c 72. d 73. a 74. a, b, c 75. 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 Powered by Cognero
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Chapter 34: Personal Property and Bailments 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. When the object itself cannot be physically delivered, a symbolic, or constructive, delivery will be sufficient. Constructive delivery confers the right to take possession of the object in question. 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. 76. Bailment for the mutual benefit of the bailee and the bailor. This is the most common kind of bailment and involves some form of compensation for storing property or holding property while it is being serviced. It is a contractual bailment and may be referred to as a bailment for hire or a commercial bailment. In this type of bailment, the bailee owes a duty to exercise a reasonable degree of care. 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.
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Chapter 35: Real Property and Landlord-Tenant Law
Indicate whether the statement is true or false. 1. Land includes the soil on the surface of the earth, but not the waters contained on it. a. True b. False 2. The owner of real property has relatively exclusive rights to the airspace above the land. a. True b. False 3. 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 4. An individual’s right to property is one of the rights of citizenship. a. True b. False 5. Real property consists of land, and does not include anything attached to it. a. True b. False 6. Flights over someone’s land can never be a violation to the owner’s property rights a. True b. False 7. Plants can never be considered real property. a. True b. False 8. Crops are real property, but immediately after being harvested (or cut down) become personal property a. True b. False 9. To be a fixture, an item of personal property must be physically attached to the land in some way. a. True b. False 10. The most important factor in determining whether an item is a fixture is the perception of a disinterested third party. a. True b. False 11. Tile and carpeting permanently attached to the floor of a house are most likely intended to be fixtures. a. True b. False Powered by Cognero
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Chapter 35: Real Property and Landlord-Tenant Law 12. 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 13. A fee simple absolute is an estate or interest in land with no limits in terms of disposition or duration. a. True b. False 14. 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 15. In both a tenancy in common, and a joint tenancy, each co-owner owns an undivided interest in the property. a. True b. False 16. When one tenant in common dies, that party’s interest in the property automatically passes to the surviving owners. a. True b. False 17. When a joint tenant dies, his or her interest in the property passes to his or her chosen heirs. a. True b. False 18. Joint tenants can transfer their rights by sale or gift to another without the consent of the other joint tenants a. True b. False 19. A tenancy at will refers to most property acquired by either spouse during the course of the marriage a. True b. False 20. With a tenancy at will, either party can terminate the tenancy without notice. a. True b. False 21. 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 22. A license is a personal privilege that cannot be withdrawn or revoked. a. True Powered by Cognero
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Chapter 35: Real Property and Landlord-Tenant Law b. False 23. A valid deed must contain words indicating an intent to convey (transfer) the property. a. True b. False 24. The covenant of quiet enjoyment guarantees that the buyer will not disturb the land or any of its neighbors. a. True b. False 25. To acquire property by adverse possession, the possession must be secret or clandestine. a. True b. False 26. 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 27. Adverse possession is a means of obtaining title to land without delivery of a deed. a. True b. False 28. 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 29. 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 30. The covenant of quiet enjoyment is a right that a lessee receives from the lessor. a. True b. False 31. A lease of property for a prohibited use is unenforceable. a. True b. False 32. If the covenant of quiet enjoyment is breached, the tenant can terminate the lease and sue for damages. a. True b. False 33. Rendering the leased premises unfit for occupancy is constructive eviction. a. True Powered by Cognero
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Chapter 35: Real Property and Landlord-Tenant Law b. False 34. The tenant’s use of the leased property must not injure the landlord’s interest. a. True b. False 35. 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 36. If the landlord sells the leased property, the tenant becomes the tenant of the new owner. a. True b. False 37. 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 38. 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 39. The same restrictions that apply to an assignment of the tenant’s interest in leased property apply to a sublease. a. True b. False
Indicate the answer choice that best completes the statement or answers the question. 40. Jack owns a parcel of land. Jack tows a mobile home to the parcel and anchors it to the land near a stand of Douglas fir trees. Jack’s real property consists of (choose all applicable answers) a. the land. b. the mobile home. c. the trees. d. his furniture 41. 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. 42. 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 Powered by Cognero
