CHAPTER 1 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) Business law consists of the enforceable rules of conduct that govern commercial relationships. ⊚ true ⊚ false
2)
Many market transactions occur without legal guidelines. ⊚ true ⊚ false
3) Law is rules of conduct in any organized society that are enforced by the governing authority of the community. ⊚ true ⊚ false
4) The respect we give to the law as a source of authority is in part a recognition of the fact that in the absence of law, we would rely solely on the goodwill and dependability of one another. ⊚ true ⊚ false
5)
Crimes are prosecuted not by individuals but by the state or federal government. ⊚ true ⊚ false
6) Private law involves disputes between private individuals or groups and their government. ⊚ true ⊚ false
7) If a pet store dumps waste from its business behind its building, it is a violation of a public law.
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⊚ ⊚
true false
8) The U.S. Constitution is the foundation for approximately one-half of all laws in the United States. ⊚ true ⊚ false
9)
The legislative branch of government creates statutory law. ⊚ true ⊚ false
10)
An alternative name for case law is statutory law. ⊚ true ⊚ false
11) Judicial decisions are laweven if the legislative branch should revoke them later by enacting new statutory law. ⊚ true ⊚ false
12)
The term stare decisis means "standing by the decision." ⊚ true ⊚ false
13)
The purpose of stare decisis is to create less predictability for businesses and individuals. ⊚ true ⊚ false
14) Stare decisis is a legal principle that rulings made by lower courts are binding on higher courts in the same jurisdiction. ⊚ true ⊚ false Version 1
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15)
A decision of a state appeals court is not binding on a trial court located in the same state. ⊚ true ⊚ false
16) A decision from the New Jersey Supreme Court is not binding on a New York trial court, even if New York has no applicable law on the issue involved. ⊚ true ⊚ false
17) The National Conference of Commissioners on Uniform State Laws (NCC) regularly urges states to enact model laws to provide greater uniformity of law. ⊚ true ⊚ false
18) Judges claim the power to issue executive orders on the basis of the Article II, Section 1 constitutional power to "take care that the laws be faithfully executed." ⊚ true ⊚ false
19)
A treaty is a non-binding agreement between two states or international organizations. ⊚ true ⊚ false
20) law.
Laws comparing and studying the laws in different countries are known as contributory ⊚ ⊚
true false
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 21) Which of the following is not one of the six functional areas of business that sits on a foundation of business law?
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A) management B) production and transportation C) marketing D) accounting and finance E) state and federal taxation
22) A commercial firm that seeks to merge with another firm must obey the laws of antitrust. This is an example of: A) business law B) equity C) ethics D) The Uniform Contracts Code E) The International Contracts Code
23)
“Guaranteeing personal freedoms” is: A) the exclusive purpose of the law. B) one of the numerous purposes fulfilled by the law. C) a purpose of criminal, but not civil, law. D) a purpose of civil, but not criminal, law. E) a cultural, but not legal, expectation.
24)
Which of the following is one of the numerous purposes fulfilled by the law?
A) Discouraging social justice B) Limiting personal freedoms C) Serving as a moral guide by indicating maximum expectations of citizens and organizations D) Providing order such that one can depend on a promise or an expectation of obligations E) Serving as a supplement to fighting
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25)
Which of the following is not one of the numerous purposes fulfilled by the law?
A) Providing order such that one can depend on a promise or an expectation of obligations B) Serving as an alternative to fighting C) Facilitating change without requiring a rational consideration of options D) Encouraging social justice E) Serving as a moral guide by indicating minimal expectations of citizens and organizations
26) Louisville, Kentucky is debating a new business ordinance that will address sidewalks in its city. Members of the Louisville city council do not need to concern themselves with which of the following issues? A) Local taxes B) Environmental standards C) Federally-mandated restrictive covenants D) Building codes E) Local zoning
27)
Which of the following is not a purpose of the law as set forth in the text?
A) Encouraging taxation B) Serving as a moral guide by indicating minimal expectations of citizens and organizations C) Encouraging social justice D) Guaranteeing personal freedoms E) Providing order such that one can depend on a promise or an expectation of obligations
28)
When classifying law, which of the following is not a way in which law is classified?
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A) National vs. international B) Philosophical vs. ethical C) Civil vs. criminal D) Private vs. public E) Federal vs. state
29) If Dalynda caused Tonya to breach a contract with a customer because she did not ship the promised goods, which type of law is applicable? A) Civil law B) Public law C) Governmental law D) Criminal Law E) Ethical law
30) When Austin, Texas decides to implement a new tax code that will impose a new tax on business owners within its city limits, which law is applicable? A) Private law B) Public law C) Federal law D) Criminal law E) State law
31) Carter was stopped by the police and accidentally mistaken as a wanted criminal. He was taken to the police station and held for four days. If he were to sue, what law would be applicable? A) Criminal law B) Civil law C) Private law D) Criminal and private law E) Civil and criminal law
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32) Tarius was driving under the influence and hit and injured a pedestrian in violation of the law in Clear Lake, Minnesota against drinking and driving. Under which of the following laws will Tarius be charged? A) Civil law B) Criminal law C) Procedural law D) Common law E) Administrative law
33) In 2009, Mississippi Valley Silica Company was ordered to pay a plaintiff $9 million because the court ruled that it sold sand to the plaintiff's employer with the knowledge that using the sand on a regular basis would expose a worker to a form of cancer, and Mississippi Valley did not alert those who bought the sand about the risk. The $9 million recovery is an example of a __________. A) frivolous lawsuit B) jury nullification C) public law remedy D) civil law remedy E) criminal law remedy
34) A majority of citizens in a democracy can agree to permit certain authorities to make and enforce rules describing what behavior is permitted and encouraged in their community. These rules are what we refer to as __________. A) the electoral college B) good faith and fair dealing C) respondeat superior D) stare decisis E) the law
35) Lenny and Kravits enter into an agreement where Lenny will purchase 200 units of new storage bins from Kravits. Kravits, however, breaches the contract and does not supply Lenny with the contracted bins. This deals with which of the following types of laws? Version 1
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A) public law B) federal law C) criminal law D) private law E) equity
36) If a computer store dumps waste behind its building in violation of local, state, or federal environmental regulations, the resulting dispute focuses on __________ law. A) public B) preferential C) consensual D) private E) black-letter
37) Which type of law involves the rights and responsibilities involved in relationships between persons, and between persons and their government? A) Criminal B) Procedural C) Civil D) Natural E) Positive
38) When a crime is committed against the public such as insider training, price fixing, or embezzlement, who prosecutes the crime? A) Any person affected by the wrongdoing B) State and federal governments C) Federal governments only D) State governments only E) Local municipalities where the crime happened
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39) Assume a restaurant is forced to pay damages to a person who suffered food poisoning after eating at the restaurant. What type of law is involved? A) Public law only B) Private law only C) Civil law only D) Public, private, and civil law E) Private law and civil law
40) Assume the Securities and Exchange Commission (SEC) prosecutes someone for insider trading. That prosecution is an example of __________. A) criminal law B) procedural law C) civil law D) natural law E) adherence to the Uniform Criminal Code
41) In the United States, which law is determined to be the supreme law of the land, the foundation for all laws? A) The United States Code B) The Declaration of Independence C) Private law D) The United States Constitution E) The Uniform Commercial Code
42) What establishes the fundamental principles and rules by which the United States and individual states are governed? A) Administrative rules B) The U.S. Constitution only C) State constitutions only D) State bylaws E) Both the U.S. Constitution and the constitutions of each state
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43) The state of Minnesota’s legislature implemented a new law governing how much salt and sand could be distributed on the roadways when the weather turned icy. This action by the legislature is known as __________. A) criminal law B) private law C) uniform rule D) an executive order E) statutory law
44) Terrance is looking to find the law that Georgia passed in regard to mud flaps required on 18-wheel semi-trucks. Where would he look to find the law? A) The United States Code B) State mandate Laws C) State codes D) The State Reporter E) The State Code of Law Enforcement
45) The United States Congress enacted a law that penalized businesses if they did not offer health insurance to workers in certain major industries. Where could a business owner look to determine if his or her business was exempt from the new law? A) The United States Code B) The Congressional Register C) The Uniform Register D) The Uniform Congressional Cod E) The Restatement of Business Laws
46)
The __________ are a collection of all the laws in one convenient location.
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A) codified laws B) codes C) classifications of law D) report holders E) common laws
47) Temecula, California has instituted a new code regarding motorized scooters. This is an example of a(n): A) city statute B) ordinance C) federal classification D) city report E) restrictive covenant
48) Paired with the publications of the American Law Institute, what became the source of the Uniform Commercial Code? A) The Uniform Contracts Code Committee B) State legislatures C) The U.S. Senate and House of Representatives D) The National Conference of Commissioners on Uniform State Laws E) The National Uniform Code Committee
49)
If a uniform law is proposed, what are the requirements that each state must follow? A) A state legislature can ignore the proposed uniform law, adopt it in full, or adopt it in
part. B) All states must adopt the uniform statute within six months. C) All states must adopt the uniform statute within one year. D) A state legislature is not required to adopt the uniform statute, but if the state legislature decides to do so, the statute must be adopted in its entirety. E) States are not required to do anything; the law takes effect one year from the date of the proposed uniform law.