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Chapter 35: Real Property and Landlord-Tenant Law 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. 43. Grey 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. Grey. c. Industrial Mining and Grey in proportion to the value of their rights. d. no one. 44. Nancy owns Office Tower, which is 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. 45. 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. 46. Colleen 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. None of them are fixtures 47. 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. 48. Derek deeds a parcel of timberland in fee simple absolute, he gifts it to Elaine as a gift. What ownership right does Elaine now have a. a fee simple absolute. b. a life estate. c. the right to adverse possession. Powered by Cognero
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Chapter 35: Real Property and Landlord-Tenant Law d. the power of eminent domain. 49. 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 50. Allen owns Buffalo Ranch. Allen’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 he sees fit. Allen’s ownership interest is a. a fee simple absolute. b. a license. c. a life estate. d. a profit. 51. 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. 52. 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. 53. 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. 54. _________ is what distinguishes a joint tenancy from a tenancy in common a. A life estate b. Right of survivorship c. A right to misuse the property d. A right to will their portion 55. 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. Powered by Cognero
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Chapter 35: Real Property and Landlord-Tenant Law c. community property. d. illegal. 56. 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. 57. 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. 58. 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. 59. 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. 60. Estes, the owner of Forest Mountain, and Gert, the tenant of a cabin on Estes’s mountain, may create a fixed-term tenancy by a. implied contract. b. express contract. c. any of the choices. d. sufferance. 61. 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. Powered by Cognero
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Chapter 35: Real Property and Landlord-Tenant Law 62. Cal has an easement that allows him to drive across Dale’s land to get to Cal’s house. With respect to Dale’s land, Cal’s right is a. a possessory interest. b. a nonpossessory interest. c. a right to adverse possession. d. the power of eminent domain. 63. 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. 64. Logging Corporation has a right to go onto Mount 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. 65. Frank tells Gala 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. Gala can exercise the right for the duration of her life. c. Gala can pass title to the right to her heirs. d. Gala can force her way into Frank’s lake whenever she sees fit. 66. These are ways that real property ownership can be transferred (choose all applicable answers) a. in a will. b. by adverse possession c. by a deed. d. using it as collateral in an illegal poker game 67. ______ means a home is in reasonable working order and sound construction. a. Implied warranty of habitability b. Express warranty of guarantee c. Express guarantee d. Implied warranty of fitness 68. To transfer the title to Olivia’s office building 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. Powered by Cognero
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Chapter 35: Real Property and Landlord-Tenant Law 69. 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. 70. 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. 71. The following must be satisfied for adverse possession to apply (choose all applicable answers) a. the use of the land is open. b. the use of the land is continuous c. the use of the land is extreme d. the use of the land is without consent 72. 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. 73. Beto 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. 74. Star Residences 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. 75. 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. Powered by Cognero
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Chapter 35: Real Property and Landlord-Tenant Law 76. 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. 77. Jade owns a loft that she leases to Key and Liu. If Jade sells the loft, Key and Liu 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. 78. Rita has a fixed-term tenancy for her apartment with Studio Apartments. If Rita abandons the premises before the lease expires a. Studio must make a reasonable attempt to evict Rita. b. Studio 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.
79. 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? 80. 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 a 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? 81. Bob is enjoying living on his wooded piece of property he found. He has been living on the property for 12 years now and has built himself a cabin, a garden, and done lots of decorating. Jerry owns 150 acres of land and the back 50 acres is all wooded. Jerry has no reason to go access any part of that portion, but one day he was riding his tractor back there looking for a missing cow and sees a cabin, garden, and other evidence of someone living on his property. Jerry calls the police and seeks to see what his remedies are against Bob. The statute for acquiring adverse possession in his state is 10 years. Can Jerry succeed? Can Bob succeed? Why, or why not?