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50) When judges make legal interpretations, this is often referred to as case law or ___________. A) statutory law B) civil law C) constitutional law D) common law E) federal law
51)
Which of the following terms means that past decisions guide future decisions? A) civil law B) common law C) precedent D) respondeat superior E) futuristic law
52)
Which of the following topics is not regulated by the Uniform Commercial Code? A) Bank deposits B) Title documents C) Warranties D) Bank collections E) State taxes
53)
When courts rely on precedent, they are obeying stare decisis which means: A) “standing by the decision” B) “this is the final rule” C) “no law shall change” D) “decision by the court” E) “decisions are meant to change”
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54) A case that has been used in accordance with stare decisis as a binding precedent is __________, which abolished discriminatory policies for individuals of different racial backgrounds. A) Curtis v. School Board B) Laughlin v. Glover C) Grover v. Sidwell D) Brown v. Board of Education E) Story v. Price
55) In which of the following cases did the U.S. Supreme Court rely on precedent to strike down a school's admissions policy that reserved slots for members of minority races? A) Story v. Price B) Brown v. Board of Education C) University of California v. Bakke D) Grover v. University of Mississippi E) Adkins v. Price
56)
Restatements of law can best be described as _________
A) laws that are restated according to what each state believes the law should be. B) summaries of common law rules in a particular area of the law that have been enacted by most states. C) restatements of classical cases that are still used today. D) laws that are followed at the federal level and forced on the states to follow. E) summaries of new statutes that are implemented by states each year.
57) The Environmental Protection Agency, Occupational Safety and Health Administration and Consumer Product Safety Commission are all types of __________.
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A) administrative agencies B) executive agencies C) consumer right’s agencies D) national safety agencies E) legislative agencies
58) Which of the following administrative agencies is not an independent agency? Use Exhibit 1-2 A) The Equal Employment Opportunity Commission B) The Federal Trade Commission C) The Small Business Administration D) The National Transportation Safety Board E) The Nuclear Regulatory Commission
59) Which of the following contains all of the executive orders that are created by the U.S. president? A) The Federal Reporter B) The American Code C) The Code of Federal Regulations D) Federal Statutes E) The Restatements of Executive Orders
60) When the United States president negotiates a treaty as part of his or her executive duties, how many U.S. senators does it take to ratify the treaty to make it binding? A) One-half of the Senate B) One-third of the Senate C) Two-thirds of the Senate D) One-fourth of the Senate E) Treaties must be unanimously approved by the Senate.
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61) Which of the following schools of jurisprudence is most closely tied to the pursuit of efficiency? A) Identification with the vulnerable B) Historical school C) Cost-benefit analysis D) Legal realism E) Comparative realism
62) One of the most often-used guidelines for shaping the law is tradition, or custom, which is also called __________. A) the historical school B) legal realism C) cost-benefit analysis D) identification with the vulnerable E) res ipsa loquitur
63)
In which school of jurisprudence is the concept of stare decisis rooted? A) The historical school B) Legal realism C) Cost-benefit analysis D) Legal positivism E) Cultural retrenchment
64)
What is the purpose of the World Trade Organization? A) To require laws to be uniform across all nations B) To stimulate negotiations among member nations to reduce barriers to international
trade C) To establish non-tariff trade barriers among nations D) To allow non-member states to participate in the General Agreement on Tariffs and Trade E) To set fair tariffs across all nations
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65)
Why is it important to understand comparative law as a business person?
A) All business people must know all international laws to do business effectively. B) Businesses must abide by all treaties that are in place in all countries. C) Federal law requires that businesses get federally licensed to do business abroad. D) Because of advances in technology and transportation, trade with other countries is far easier today than it was in past years. E) The European Union mandates that all U.S. businesses be certified in international law.
66) Candy wants to start an Internet business. The Chinese government tells her that certain items on her site are objectionable and illegal, and that if she wants to do business in China, she must remove the objectionable material. Which of the following is true? A) Candy is within her rights and should stand her ground. She is a U.S. citizen, and so long as she obeys U.S. laws, she can do business in China. B) Candy is within her rights only if she petitioned her state senator and obtained his or her permission to proceed. C) If Candy wants to do business in China, she must abide by Chinese law. D) By international law, there is a set fee of $10,000 that Candy can pay if she wants to obey only U.S. law. If she pays that amount, she can continue in China without any modification. E) By international law, there is a set fee of $5,000 that Candy can pay if she wants to obey only U.S. law. If she pays that amount, she can continue in China without any modification.
67) The Stolen Book. Betty tells Susan that Bob stole her business law book from her car. The next day Susan confronts Bob and slaps him for stealing her book. Bob has Susan arrested for slapping him. Susan sues Bob for damages in the amount of the book and for maliciously having her arrested. Claiming that she lied, Bob sues Betty for defamation. The lawsuit Susan has against Bob for damages for stealing her book involves which of the following? A) Public law B) Private law C) Administrative law D) Both public and private law E) Comprehensive law
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68) The Stolen Book. Betty tells Susan that Bob stole her business law book from her car. The next day Susan confronts Bob and slaps him for stealing her book. Bob has Susan arrested for slapping him. Susan sues Bob for damages in the amount of the book and for maliciously having her arrested. Claiming that she lied, Bob sues Betty for defamation. The prosecution by the government against Susan for slapping Bob involves which of the following? A) Public law B) Private law C) Administrative law D) Both public and private law E) Comprehensive law
69) The Stolen Book. Betty tells Susan that Bob stole her business law book from her car. The next day Susan confronts Bob and slaps him for stealing her book. Bob has Susan arrested for slapping him. Susan sues Bob for damages in the amount of the book and for maliciously having her arrested. Claiming that she lied, Bob sues Betty for defamation. The action Bob has against Betty for defamation involves which of the following? A) Criminal law B) Civil law C) Insider law D) Both criminal and civil law E) Administrative law
70) The Stolen Book. Betty tells Susan that Bob stole her business law book from her car. The next day Susan confronts Bob and slaps him for stealing her book. Bob has Susan arrested for slapping him. Susan sues Bob for damages in the amount of the book and for maliciously having her arrested. Claiming that she lied, Bob sues Betty for defamation. Bob is anxious to see Susan punished for slapping him. Which of the following is true regarding action Bob can take?
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A) Bob can hire his own lawyer to prosecute Susan and send her to jail but cannot bring a civil action if he prosecutes criminally. B) Bob's privately retained lawyer may not prosecute Susan alone but may insist on jointly trying the criminal case with the government lawyer. C) Bob can bring an additional civil action against Susan for slapping him only if he loses the criminal case. D) Bob can hire his own lawyer to prosecute Susan and send her to jail, and Bob can also bring an additional civil action against Susan for slapping him. E) Bob's privately retained lawyer may not prosecute Susan because that is the government's job, but the privately retained lawyer can bring a civil action against Susan.
71) To the Dogs. Alice loves all animals and is starting a new grooming business for dogs. She believes that animals are very important and plans to exceed any applicable regulations regarding cleanliness and health standards. Alice thinks some local regulations make no sense. For example, there is a local ordinance that all dogs must be kept on a leash at all times when not in a fenced area. Although Alice lives on a large lot with plenty of room for dogs to run free, she plans to obey the leash regulation and all others. She is aware, however, that members of the community have had success in changing local regulations by petitioning the city council. Alice plans to proceed in that manner to attempt a change in the leash law. Alice's plan to seek change through following what others have done in the past by petitioning city council is rooted in which of the following? A) Legal positivism B) The historical school C) Legal realism D) Natural law E) Cost-benefit analysis
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72) International Expansion. Zach wants to expand his coffee business internationally - into Zeno, a small remote country in Africa. His best friend Zora asks him if he plans to hire legal counsel for the expansion. Zach replies, "Of course not. The U.S. has the strictest laws regarding contracts, employment, and business practices. So long as I'm legal here, I'm legal anywhere. Besides, I studied up on Zeno law ten years ago, and I know it all." Zach proceeds and lands in jail in the remote country of Zeno for violating recently passed laws protecting employees and mandating certain benefits. Authorities there claim that he sexually harassed an employee, failed to pay sufficient wages, and failed to give employees Zeno's mandated 12 weeks of vacation per year. The type of law involved in comparing laws between the U.S. and Zeno is _________. A) comparative law B) contributory law C) comprehensive law D) complete law E) delineated law
73) International Expansion. Zach wants to expand his coffee business internationally - into Zeno, a small remote country in Africa. His best friend Zora asks him if he plans to hire legal counsel for the expansion. Zach replies, "Of course not. The U.S. has the strictest laws regarding contracts, employment, and business practices. So long as I'm legal here, I'm legal anywhere. Besides, I studied up on Zeno law ten years ago, and I know it all." Zach proceeds and lands in jail in the remote country of Zeno for violating recently passed laws protecting employees and mandating certain benefits. Authorities there claim that he sexually harassed an employee, failed to pay sufficient wages, and failed to give employees Zeno's mandated 12 weeks of vacation per year. Which of the following is true regarding Zach's legal problems in Zeno? A) Zach can rely upon the federal statutory laws of the U.S. as a defense but not his U.S. Constitutional rights. B) Zach is entitled to all U.S. Constitutional rights in Zeno because he is a U.S. citizen, but he cannot rely on U.S. statutory rights. C) Zach can rely upon the federal statutory laws of the U.S. as a defense, and he is also entitled to all U.S. Constitutional rights in Zeno because he is a U.S. citizen. D) Zach must obey the laws of Zeno when operating a business in Zeno and cannot rely upon U.S. laws as a defense. E) Zach is subject to civil laws but not criminal laws of Zeno.
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74) International Expansion. Zach wants to expand his coffee business internationally - into Zeno, a small remote country in Africa. His best friend Zora asks him if he plans to hire legal counsel for the expansion. Zach replies, "Of course not. The U.S. has the strictest laws regarding contracts, employment, and business practices. So long as I'm legal here, I'm legal anywhere. Besides, I studied up on Zeno law ten years ago, and I know it all." Zach proceeds and lands in jail in the remote country of Zeno for violating recently passed laws protecting employees and mandating certain benefits. Authorities there claim that he sexually harassed an employee, failed to pay sufficient wages, and failed to give employees Zeno's mandated 12 weeks of vacation per year. Which of the following is true regarding Zach's defense that he thought he knew the law of Zeno because he had studied it some years before and that the laws under which he was arrested were new? A) Rules in international business change frequently, and Zach had a duty to stay current. It is not a defense that he studied the law at one time and that the laws at issue were new. B) Zach is entitled to rely as a defense on the fact that he had studied the law at one time. Officials in Zeno were charged with publicizing any changes. C) If Zach can prove that the laws at issue were passed within the last twelve months before he was arrested, he will get out of jail because under international law, there is a twelve month grace period for foreigners. D) If Zach can prove that the laws at issue were passed within the last six months before he was arrested, he will get out of jail because under international law, there is a six-month grace period for foreigners. E) Zach cannot be prosecuted so long as he was not aware he was violating the law. He did not have the requisite intent to perform a criminal act regardless of whether the laws were new.
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75) Inattentive Driving. While cutting class and driving off campus to check on her new dress for the upcoming formal, Molly, a busy college student, is busy talking on her cell phone with her friend Sharon. Molly is trying to talk Sharon into going to the dance with her brother, who has a big crush on Sharon. Unfortunately for Molly, there is a statute in her state outlawing talking on a cell phone while operating a motor vehicle. Molly crashes into the side of Sam's new convertible when she looks down to pick up a can of soda she just dropped onto her new jeans. A police officer just down the street comes over to investigate. Molly explains to him that it was difficult to hold the cell phone in one hand, the soda in the other, and also drive. The officer was not impressed. Around that time Sam comes along. He is furious regarding the significant dent in his new car. Molly says she has insurance and that she will cover the whole incident. Sam says that is insufficient. The officer is annoyed because it is his lunch break. He tells Molly that she must obey the law and proceeds to write several citations to her. Which type or types of law is or are involved in the above situation considering Molly's interaction with both the officer and Sam? A) Public law only B) Private law only C) Civil law and private law only D) Criminal law and public law only E) Public law, private law, civil law, and criminal law
76) Inattentive Driving. While cutting class and driving off campus to check on her new dress for the upcoming formal, Molly, a busy college student, is busy talking on her cell phone with her friend Sharon. Molly is trying to talk Sharon into going to the dance with her brother, who has a big crush on Sharon. Unfortunately for Molly, there is a statute in her state outlawing talking on a cell phone while operating a motor vehicle. Molly crashes into the side of Sam's new convertible when she looks down to pick up a can of soda she just dropped onto her new jeans. A police officer just down the street comes over to investigate. Molly explains to him that it was difficult to hold the cell phone in one hand, the soda in the other, and also drive. The officer was not impressed. Around that time Sam comes along. He is furious regarding the significant dent in his new car. Molly says she has insurance and that she will cover the whole incident. Sam says that is insufficient. The officer is annoyed because it is his lunch break. He tells Molly that she must obey the law and proceeds to write several citations to her. Which of the following is true regarding Molly's predicament?
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A) Molly can be given a ticket and prosecuted criminally by government officials, but she may not be sued for a civil violation. B) Molly can be sued for a civil action and must pay for Sam's car, but she cannot be prosecuted for a criminal violation. C) Molly can be sued in a civil action by Sam, and the government can also prosecute her for a criminal violation. D) So long as Molly has insurance and can pay for Sam's vehicle damage, she cannot be prosecuted in a civil or criminal action. E) Sam can prosecute Molly in a criminal action, but he cannot sue her in a civil action.
77) Inattentive Driving. While cutting class and driving off campus to check on her new dress for the upcoming formal, Molly, a busy college student, is busy talking on her cell phone with her friend Sharon. Molly is trying to talk Sharon into going to the dance with her brother, who has a big crush on Sharon. Unfortunately for Molly, there is a statute in her state outlawing talking on a cell phone while operating a motor vehicle. Molly crashes into the side of Sam's new convertible when she looks down to pick up a can of soda she just dropped onto her new jeans. A police officer just down the street comes over to investigate. Molly explains to him that it was difficult to hold the cell phone in one hand, the soda in the other, and also drive. The officer was not impressed. Around that time Sam comes along. He is furious regarding the significant dent in his new car. Molly says she has insurance and that she will cover the whole incident. Sam says that is insufficient. The officer is annoyed because it is his lunch break. He tells Molly that she must obey the law and proceeds to write several citations to her. The law in Molly's state regulating cell phone usage would be classified as which of the following? A) A statute B) A type of common law C) An executive order D) A uniform law E) res judicata
78) Which of the following do not spell out what market participants may and may not legally do?
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A) Constitutions B) Legislatures C) Regulatory bodies D) Business Owners E) Courts
79)
A majority of citizens in a democracy can agree to establish rules for: A) business behavior B) prosecutions C) constitutional amendments D) civil procedure E) criminal procedure
80) Raul worked for Townsend Industries developing secret genetic testing equipment to sell to hospitals and research facilities. In a financial bind, Raul sold some of the plans for the newest laboratory testing equipment to Townsend Industries’ biggest competitor. This involves: A) quasi-public law B) comparative law C) criminal law D) public law E) the Uniform Criminal Code
81) Although they are not a source of law in the same sense as constitutions and statutory law, __________ serve(s) as a basis for some statutory law at the state level. A) comparative law B) trial court decisions C) treaties D) model or uniform laws E) res ipsa loquitur
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82) The Family and Medical Leave Act, which mandates that businesses employing more than 50 people provide workers with up to 12 weeks’ paid leave for family related affairs such as having a child, is an example of what type of jurisprudence? A) Historical school B) Legal realism C) Cost benefit analysis D) Stare decisis E) Common law
ESSAY. Write your answer in the space provided or on a separate sheet of paper. 83) List the purposes of the law and discuss why these purposes are necessary for an ordered society.
84) Define "stare decisis," discuss when it occurs in the legal system, and explain why stare decisis is important to businesses and individuals.
85) Explain in what ways a treaty between a foreign country and the United States is similar to a contract.
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86) Explain the function of administrative agencies and why they are necessary.List five independent agencies and five executive agencies.
87) Judge Susie Justice, who is newly appointed to the bench, is presented with a question of law involving a cat named Chester who scratched a neighbor's antique jalopy. The neighbor, George, demands justice in the form of full payment from Chester's owner, Bill, and also requests that Chester be shipped to the local animal shelter. Bill says that he should not have to pay anything because Chester had never scratched before, that Chester should be allowed to stay in the neighborhood, and that he should be reimbursed for his legal fees by George who is a grump and never should have brought the lawsuit. Judge Justice is perplexed and wants to make a good decision since she is new to the bench. Describe how the judge should go about reaching a decision. Discuss in your answer the impact of cases from other jurisdictions assuming there is no relevant law in Judge Justice's jurisdiction. Also, assuming there is relevant law in this jurisdiction, discuss the applicable legal standard the judge should apply if she finds a relevant statute that conflicts with earlier case law.
88) Describe contrasts between the cost-benefit school of jurisprudence and the identification with the vulnerable school of jurisprudence.