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Chapter 35: Real Property and Landlord-Tenant Law Answer Key 1. False 2. True 3. True 4. True 5. False 6. False 7. False 8. True 9. False 10. False 11. True 12. True 13. True 14. False 15. True 16. False 17. False 18. True 19. True 20. True 21. False 22. False 23. True 24. False 25. False Powered by Cognero
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Chapter 35: Real Property and Landlord-Tenant Law 26. True 27. True 28. False 29. False 30. True 31. True 32. True 33. True 34. True 35. False 36. True 37. True 38. False 39. True 40. b 41. c 42. a 43. a 44. d 45. a 46. c 47. a 48. a 49. a 50. a 51. c Powered by Cognero
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Chapter 35: Real Property and Landlord-Tenant Law 52. c 53. a 54. b 55. c 56. b 57. d 58. a 59. d 60. b 61. d 62. b 63. a 64. c 65. a 66. a 67. a 68. b 69. b 70. a 71. a 72. d 73. a 74. d 75. a 76. a Powered by Cognero
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Chapter 35: Real Property and Landlord-Tenant Law 77. a 78. b 79. 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 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. 80. 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. 81. A person who wrongfully possesses the real property of another (by occupying or using it) may eventually acquire title to it through adverse possession. Adverse possession is a means of obtaining title to land without delivery of a deed and without the consent of—or payment to—the true owner. Thus, adverse possession is a method of involuntarily transferring title to the property from the true owner to the adverse possessor. Essentially, when one person possesses the property of another for a certain statutory period, that person acquires title to the land. The statutory period varies from three to thirty years, depending on the state, with ten years being the most common. For property to be held adversely, four elements must be satisfied: 1. Possession must be actual and exclusive. The possessor must physically occupy the property. This requirement is clearly met if the possessor lives on the property, but it may also be met if the possessor builds fences, erects structures, plants crops, or even grazes animals on the land. 2. Possession must be open, visible, and notorious, not secret or clandestine. The possessor must occupy the land for all the world to see. The obviousness requirement ensures that the true owner is on notice that someone is possessing the owner’s property wrongfully. 3. Possession must be continuous and peaceable for the required period of time. This requirement means that the possessor must not be interrupted in the occupancy by the true owner or by the courts. Continuous does not mean constant. It simply means that the possessor has continuously occupied the property in some fashion for the statutory time. Peaceable means that no force was used to possess the land. 4. Possession must be hostile and adverse. In other words, the possessor cannot be living on the property with the owner’s permission and must claim the property as against the whole world. (See this chapter’s Business Law Analysis feature for an illustration.)
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Chapter 36: Insurance, Wills, and Trusts
Indicate whether the statement is true or false. 1. 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 2. 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 3. Risk can be described as a prediction concerning potential loss based on known and unknown factors. a. True b. False 4. Insurance contracts are usually obtained through an agent, who works as an independent contractor. a. True b. False 5. Insurance policies differ in relation to the interests that they protect, because of the types of losses that are expected to protect.They vary with the nature of an activity. a. True b. False 6. By insuring property, its owners protect themselves. a. True b. False 7. Insurance is an arrangement for transferring and allocating risk. a. True b. False 8. 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 9. An insurable interest in property need not exist when a policy insuring against its damage or loss is purchased. a. True b. False 10. Life insurance requires that an insurable interest in the continued life of the insured exists,at the time when a policy is obtained. a. True b. False Powered by Cognero
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Chapter 36: Insurance, Wills, and Trusts 11. Key person insurance is insurance purchased by a family member for someone who is a key member of their family. a. True b. False 12. 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 13. Consideration may be given for an insurance contract, but is not required. a. True b. False 14. The effective date of an insurance policy is always the date the policy was signed. a. True b. False 15. A binder in an insurance policy is the amount that is paid for the policy. a. True b. False 16. An insured must insure their property for the full amount for it to be effective. a. True b. False 17. 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 18. An insurer can cancel a policy because the insured has appeared as a witness in a case brought against the company. a. True b. False 19. Once an insurer has accepted a risk, and an event occurs that gives rise to a claim, the insurer has a duty to investigate in order to determine the facts. a. True b. False 20. An insurance company can raise as a defense against payment on a policy,if it would be valid in an ordinary action on a contract. a. True b. False 21. An executoris a personal representative appointed by the court, if the decedent had no will. a. True Powered by Cognero