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Answer Key Test name: Chap 01_5_The Essentials_Kubasek 1) TRUE Business law consists of the enforceable rules of conduct that govern commercial relationships.In other words, buyers and sellers interact in market exchanges within the rules that indicate the boundaries of legal business behavior. Constitutions, legislatures, regulatory bodies, and courts spell out what market participants may or may not legally do. 2) FALSE There is simply no market transaction that occurs outside legal guidelines. 3) TRUE Law is rules of conduct in any organized society that are enforced by the governing authority of the community. 4) TRUE The respect we give to the law as a source of authority is in part a recognition of the fact that in the absence of law, we would rely solely on the goodwill and dependability of one another.Most of us greatly prefer the law to that option. 5) TRUE Criminal law applies to situations in which someone commits an act against the public as a unit. These crimes are prosecuted not by individuals but by the state or federal government. 6) FALSE Public law involves disputes between private individuals or groups and their government. 7) TRUE
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If a business violates a law, the resulting dispute focuses on public law. Public law involves disputes between private individuals or groups and their government. 8) FALSE The U.S. Constitution is the supreme law of the land; the foundation for all laws in the United States. 9) TRUE Legislative actions, called statutes, are an important source of law. The assortment of rules and regulations put forth by legislatures is statutory law. 10) FALSE An alternative name for case law is common law. 11) FALSE Judicial decisions are law unless new statutory law revokes them later. 12) TRUE When courts rely on precedent, they are obeying stare decisis ("standing by their decision"). 13) FALSE The purpose of stare decisis is to create greater predictability for businesses and individuals. 14) FALSE Stare decisis is a legal principle that rulings made by higher courts are binding on lower courts in the same jurisdiction. 15) FALSE If an issue is brought before a state court, the court will ascertain whether the state appeals court has made a decision on a similar issue, which would have then set a binding precedent that the lower court would need to follow. 16) TRUE
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Different state courts are not bound by each other's decision, and so they might have different decisions on the same subject. 17) TRUE The National Conference of Commissioners on Uniform State Laws (NCC) regularly urges states to enact model laws to provide greater uniformity of law. The response is entirely in the hands of the state legislatures. They can ignore a suggestion or adopt part or all of the proposed model law. 18) FALSE Presidents claim the power to issue executive orders on the basis of their Article II, Section 1 constitutional power to "take care that the laws be faithfully executed." 19) FALSE A treaty is a binding agreement between two states or international organizations. In the United States, a treaty is generally negotiated by the executive branch. To be binding, it must then be approved by twothirds of the Senate. 20) FALSE Laws comparing and studying the laws in different countries are known as comparative law. 21) E Each of the six functional areas of business—management, production and transportation, marketing, research and development, accounting and finance, and human resource management—sits on a foundation of business law. 22) A Business law consists of the enforceable rules of conduct that govern commercial relationships (“commercial” meaning “for the purpose of making a profit”).For example, a firm is required by law to obey the antitrust laws when it considers merging with another firm. Version 1
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23) B “Guaranteeing personal freedoms” is one of the numerous purposes fulfilled by the law. 24) D One of the numerous purposes fulfilled by the law is providing order such that one can depend on a promise or an expectation of obligations. 25) C The numerous purposes fulfilled by the law include: providing order such that one can depend on a promise or an expectation of obligations; serving as an alternative to fighting; facilitating a sense that change is possible, but only after a rational consideration of options; encouraging social justice; guaranteeing personal freedoms; and serving as a moral guide by indicating minimal expectations of citizens and organizations. 26) C Because so much business activity occurs within the jurisdiction of state courts, business managers must be familiar with the local city and county ordinances that govern matters not covered by federal or state codes. These ordinances address important business considerations such as local taxes, environmental standards, zoning ordinances, and building codes. 27) A Purposes of the law include the following: Providing order such that one can depend on a promise or an expectation of obligations; serving as an alternative to fighting; facilitating a sense that change is possible, but only after a rational consideration of options; encouraging social justice; guaranteeing personal freedoms; and serving as a moral guide by indicating minimal expectations of citizens and organizations. 28) B
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There are many ways of thinking about the law. For example, we can divide law into national versus international law, federal versus state law, and public versus private law. 29) A Civil law involves the rights and responsibilities found in relationships between persons and between persons and their government. 30) B Public law involves disputes between private individuals or groups and their government. 31) B Civil law involves the rights and responsibilities found in relationships between persons and between persons and their government. It also involves the remedies available when someone's rights are violated. 32) B Criminal law applies to situations in which someone commits an act against the public as a unit. These crimes are prosecuted not by individuals but by the state or federal government. 33) D Civil law involves the rights and responsibilities found in relationships between persons and their government. It also involves the remedies available when someone’s rights are violated, including financial recovery. 34) E A majority of citizens in a democracy can agree to establish rules for business behavior permitting certain authorities to make and enforce rules describing what behavior is permitted and encouraged in their community, and these rules are what we refer to as the law. 35) D Private law involves disputes between private individuals or groups. 36) A Version 1
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Public law involves disputes between private individuals or groups and their government. 37) C Civil law involves the rights and responsibilities found in relationships between persons and between persons and their government. It also involves the remedies available when someone’s rights are violated. 38) B Criminal law applies to situations in which someone commits an act against the public as a unit. Crimes are prosecuted not by individuals but by the state or federal government. 39) E Private law involves disputes between private individuals or groups, and civil law involves the rights and responsibilities found in relationships between persons and between persons and their government. 40) A One example of a criminal law is the prohibition against insider trading on the stock exchange.Insider trading occurs when an individual uses insider, or secret, company information to increase her or his own finances or those of family or friends. 41) D The U.S. Constitution is the supreme law of the land, the foundation for all laws in the United States. 42) E The United States Constitution and the constitution of each state establish the fundamental principles and rules by which the United States and the individual states are governed. The term constitutional law refers to the general limits and powers of the federal and state governments as stated in their written constitutions. 43) E
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Legislative actions, called statutes, are an important source of law. The assortment of rules and regulations put forth by legislatures is what we call statutory law. 44) C Legislative acts can be found in the various state codes when they are enacted by state legislatures.The codes are a collection of all the laws in one convenient location. 45) A Legislative actions, called statutes, are an important source of law. The assortment of rules and regulations put forth by legislatures is what we call statutory law. Legislative acts can be found in the United States Code when Congress passes them. 46) B The codes are a collection of all the laws in one convenient location. 47) B Local city and county ordinances govern matters not covered by federal or state codes. These ordinances address important business considerations such as local taxes, environmental standards, zoning ordinances, and building codes. 48) D The proposals of the National Conference of Commissioners on Uniform State Laws (NCC), while not laws themselves, have been adopted on more than 200 occasions by state legislatures. The NCC urges states to enact model laws to provide greater uniformity of law. The NCC is an especially important influence on business law. Paired with the publications of the American Law Institute, the NCC became the source of the Uniform Commercial Code (UCC). 49) A
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State legislatures can ignore a suggestion or adopt part or all of a proposed model law. The response is entirely in the hands of the state legislatures. 50) D Case law is the collection of legal interpretations made by judges. An alternative name for case law is common law. 51) C Precedent is the use of past decisions to guide future decisions. An earlier decision in a similar fact pattern is a precedent that guides later decisions, thereby providing greater stability and predictability to the law. 52) E The Uniform Commercial Code laws include sales laws and other regulations affecting commerce, such as bank deposits and collections, title documents, and warranties. 53) A When courts rely on precedent, they are obeying stare decisis ("standing by the decision"). Following stare decisis creates greater predictability for both businesses and individuals that look to the courts for the rules on which they should rely when they engage in market exchanges. In accordance with stare decisis, rulings that are made in higher courts become binding precedent for lower courts. 54) D One example of a case that has been used in accordance with stare decisis as a binding precedent is Brown v. Board of Education, which abolished discriminatory policies for individuals of different racial backgrounds. 55) C
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In University of California v. Bakke, the U.S. Supreme Court found that the school's admissions policy was not legal, referencing Brown v. Board of Education and stating that the basic principle behind it and similar cases was that individuals could not be excluded on the basis of race or ethnicity. 56) B Just as state statutes have been strongly influenced by the suggestions of the National Conference of Commissioners on Uniform State Laws (NCC), common law evolves with the assistance of a mechanism called Restatements of the Law. These Restatements are summaries of the common law rules in a particular area of the law that have been enacted by most states. 57) A The Consumer Product Safety Commission is an example of an independent federal administrative agency. The Occupational Safety and Health Administration, the Small Business Administration, the National Science Foundation, and the Veteran’s Administration are all examples of executive administrative agencies of the federal government. 58) C The federal government, as well as state and local governments, have dozens of administrative agencies whose task is to perform a particular government function. See Exhibit 1-2 which highlights different Independent and Executive agencies. 59) C The Code of Federal Regulations (CFR) contains all the executive orders created by the President. 60) C
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A treaty is a binding agreement between two states or international organizations. In the United States, a treaty is generally negotiated by the executive branch. To be binding, a treaty must be approved by twothirds of the Senate. 61) C The cost-benefit analysis approach to legal change is tied closely to the pursuit of efficiency. If a law yields more benefits than costs, then we have saved resources. Those resources can then be used to provide us with more goods and services. 62) A One of the most often used guidelines for shaping the law is tradition, or custom, which is also called the historical school. When we follow this tradition, we attempt to link our future behavior to the behavior of those who faced similar problems in earlier historical periods. 63) A Stare decisis is rooted in the perspective of the historical school.When we follow tradition, or custom, we attempt to link our future behavior to the behavior of those who faced similar problems in earlier historical periods. 64) B The WTO stimulates negotiations among member nations to reduce barriers to international trade. The WTO attempts to enforce trade agreements governing trade among its 160 member nations. 65) D Comparative and international law is extremely important for future business managers. Because of advances in technology and transportation, trade with other countries is far easier today than it was in past years. 66) C
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Business managers need to be aware of various trade laws and restrictions in different countries, so that they can act accordingly when they set out to do business in those countries. 67) B Private law involves disputes between private individuals or groups. 68) A Public law involves disputes between private individuals or groups and their government. 69) B Civil law involves the rights and responsibilities found in relationships between persons and between persons and their government as well as the remedies available when someone's rights are violated. 70) E Civil law involves the remedies available when someone's rights are violated whereas criminal law applies to situations in which someone commits an act against the public as a unit. Crimes are prosecuted not by individuals but by the state or federal government. 71) B When we follow historical school tradition, we attempt to link our future behavior to the behavior of those who faced similar problems in earlier historical periods. 72) A It is important that future business managers understand comparative law, comparing and studying the laws in different countries. 73) D Globalization requires that business leaders be alert to legal differences among national jurisdictions. 74) A Globalization requires that business leaders be alert to legal differences among national jurisdictions. Version 1
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75) E Private law involves disputes between private individuals or groups; public law involves disputes between private individuals or groups and their government; civil law involves the rights and responsibilities found in relationships between persons and between persons and their government; and criminal law applies to situations in which someone commits an act against the public as a unit. 76) C Civil law involves the rights and responsibilities found in relationships between persons and between persons and their government, and criminal law applies to situations in which someone commits an act against the public as a unit. 77) A The assortment of statutes, or rules and regulations put forth by legislatures, is what we call statutory law. 78) D Constitutions, legislatures, regulatory bodies and courts spell out what market participants may and may not legally do. 79) A Many of us like to impose rules on others defining rights and responsibilities. Few of us can do this as individuals, but a majority of citizens in a democracy can agree to establish rules for business behavior. 80) C Criminal law applies to situations in which someone commits an act against the public as a whole. Several business activities that can be considered criminal include money laundering, bribery, mail fraud, racketeering, price fixing, insurance fraud, embezzlement, and theft of trade secrets. 81) D Version 1
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Although they are not a source of law in the same sense as constitutions and statutory law, model or uniform laws serve as a basis for some statutory law at the state level. 82) B Legal realism is based on the idea that, when ruling on a case, judges need to consider more than just the law. This school of thought dictates that they also take factors such as social and economic conditions into consideration when making a judgment. Followers of legal realism argue that the law must not be the sole factor in deciding a case since legal guidelines were designed by humans and exist in an ever-changing society. 83) The purposes of the law should be listed as follows: ● Providing order such that one can depend on a promise or an expectation of obligations. ● Serving as an alternative to fighting. ● Facilitating a sense that change is possible, but only after a rational consideration of options. ● Encouraging social justice. ● Guaranteeing personal freedoms. ● Serving as a moral guide by indicating minimal expectations of citizens and organizations. Students will vary on discussion of why the law is necessary for an ordered society. Ideas would include enforcement of contracts, protection of underprivileged members of society, and the provision of a remedy for injustice. 84) The term "stare decisis" means standing by a decision. It occurs when courts rely on precedent. The adherence to stare decisis creates greater predictability for both businesses and individuals who look to the courts for the rules on which they should rely when they engage in market exchanges. Version 1
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85) Both treaties and contracts are attempts by parties to determine rights and obligations among themselves. Additionally, when a party fails to obey a treaty or contract, international law imposes liability on the party who failed to obey the agreement. 86) Constitutions and statutes are not complete in the sense of covering all the detailed rules that affect government and business relations. The task of administrative agencies is to perform particular governmental functions. For independent and executive agencies, students may choose from agencies listed in the textbook. 87) Students should reference the need for Judge Susie Justice to check for relevant case law and statutory law. Cases from other jurisdictions may be influential to the judge but are not binding. A later passed state statute would apply as opposed to conflicting case law. 88) The cost-benefit school of jurisprudence is an economic school of jurisprudence in which all costs and benefits of a law are given monetary values. Those laws with the highest ratios of benefits to costs are then preferable to those with lower ratios. From the cost-benefit perspective, one would examine all the costs and benefits for alternative laws or decisions and place monetary values on those costs and benefits. With those calculations, a cost-benefit analysis may serve as a guide to legal change with the most attractive choice being the one that maximizes the ration of benefits to costs. The identification with the vulnerable school of jurisprudence is tied closely to the pursuit of fairness in our society. The metaphor of a level playing field is linked with some higher law or body of moral principles that connects all of us in the human community. We might look at a particular employment contract, for example, and react by observing that “it is just not fair.” Our caring impulse as a human feels outrage at that legal arrangement. That outrage can be a stimulus for legal change.
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CHAPTER 2 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) Ethics is the study and practice of decisions that meet, but do not exceed, minimum standards of behavior prescribed by law. ⊚ true ⊚ false
2) Business ethics is concerned with making correct decisions when making important decisions about the future of the business. ⊚ true ⊚ false
3) An ethical dilemma is a problem about what a firm should do for which no clear, right decision is available. ⊚ true ⊚ false
4)
Reasonable people can expect to disagree about optimal solutions to ethical dilemmas. ⊚ true ⊚ false
5)
A business decision cannot be legal but unethical. ⊚ true ⊚ false
6)
Ethical standards are uniform across the United States but are not uniform internationally. ⊚ true ⊚ false
7) The stakeholders of a business are limited to those who have an ownership interest in the business. ⊚ true ⊚ false
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8) Business managers should make sure they consider all relevant stakeholders when they engage in ethical reasoning. ⊚ true ⊚ false
9)
Employees are one of the major stakeholders of a business. ⊚ true ⊚ false
10) The social responsibility of business consists of the expectations the community imposes on firms doing business within its borders. ⊚ true ⊚ false
11)
We derive our ethics from the interplay of values. ⊚ true ⊚ false
12) The Golden Rule is the idea that we should interact with other people in a manner consistent with the way we would like them to interact with us. ⊚ true ⊚ false
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 13) Hulio and Helena work for Corporate Enterprise. Both see what they believe to be unethical treatment of a certain group of employees. The employees do not complain and do not say anything about this treatment. Hulio and Helena are not sure whether to report the potential violation. This is an example of an ethical _____________.
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A) standard B) mandate C) imperative D) dilemma E) hypothesis
14) The social responsibility of business consists of the expectations __________ impose(s) on firms. A) the community B) future generations C) management D) employees E) shareholders
15)
Which of the following is an incorrect statement regarding values?
A) Values are positive abstractions. B) Values capture our sense of what is good or desirable. C) Values come from the interplay of ethics. D) Values are ideas that underlie conversations about business ethics. E) Values represent our understanding of the purposes we will fulfill by making particular decisions.
16)
Which of the following is an example of the primary value of freedom? A) To embrace and promulgate notions of nationalism B) To possess the capacity or resources to act as one wishes C) To provide resources in proportion to need D) To maximize the amount of wealth in society E) To get the most from a particular output
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17) When Dole Food Company (Dole) was sued by a bunch of its employees for the use of a chemical on its bananas, the jury ordered Dole to pay $2.5 million in punitive damages. What became of this punitive damage award? A) On appeal, the appellate court doubled the punitive damage award to $5 million. B) A judge vacated the punitive damage award. C) A judge capped the punitive damage award to the level of actual damages. D) On appeal, the appellate court tripled the punitive damage award to $7.5 million. E) The punitive damages were distributed to various charitable organizations.
18)
The "Who" in the WH process of ethical decision making means what? A) Who are the corporate decision makers? B) Who are the people in power? C) Who are the stakeholders affected by the decisions a firm makes? D) Who determines what is right or wrong? E) Who is able to sue in a lawsuit?
19)
What do values generally represent? A) Our understanding of the purposes we will fulfill by making particular decisions. B) Our belief in what is right and wrong. C) Our subconscious demands. D) Government imposed moral minimums. E) Action-oriented goals set by the state
20)
What does the “Golden Rule” mean when discussing ethics?
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A) It suggests that before we act, we should imagine the act being broadcast across national television channels. B) It asks us to consider what the world would be like if our decision was copied by everyone else. C) It asks us to consider what the government would deem right and wrong when making business decisions. D) It suggests that we interact with other people in a manner consistent with the way we would like for them to interact with us. E) It suggests that we use a cost-benefit-analysis approach in all decision-making.
21) What does the so called public disclosure or “television test” mean in regard to ethical considerations? A) It requires us to imagine that our actions are being broadcast on national television. B) It requires that actions be discussed with local officials before any action is taken. C) It suggests that we interact with other people in a manner consistent with the way we would like for them to interact with us. D) It asks us to consider what the world would be like if our decision was copied by everyone else. E) It asks us to consult with the public before any major industry decision is made.
22) If Lamar decides that it is okay to cheat on his taxes, and he believes that it is okay for everyone to cheat on their taxes, which ethical test does he believe in? A) The public disclosure test B) The universalization test C) The Golden Rule D) The universal ethical dilemma test E) The ethical paradigm standard
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23) Environmental Concerns. Connie, the president of a company that makes paper, has a new interest in the environment. She recently went to a seminar on environmental dangers and has decided to take steps to clean things up. She started at home and was also committed to change things at work. Connie had to face the fact that her company has been cheating and is not in compliance with applicable environmental regulations due to dumping in a nearby river. Her company has never been cited, however, because it employs a very large number of people in the community, including the mayor's wife and the chief-of-police's brother. On her mission to clean things up, Connie has decided to go even further than the law requires and install the very latest environmental protections. When she announced her plan, the chair of the company's board of directors, Brooke, had a meeting with Connie. Brooke told Connie to analyze the situation carefully because the cost of the additional equipment would mean no dividend to shareholders and no raise for employees. Furthermore, Brooke told Connie that installing all the new equipment would result in higher prices for the company's paper products and could bankrupt the company because of foreign competition. Brooke hinted that Connie could be fired if she persisted. Brooke suggested that Connie just be concerned with a minimal standard of ethics. Which of the following is the minimal standard that a business must meet in a consideration of business ethics? A) Decisions must be legal. B) Decisions must meet the criteria of a follower of the WH Framework for Business Ethics. C) Decisions must meet the requirements of the most important stakeholders. D) Decisions must receive a majority vote of acceptance by employees. E) Both that decisions must be legal and that decisions receive a majority vote of acceptance by employees.
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24) Environmental Concerns. Connie, the president of a company that makes paper, has a new interest in the environment. She recently went to a seminar on environmental dangers and has decided to take steps to clean things up. She started at home and was also committed to change things at work. Connie had to face the fact that her company has been cheating and is not in compliance with applicable environmental regulations due to dumping in a nearby river. Her company has never been cited, however, because it employs a very large number of people in the community, including the mayor's wife and the chief-of-police's brother. On her mission to clean things up, Connie has decided to go even further than the law requires and install the very latest environmental protections. When she announced her plan, the chair of the company's board of directors, Brooke, had a meeting with Connie. Brooke told Connie to analyze the situation carefully because the cost of the additional equipment would mean no dividend to shareholders and no raise for employees. Furthermore, Brooke told Connie that installing all the new equipment would result in higher prices for the company's paper products and could bankrupt the company because of foreign competition. Brooke hinted that Connie could be fired if she persisted. Brooke suggested that Connie just be concerned with a minimal standard of ethics. Which of the following would be a stakeholder in the company? A) The community only B) The shareholders only C) Future generations only D) The community and shareholders only E) The community, shareholders, and future generations
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25) Environmental Concerns. Connie, the president of a company that makes paper, has a new interest in the environment. She recently went to a seminar on environmental dangers and has decided to take steps to clean things up. She started at home and was also committed to change things at work. Connie had to face the fact that her company has been cheating and is not in compliance with applicable environmental regulations due to dumping in a nearby river. Her company has never been cited, however, because it employs a very large number of people in the community, including the mayor's wife and the chief-of-police's brother. On her mission to clean things up, Connie has decided to go even further than the law requires and install the very latest environmental protections. When she announced her plan, the chair of the company's board of directors, Brooke, had a meeting with Connie. Brooke told Connie to analyze the situation carefully because the cost of the additional equipment would mean no dividend to shareholders and no raise for employees. Furthermore, Brooke told Connie that installing all the new equipment would result in higher prices for the company's paper products and could bankrupt the company because of foreign competition. Brooke hinted that Connie could be fired if she persisted. Brooke suggested that Connie just be concerned with a minimal standard of ethics. Connie, however, decides to go forward with her plan to clean things up because she wants to treat others in the same manner that she wants to be treated. Connie's approach is best referred to as the __________. A) Golden Rule B) public disclosure test C) universalization test D) Sarbanes-Oxley Rule E) television test
26)
Business ethics requires all except the following: A) weighing the benefits of a decision compared to its harm B) consideration of duties owed to other human beings C) the characteristics possessed by a virtuous person D) contemplation of Christian principles of faith E) the care we have for the well-being of those affected by business decisions
27) Before business managers consider the social responsibilities of firms in their communities, they need to:
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A) see who the local mayor is and determine if they are business friendly. B) determine how corporate friendly the community is. C) determine the relevant educational background of the community. D) determine if the tax base is fair. E) gather all the relevant facts.