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Chapter 36: Insurance, Wills, and Trusts b. False 22. A gift of real property in a will is called a bequest. a. True b. False 23. A valid will is one that represents the maker’s intent to transfer and distribute his or her property. a. True b. False 24. For a will to be valid, the testator’s signature must appear on it, generally at the end. a. True b. False 25. 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 26. In most states, the testator’s marriage after the execution of a will may affect the distribution of the estate. a. True b. False 27. 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 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 29. Under intestacy laws, if no heirs exist, then the state assumes ownership of the property of an estate. a. True b. False 30. Under intestacy laws, a surviving spouse receives the decedent’s entire estate. a. True b. False 31. Under intestacy laws, stepchildren are not considered kin. a. True b. False 32. If a will does not provide how an estate will be distributed to grandchildren, under the per stirpes method of distribution, all heirs inherit equally. Powered by Cognero
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Chapter 36: Insurance, Wills, and Trusts a. True b. False 33. 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 34. 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 35. 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 36. The elements of a trust include actual delivery by the grantor to the beneficiary with the intent of passing title. a. True b. False 37. A trust must be express because the essential elements of a trust include a writing. a. True b. False 38. At the grantor’s death, assets held in a living trust revert to the decedent’s estate. a. True b. False 39. In an irrevocable living trust, legal title to the trust property passes to the beneficiary. a. True b. False 40. 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 41. With a resulting trust, assets held in the trust can pass to the heirs after going through the probate. a. True b. False 42. 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 Powered by Cognero
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Chapter 36: Insurance, Wills, and Trusts 43. 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
Indicate the answer choice that best completes the statement or answers the question. 44. 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. 45. An insurance broker is most likely a. an employee of an insurance company. b. an independent contractor. c. an underwriter. d. a beneficiary. 46. 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. 47. 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. 48. Rita is the chief executive officer for Sales, Inc., a successful market research firm. The company obtains insurance on Rita’s life from Tempo Insurance Company. This policy is a. key-person insurance. b. liability insurance. c. life insurance. d. none of the choices. 49. . Roma obtains a fire insurance policy on her house 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. Powered by Cognero
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Chapter 36: Insurance, Wills, and Trusts c. shifting the imposition of liability. d. transferring and allocating risk. 50. 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. 51. Dawn applies for a life insurance policy with Equity Insurance Company through Fletch, an agent who works for Equity. Dawn pays the initial premium. Fletch 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. 52. 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. 53. 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. 54. Clark obtains from Dependable Insurance, Inc., a policy that provides if a dispute arises between the parties concerning the settlement of a claim, the dispute must be submitted to an impartial third party, not a court, for resolution. This is a. an antilapse clause. b. an arbitration clause. c. an appraisal clause. d. an incontestability clause. 55. Anne obtains a liability insurance policy for her Bagels & Coffee Shop from Choice Insurance Company. 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. Powered by Cognero
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Chapter 36: Insurance, Wills, and Trusts d. have an insurable interest. 56. Once the insurance policy is issued, the insured has basic duties under the contract (choose all applicable answers) a. to notify the insurer within a reasonable time if an event occurs that gives rise to a claim. b. to cooperate with the insurer during any investigation or litigation. c. to call the insurance office on a regular basis d. to pay the premiums as stated in the contract. 57. . In a denial of an insurance claim, an insurance company can raise any of the defenses that would be valid in an ordinary action on a contract, as well as the following (choose all applicable answers) a. lack of an insurable interest. b. fraud or misrepresentation. c. illegal action of the insured. d. the sexual orientation of the insured. 58. 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. 59. A gift of personal property by will is called a a. bequest. b. devise. c. administration. d. gift. 60. 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. 61. In her will, Delia makes a gift of $10,000 to Esteban. This is a. a testament b. a devise. c. a legacy. d. a residuary. 62. If the assets of an estate are insufficient to pay in full all general bequests provided for in the will, a(n) _________ will take place. a. a division b. a negation Powered by Cognero