28) According to the textbook, which of the following is not one of the core values associated with Adidas? A) We are committed to continuously strengthening our brands and products to improve our competitive position. B) We are dedicated to consistently delivering outstanding financial results. C) We will create an environment that does absolutely no harm. D) We are consumer focused and therefore we continuously improve the quality, look, feel and image of our product. E) We are a global organization that is socially and environmentally responsible.
29) When evaluating primary values, what is not one of the alternative meanings to “justice” described in the textbook? A) To receive the products of your labor B) To maximize the amount of wealth to society C) To treat all humans identically, regardless of class, gender, age and sexual preference D) To provide resources in proportion to need E) To possess anything that someone else is willing to grant you
30)
The many groups of people affected by a firm’s decisions are know as: A) Stockholders B) Lobbyists C) Third party beneficiaries D) Outliers E) Stakeholders
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31) Which of the following would not be considered a stakeholder for the purposes of the WH framework? A) Owners or shareholders B) Employees C) Customers D) Administrative agencies in charge of regulating the firm E) Future generations
32)
What happened that caused WorldCom’s CEO Bernard Ebbers to go to jail?
A) Ebbers and other WorldCom officials used fraudulent accounting methods to overstate their financial status. B) Ebbers and other WorldCom officials were embezzling money from the company. C) Ebbers and other WorldCom officials were caught selling fraudulent company stock. D) High level officials including Ebbers allowed unsafe working conditions in the workplace in violation of OSHA regulations. E) Worldcom’s board of directors caught Ebbers selling trade secrets to China, in violation of the company’s intellectual property rights.
33) In 2011, Tyson Foods of Arkansas was found guilty of violating which law when it was found to be receiving bribes from Mexican officials? A) The Anti-Corruption Act B) The Foreign Corrupt Practices Act C) The Bribery and Defamation Act D) The Occupational Safety and Health Act E) The International Agreement on Free Trade Act
34) Kristin Richmond, one of the founders of Revolution Foods, believes that the objective of Revolution Foods is to do what in response to Kraft’s Lunchables?
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A) To provide higher-quality ingredients to cultivate healthier life styles B) To show that Kraft Lunchables are too high in fat and sodium and therefore unhealthy C) To dominate the market with healthier alternatives by using only natural foods, and thereby force Kraft out of the packaged lunch market D) To prove that Revolution Foods products are more ethically prepared and distributed E) To show consumers that Kraft was falsely advertising its calorie and fat contents
35) In the “WH” process of ethical decision making, what does the “H” stand for? Use Exhibit 2-6 A) Handlers B) Help C) How D) Happen E) History
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Answer Key Test name: Chap 05_5e_The Essentials 1) FALSE Ethics is the study and practice of decisions about what is good or right. 2) FALSE The definition of business ethics refers to standards of business conduct. It does not result in a set of correct decisions. 3) TRUE An ethical dilemma is a problem about what a firm should do for which no clear, right decision is available. 4) TRUE An ethical dilemma is a problem about what a firm should do for which no clear, right decision is available.Reasonable people can expect to disagree about optimal solutions to ethical dilemmas. 5) FALSE A business decision can be legal but unethical. 6) FALSE Different countries have different ethical standards.Thus, ethical conceptions shape business law and business relationships uniquely in each country. 7) FALSE The stakeholders of a business consist of many different groups of people who are affected by the business's decisions. They include owners or shareholders, employees, customers, management, the general community where the firm operates, and future generations. 8) TRUE
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Business managers should consider all relevant stakeholders when they engage in ethical reasoning, since any given managerial decision affects, in varying degrees, owners or shareholders, employees, customers, management, the general community where the firm operates, and future generations. 9) TRUE The stakeholders of a firm are the many groups of people affected by the firm’s decision, including its employees. 10) TRUE The social responsibility of business consists of the expectations the community imposes on firms doing business within its borders.These expectations must be honored to a certain extent, even when a firm wishes to ignore them, because firms are always subject to the implicit threat that legislation will impose social obligations on them. 11) TRUE Values are positive abstractions that capture one's sense of what is good and desirable. They are ideas that underlie conversations about business ethics. We derive our ethics from the interplay of values. 12) TRUE The Golden Rule is the idea that we should interact with other people in a manner consistent with the way we would like them to interact with us. This guideline urges us to be aware that other people, including their rights and needs, matter. 13) D An ethical dilemma is a problem about what a firm should do for which no clear, right decision is available.Reasonable people can expect to disagree about optimal solutions to ethical dilemmas. 14) A
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The expectations that a community places on the actions of a business is referred to as the social responsibility of business. If the community expects businesses to obey certain standards of fairness, even when the standards interfere with profit maximization, firms that choose to ignore this expectation do so at their peril. 15) C Values are positive abstractions that capture our sense of what is good or desirable. They are ideas that underlie conversations about business ethics. We derive our ethics from the interplay of values. Values represent our understanding of the purposes we will fulfill by making particular decisions. 16) B The primary value of freedom includes possessing the capacity or resources to act as one wishes, acting without restriction from rules imposed by others, and escaping the cares and demands of this world entirely. 17) B On November 15, 2007, a jury ordered Dole also to pay $2.5 million in punitive damages to five of the workers—that is, damages paid in excess of the plaintiffs’ proved injuries. Later, however, a judge vacated the punitive damages and lowered the actual damages of $3.3 million to $1.58 million. 18) C The "W" in the WH process of ethical decision making stands for "Who"; namely, the stakeholders who are affected by the decisions a firm makes. Those stakeholders include customers, owners or investors, management, employees, the community, and future generations. 19) A Values represent our understanding of the purposes we will fulfill by making particular decisions. Version 1
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20) D The Golden Rule is the idea that we should interact with other people in a manner consistent with the way we would like for them to interact with us. 21) A The public disclosure test is sometimes called the "television test," for it requires us to imagine that our actions are being broadcast on national television. 22) B Before we act, the universalization test asks us to consider what the world would be like were our decision copied by everyone else. Applying the universalization test causes us to wonder aloud: “Is what I am about to do the kind of action that, if others followed my example, makes the world a better place for me and those I love?” 23) A The legality of a decision is the minimal standard that must be met in a consideration of business ethics. The existence of that minimum standard is essential for the development of business ethics. Think of the law as the most recent consensus about the lower level of business ethics. Law and business ethics serve as an interactive system— informing and assessing each other. 24) E Stakeholders of a firm are the many groups of people affected by the firm's decisions. They include owners or shareholders, employees, customers, management, the general community where the firm operates, and future generations. 25) A
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The Golden Rule represents the idea that we should interact with other people in a manner consistent with the way we would like them to interact with us. This guideline urges us to be aware that other people, including their rights and needs, matter. 26) D Business ethics requires a thought process that weighs the benefits of a decision compared to its harm, consideration of the duties we owe other human beings, the characteristics possessed by a virtuous person, and the care we have for the well-being of those affected by business decisions. 27) E Before business managers consider the social responsibilities of firms in their communities, they need to gather all the relevant facts. Experienced managers know that assembling the facts is just the beginning of a thoughtful business decision. 28) C
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Adidas’s core values as shown in Exhibit 2-4 include the following: We are committed to continuously strengthening our brands and products to improve our competitive position We are consumer-focused and therefore we continuously improve the quality, look, feel and image of our products and our organizational structures to match and exceed consumer expectations and to provide them with the highest value. We are innovation and design leaders who seek to help athletes of all skill levels achieve peak performance with every product we bring to market. We are dedicated to consistently delivering outstanding financial results. We are a global organization that is socially and environmentally responsible, that embraces creativity and diversity and is financially rewarding for our employees and shareholders. 29) B To help make WH useful to you as a manager, Exhibit 2-5makes clear the central role of clarifying what version of a value one feels loyalty toward. In Exhibit 2-5 “Primary Values and Business Ethics”, Justice has four alternative meanings: To receive the products of your labor, to treat all humans identically, regardless of class, gender, age and sexual preference, to provide resources in proportion to need, to possess anything that someone else is willing to grant you. 30) E The stakeholders of a firm are the many groups of people affected by the firm’s decisions. 31) D
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The stakeholders of a firm are the many groups of people affected by the firm’s decisions. These groups include owners or shareholders, employees, customers, management, the general community where the firm operates and future generations. 32) A WorldCom used fraudulent accounting methods that allowed it to overstate its financial status to its shareholders. Specifically, CEO Bernard Ebbers presented a false picture of WorldCom’s net worth, informing the Board of Directors of WorldCom that the company would continue growing vigorously. However, Ebbers knew that his projections were inconsistent with WorldCom’s declining position. 33) B In 2011, Tyson was charged with conspiracy and violating the Foreign Corrupt Practices Act by allowing company officials to receiving bribes and making them appear legal. To avoid trial, Tyson was forced to pay $4 million as a criminal penalty and $1.2 million to the Securities Exchange Commission for the charge of maintaining illegal records. 34) A Kristin Richmond, one of the founders of Revolution Foods, believes that the objective of Revolution Foods is to provide higher-quality ingredients to cultivate healthier lifestyles. Making foods with real meat, real cheese, and other recognizable ingredients appears to be the driving force behind the company. In other words, rather than focusing solely on profits, Revolution Foods attempts to focus on what will also help the consumer lead a healthier lifestyle. 35) C The WH process of ethical decision making is laid out in Exhibit 2-6. The “W” stands for “who” and the “H” stands for “how.”
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CHAPTER 3 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) A court need only have one type of jurisdiction to decide any particular case. ⊚ true ⊚ false
2) Suppose a Utah resident has not paid property taxes on a piece of land she owns in Idaho. Idaho courts have in rem jurisdiction over the property. ⊚ true ⊚ false
3) A federal district court established a “sliding-scale” standard for determining whether a business with Internet connections satisfies the minimum-contacts standard. ⊚ true ⊚ false
4)
Subject-matter jurisdiction is also known as “in rem” jurisdiction. ⊚ true ⊚ false
5) State courts have the power to hear all cases, including those cases within the exclusive jurisdiction of the federal court system. ⊚ true ⊚ false
6) Conditional federal jurisdiction means that both state and federal courts have jurisdiction over a case. ⊚ true ⊚ false
7) Once a case is in the proper court system, application of the res ipsa loquitur doctrine determines which trial court in the system will hear the case.
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⊚ ⊚
true false
8) A person who has the legal right to bring an action in court has what is known as a conditional privilege. ⊚ true ⊚ false
9) The case-or-controversy (or justifiable controversy) requirement ensures that courts do not render advisory opinions. ⊚ true ⊚ false
10) The justices of the United States Supreme Court serve ten-year terms of appointment, subject to renewal by the advice and consent of the U.S. Senate. ⊚ true ⊚ false
11)
The United States circuit courts of appeal are known as courts of last resort. ⊚ true ⊚ false
12)
The defendant responds to a complaint with a document formally known as a reply. ⊚ true ⊚ false
13) A defendant who believes that he or she has a claim against the plaintiff would include a pleading known as areply with the answer. ⊚ true ⊚ false
14)
A reply is aformal answer to a motion for summary judgment.
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⊚ ⊚
15)
true false
In most states, a party has a certain, limited number of peremptory challenges. ⊚ true ⊚ false
16) In Batson v. Kentucky, the United States Supreme Court ruled that gender-based peremptory challenges in civil cases violate the due process clause of the Fourteenth Amendment to the U.S. Constitution. ⊚ true ⊚ false
17)
Either party may appeal a judge’s final judgment. ⊚ true ⊚ false
18) If an appellate judge agrees with the majority's decision but for different reasons, the judge may write a "dissenting" opinion. ⊚ true ⊚ false
19)
The United States Supreme Court hears approximately 175 cases per year. ⊚ true ⊚ false
20)
The term ADR refers to the resolution of legal disputes through litigation. ⊚ true ⊚ false
21)
Courts generally support the use of ADR methods. ⊚ true ⊚ false
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22) In order to support the mission of alternative dispute resolution, resolving disputes outside of traditional legal channels, lawyers cannot serve as arbitrators. ⊚ true ⊚ false
23)
An arbitrator is less likely to issue a compromise decision than a judge. ⊚ true ⊚ false
24) Med-arb is a dispute resolution process in which the parties agree to start out in arbitration and, if the arbitration is unsuccessful on one or more points, to move on to mediation. ⊚ true ⊚ false
25) According to the federal rules of civil procedure, litigating parties cannot use the results of early neutral case evaluation to settle their case. ⊚ true ⊚ false
26) The defendant in a state action must transfer the case to federal court if there is concurrent jurisdiction. ⊚ true ⊚ false
27) The federal court system derives its power from the deferential consent of the executive branch of the United States government. ⊚ true ⊚ false
28) A case is ripe if a judge’s decision is capable of affecting the parties at some point in the foreseeable future.
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⊚ ⊚
29)
true false
ADR gives businesses less control over the resolution of a dispute. ⊚ true ⊚ false
30) An arbitrator’s decision is called an award, but only ifthe arbitrator orders the defendant to pay the plaintiff monetary compensation. ⊚ true ⊚ false
31) A mediator is selected for the disputing parties by the court with appropriate jurisdiction over the case. ⊚ true ⊚ false
32) If mediation is not successful the parties must resort to litigation, and anything said during mediation can be used as evidence at trial. ⊚ true ⊚ false
33) If an appellate court concludes that the trial court's ruling was incorrect and remands the case, the appellate court will conduct the new trial or hearing. ⊚ true ⊚ false
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 34) What type of jurisdiction do trial courts have?
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A) Special B) Appellate C) Summary D) Original E) Review
35)
What do trial court juries determine? A) Whether the trial court judge gave proper jury instructions B) Whether the trial court has proper jurisdiction to hear the case C) Questions of fact D) Whether the defendant received proper service E) Whether each attorney is moral and credible
36) What is the procedure by which the plaintiff presents the defendant with a copy of the complaint and summons indicating the defendant is being sued? A) Service of process B) Subpoena C) Subpoena duces tecum D) Answer and reply E) Answer and counterclaim
37) Most states have a statute that allows for its court system to serve an out-of-state defendant if certain minimum contact requirements are met. What is the name of this statute? A) Minimum contacts B) Threshold contacts C) Long-arm D) In rem E) Quasi in rem
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38) Suppose Paula, a resident of Florida, and her brother Tom, who lives in Maine, have a dispute about their grandmother’s real estate left to them in a will. The property is in Michigan, where their grandmother lived. Which of the following is true regarding jurisdiction over this dispute? A) Any court within the three respective states could hear the dispute using in rem jurisdiction. B) A court in Florida would have in rem jurisdiction over the dispute if Paula files the lawsuit. C) A court in Maine would have have in rem jurisdiction over the dispute if Tom files the lawsuit. D) A court in Michigan would have in personam jurisdiction because the property was their grandmother’s originally. E) A court in Michigan would have in rem jurisdiction over the property since that is where the property is located.
39) When a plaintiff files a case involving concurrent jurisdiction in state court, the defendant has a right of _____. A) voluntary dismissal B) removal C) summary judgment D) replevin E) first refusal
40)
Which of the following is true regarding state court jurisdiction?
A) State courts can hear only state claims. B) State courts always have concurrent jurisdiction with the federal courts. C) Federal courts begin with exclusive jurisdiction until a state court intervenes. D) Cases may fall under state jurisdiction, exclusive federal jurisdiction, or concurrent jurisdiction, and state courts have the power to hear all cases not within the exclusive jurisdiction of the federal court system. E) The federal court system determines whether a particular state court has the right to hear state claims only, federal claims only, or both state and federal claims.
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41)
What types of powers do appellate courts have? A) Appellate courts have the right to hold a trial and make determinations of fact and
law. B) Appellate courts have the right to have a trial but can only determine questions of law. C) Appellate courts have the power to review previous judicial decisions to determine whether trial courts erred in their decisions. D) Appellate courts only have the right to hear cases from the highest state courts. E) Cases at the appellate level are reviewed only if there is a question of jurisdiction.
42) Which of the following is not one of the areas of exclusive jurisdiction that a federal court offers? A) Admiralty cases B) Bankruptcy cases C) Federal criminal prosecutions D) Tort cases E) Patent and trademark cases
43) When a case involving diversity of citizenship is tried in federal court, there are two specific jurisdictional requirements that must be met. What are the conditions? A) The plaintiff and the defendant must not reside in the same state and the amount in controversy must be $100,000 or more B) The defendant must live in a foreign country and the plaintiff must reside in the United States C) The plaintiff and the defendant must not reside in the same state and the amount in controversy must exceed $75,000 D) The defendant must be a business entity (for example, a corporation) and the plaintiff must be a non-business entity E) The plaintiff and the defendant must reside in the same state and the amount in controversy must exceed $250,000
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44) If a corporation is being sued by an individual, where is the corporation’s residence considered to be? A) The state of incorporation only or the plaintiff’s home state B) The state in which the corporation has its principal place of business or the state of incorporation C) The state where the largest amount of the corporation’s employees work D) Any state in which the corporation does business E) Any state in which the individual wishes to bring the lawsuit because most corporations do business in every state via the internet
45) Suppose a plaintiff alleges that a North Carolina campaign-financing law violates his First Amendment (to the United States Constitution) free speech rights. This case _____, and it falls under _____ jurisdiction. A) raises a federal question; exclusive federal B) raises a federal question; concurrent C) raises a state question; concurrent D) raises a state question; exclusive state E) raises a state question; exclusive federal
46) Which of the following is the proper term for the geographic location that each state’s statutes determine is proper to hear a case? A) long-arm B) standing C) in rem jurisdiction D) venue E) hearing
47) Billy knows that he can bring his case against Bob in a state court in Tennessee. He is unsure, however, of which county in which to proceed. Which of the following addresses the proper county?
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A) In personam jurisdiction B) Venue C) Subject-matter jurisdiction D) Diversity jurisdiction E) Long-arm jurisdiction
48) Toledan witnesses an accident involving Yema and Norland. Yema chooses not to sue Norland, but Toledan does not want Norland to get away with his negligent actions, so he sues Norland. If the court dismisses the case, on what grounds would they do so? A) A lack of personal jurisdiction B) The inability to determine money damages C) A lack of venue D) A lack of standing E) A lack of subject matter jurisdiction
49) Morrey and Veronica get into an accident. Both sides have worked to settle their claims but are unable to do so. The case is __________ because the judge would be able to make a decision which would affect the parties. A) moot B) lacking standing C) remandable to another court D) ripe E) still hypothetical
50) To minimize extra costs associated with future litigation, many businesses will include in their contracts __________. A) forum selection clauses B) no deal if sued clauses C) attorney’s fees at twice the rate if the other side sues clauses D) removal jurisdiction clauses E) no contest clauses
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51)
The United States has how many courts of original jurisdiction at the federal level? A) 50 B) 94 C) 100 D) 150 E) 184
52)
Justices of the United States Supreme Court __________ A) have lifetime appointments. B) have the opportunity to renew their service every 15 years. C) are voted in by the U.S. electorate every 8 years. D) serve at the pleasure of the United States president. E) are selected by members of the U.S. Congress for 20-year, nonrenewable terms.