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Chapter 36: Insurance, Wills, and Trusts c. an abatement d. a proportion 63. To have testamentary capacity, a testator must be of legal age and sound mind a. at the time of death. b. at the time the will is made. c. at some time. d. at all times. 64. The clause in a will that provides that anyone who challenges the admission of the will to probate will be disinherited and receive nothing under the will is a. a testamentary clause. b. an ad valorem clause. c. an inter vivos clause. d. an in terrorem clause. 65. A will that is completely in the handwriting of the testator is called a a. nuncupative will. b. intestate. c. holographic will. d. invalid will. 66. Mace is asked to serve as a witness to Niles’s will. To qualify, Mace must be a. a U.S. citizen. b. all of the choices. c. at least eighteen years old. d. mentally competent. 67. Les executes a will in which he leaves everything to his spouse, Mindy, and in which he appoints Norma to administer the estate. The will must be signed by a. Les only. b. Les and Mindy only. c. Les, Mindy, and Norma. d. a probate judge. 68. Sally handwrites her will in crayon on a sheet of blank paper. This will is a. invalid. b. holographic. c. nuncupative. d. residuary. 69. Lena 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. Powered by Cognero
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Chapter 36: Insurance, Wills, and Trusts d. a type of trust. 70. 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 a. whatever he would have gotten if it were intestate b. is not entitled to anything. c. will receive one-half of the estate d. will receive whatever Nina allows. 71. 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. 72. Jason does not execute a will before he dies. With respect to his estate, the assets are distributed first to a. pay the debts of the decedent. b. support the surviving spouse and children. c. benefit the collateral heirs. d. satisfy gifts to the lineal heirs. 73. 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. 74. Grover does not execute a will before he dies. His survivors include his spouse Helene, and their two children, Irene and John. With respect to Grover’s estate, under intestacy laws, Helene will probably receive a. everything. b. nothing. c. one-half. d. one-third. 75. Maria 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. 76. Carl dies without a will, survived by his granddaughter Dora and her brother Elton. The grandchildren are Carl’s a. collateral heirs. Powered by Cognero
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Chapter 36: Insurance, Wills, and Trusts b. decedents. c. trustees. d. lineal heirs. 77. Emmett has two children, Frank and Gene, both of whom predecease Emmett. Frank is survived by his daughter Heidi. Gene is survived by his sons Ike and Jake. On Emmett’s death, if the distribution of his estate is per stirpes, Heidi will receive a. everything. b. nothing. c. one-half. d. one-third. 78. 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. 79. 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. 80. The essential elements of a trust are (choose all applicable answers) a. actual delivery by the grantor. b. a designated trustee. c. a writing. d. a designated beneficiary. 81. Flem owns shares of stock in Gas & Oil, Inc. To create a trust with the stock for the benefit of his spouse Hanna, Flem must convey the shares to a. a grantor. b. a settlor. c. a trustee. d. a court. 82. 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. Powered by Cognero
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Chapter 36: Insurance, Wills, and Trusts 83. Janice creates a trust that is in her name and designates that upon her death, the proceeds go to a specific beneficiary. This would be an example of a a. irrevocable trust. b. spendthrift trust. c. totten trust. d. charitable trust. 84. 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. 85. Serena decides to create a trust for the benefit of her children. She deeds her property to the trust but retains the power to amend, alter, or revoke the trust. She also serves as the trustee and receives income earned by the property. This is a. not a trust. b. a revocable living trust. c. an irrevocable living trust. d. a constructive trust.
86. 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? 87. 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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Chapter 36: Insurance, Wills, and Trusts Answer Key 1. True 2. True 3. True 4. False 5. True 6. True 7. True 8. False 9. True 10. True 11. False 12. False 13. False 14. False 15. False 16. False 17. False 18. False 19. True 20. True 21. False 22. False 23. True 24. True 25. True Powered by Cognero
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Chapter 36: Insurance, Wills, and Trusts 26. True 27. False 28. True 29. True 30. False 31. True 32. False 33. False 34. True 35. False 36. False 37. False 38. False 39. False 40. True 41. False 42. False 43. True 44. d 45. b 46. a 47. c 48. a 49. d 50. b 51. d Powered by Cognero
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Chapter 36: Insurance, Wills, and Trusts 52. b 53. a 54. b 55. a 56. a 57. a 58. c 59. a 60. d 61. c 62. c 63. b 64. d 65. c 66. d 67. a 68. b 69. b 70. a 71. b 72. a 73. a 74. d 75. c 76. d Powered by Cognero
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Chapter 36: Insurance, Wills, and Trusts 77. c 78. d 79. b 80. a 81. c 82. b 83. c 84. c 85. b 86. 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. For property insurance,the insurable interest must exist at the time the loss occurs, but need not exist when the policy is purchased. 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. Many insurance policies include a clause providing that if the insured has multiple insurance policies that cover the same property, and the amount of coverage exceeds the loss, the loss will be shared proportionately by the insurance companies. 87. 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. One way to transfer property outside the probate process is to make gifts to children orothers while one is still living. Another way is to own property in a joint tenancy. As previously discussed, in a joint tenancy, when one joint tenant dies, the other joint tenant or tenants automatically inherit the deceased tenant’s share of the property. This is true even if the deceased tenant has provided otherwise in a will. However, not all alternatives to formal probate administration are suitable to every estate.
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