53)
Which of the following is true regarding the United States Supreme Court? A) It is the intermediate court in the federal court system. B) Nine justices make up the high court. C) It does not hear appeals of cases from the court of last resort in a state system. D) It will hear cases considering questions of pure state law. E) It can never function as a trial court.
54) Which of the following is true regarding state intermediate courts of appeal in state court systems?
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A) States only have an intermediate court of appeals if there is no state Supreme Court. B) In states that do not have an intermediate court of appeal, appeals go to the federal court of appeals. C) In states that do not have an intermediate court of appeal, there is no right of appeal to any court. D) All states in the United States have intermediate courts of appeal. E) Not all states in the United States have intermediate courts of appeal; and in those states, appeals go to the state court of last resort.
55) Courts can give final judgments that solve existing problems; they cannot provide rulings about _____. A) summary judgments B) default judgments C) hypothetical situations D) dismissals with prejudice E) dismissals without prejudice
56) What tells the defendant that if he or she does not respond to the lawsuit within a certain time period that the plaintiff will receive a default judgment? A) an answer B) an appeal C) a verdict D) a summons E) a judgment
57) Which defense is used when the defendant admits the facts are accurate but there are additional facts that the defendant can point to that provide justifiable actions by the defendant?
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A) Interlocutory appeal B) Summary judgment C) True defense D) Affirmative facts E) Affirmative defense
58) After the discovery process, either party can file a motion for _____. This motion asserts that no factual disputes exist and that if the judge applied the law to the undisputed facts, her only reasonable decision would be in favor of the moving party. A) dismissal without prejudice B) summary judgment C) sanctions D) judgment notwithstanding the verdict E) an interlocutory appeal
59) After filing the initial pleadings and motions, the parties gather evidence through a process known as _____. A) inquisition B) discovery C) requests D) pleadings E) summary judgments
60) Penelope is being sued by her old employer over a breach of contract. The plaintiff sends Penelope a list of written questions that she is to answer under oath. These are known as _____. A) depositions B) interrogatories C) affirmations D) oaths E) production of documents
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61) Derran is being examined under oath by an opposing party’s attorney. All responses are being recorded by a court reporter. This process is known as a(n) _____. A) deposition B) production of documents C) interrogatory D) pre-trial conference E) inquiry
62) Billy, a witness to a motor vehicle accident, is gravely ill with cancer. Pat, who was injured in the accident, would like to preserve Billy’s testimony for trial in case he dies before the trial date. What should Pat do? A) Send interrogatories to Billy B) Take Billy's deposition C) Send a request to admit to Billy that the accident was the defendant's fault D) Have a pretrial conference with the judge and Billy E) There is nothing Pat can do to preserve Billy’s testimony for trial
63) Amber says at trial that Gwen told her that she saw Tom run the traffic light and hit Christy's car. On what basis is Amber's testimony objectionable? A) Amber’s testimony is not objectionable because it recounts the statement of an eyewitness. B) Amber’s testimony is hearsay. C) Amber’s testimony is an admission against interest. D) Amber’s testimony constitutes contempt of court. E) Amber’s testimony is based on a conflict of interest.
64) Attorney Candy represents plaintiff Ann who is suing her neighbor for nuisance, claiming that the neighbor plays music too late at night. Candy puts Ann on the stand and asks her questions. Candy is involved in which of the following?
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A) Direct examination B) Cross-examination C) Judicial examination D) Specific questioning E) Redirect questioning
65)
What does the term ADR mean with regard to the resolution of civil disputes? A) Alternate disposition remediation B) Answers, depositions, recovery C) Alternative dispute resolution D) Alternate documentation recovery E) Alternative discussion remediation
66) Which of the following is true regarding the speed and cost of alternative dispute resolution (ADR)? A) It is usually faster and cheaper than litigation. B) It is usually faster, but more expensive, than litigation. C) It is usually slower and more expensive than litigation. D) It is usually slower, but less expensive, than litigation. E) No formal studies have been conducted regarding the speed and cost of ADR, so the answer is unknown.
67)
Which of the following is an extension of negotiation? A) Arbitration B) Initials C) Neutral case evaluations D) Mediation E) Private trials
68)
Which of the following makes mediation advantageous?
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A) Only that it helps disputing parties preserve their relationships B) Only those parties to mediation have a high level of autonomy C) Only that the mediator solves the dispute if the parties are unable to do so D) Only that it helps disputing parties preserve their relationships, and parties to mediation have a high level of autonomy E) It helps disputing parties preserve their relationships, parties to mediation have a high level of autonomy, and the mediator solves the dispute if the parties are unable to do so
69)
The arbitrator typically provides a decision within _____ days of an arbitration hearing. A) 10 B) 25 C) 30 D) 90 E) 120
70)
What is the term used for an arbitrator’s final decision? A) Settlement B) Decree C) Nuisance D) Decision E) Award
71) Under what circumstance(s) may an arbitration award be set aside under the Federal Arbitration Act? A) Only when the arbitrator failed to make a final and definite award B) Only when the award was the basis of fraud C) Only when the arbitrator displayed bias D) When the arbitrator failed to make a final and definite award, the award was the basis of fraud, or the arbitrator displayed bias E) None of these, since the United States Congress repealed the Federal Arbitration Act in 1995 as part of its "Contract with America" legislative initiative
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72)
Which of the following is true about an arbitration hearing?
A) The arbitration hearing is not at all like a trial. B) The parties cannot represent themselves. C) The parties may introduce witnesses and documentation. D) The arbitrator often takes a much more passive role in an arbitration hearing than a judge takes in a trial. E) In most arbitrations, an official record of the hearing is kept.
73) What is a provision in a contract mandating that all disputes arising under the contract be settled by arbitration called? A) A binding arbitration clause B) A non-compete agreement C) A forum non conveniens clause D) An in rem clause E) A quasi in rem clause
74)
What type of dispute resolution process is med-arb?
A) A process in which the parties agree to start out in mediation and, if the mediation is unsuccessful on one or more points, to move on to arbitration B) A process in which the parties agree to start out in arbitration and, if the arbitration is unsuccessful on one or more points, move on to court-annexed ADR C) A process in which the parties agree to start in mediation and move to litigation if the mediation is unsuccessful D) A process in which the parties agree to start in arbitration and move to litigation if the mediation is unsuccessful E) A special type of arbitration that addresses medical malpractice claims
75)
What is a summary jury trial?
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A) An abbreviated trial that leads to a nonbinding jury verdict B) An unabbreviated trial that leads to a binding jury verdict C) An unabbreviated trial that leads to a nonbinding jury verdict D) An abbreviated trial in which only a few witnesses are called to the stand E) Both an abbreviated trial that leads to a nonbinding jury verdict and an abbreviated trial in which only a few witnesses are called to the stand
76) In which of the following do parties select a neutral third party and explain their respective positions to the neutral third party, who then evaluates the strengths and weaknesses of the case? A) Summary jury trial B) Minitrial C) Early neutral case evaluation D) Private trials E) Neutral submission
77) Which of the following is an ADR method in which a referee is selected and paid by the disputing parties to offer a legally binding judgment in a dispute? A) Summary jury trial B) Minitrial C) Early neutral case evaluation D) Private trials E) Neutral submission
78)
A private trial is an alternative dispute resolution method often referred to as _____. A) “rent-a-judge” B) non-binding arbitration C) non-binding mediation D) binding mediation E) “rent-a-cop”
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79) In Hertz Corp. v. Friend, the United States Supreme Court set forth the “__________” test as the appropriate test for determining a corporation's principle place of business for the purposes of diversity jurisdiction. A) quasi in rem B) nerve center C) preponderance of the evidence D) primary business E) disparate impact
80) Revenge. Jane, a first-year law student, while walking to school in inclement weather, accidentally slipped on ice knocking down Greg, another first-year law student, breaking his glasses. He was very angry with Jane and let the air out of one of her car tires. Greg also decided to sue Jane for negligence, claiming as damages $300 for his broken glasses. He decided that he already knew all about the law and did not need a lawyer. Greg sued Jane in state court. Jane, in the same lawsuit, brought an action against Greg for letting the air out of her tire. At trial in state court, Jane told the judge that a friend, Susie, told her that she saw Greg let the air out of Jane's tire. The judge disallowed Jane's testimony on that issue. Susie, however, who was in the courtroom also came and testified to that effect. The state court judge ruled in favor of Jane. Greg said that he was not giving up and that he would seek double damages on appeal in federal court. Jane and Greg live in different states when not attending school. After trial, Jane reported Greg's actions in letting the air out of her tire to the police who said that they would proceed with a criminal action against Greg. Jane's action against Greg for the tire is called a(n) _____. A) counterclaim B) cross-claim C) third party claim D) discovery claim E) service claim
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81) Revenge. Jane, a first-year law student, while walking to school in inclement weather, accidentally slipped on ice knocking down Greg, another first-year law student, breaking his glasses. He was very angry with Jane and let the air out of one of her car tires. Greg also decided to sue Jane for negligence, claiming as damages $300 for his broken glasses. He decided that he already knew all about the law and did not need a lawyer. Greg sued Jane in state court. Jane, in the same lawsuit, brought an action against Greg for letting the air out of her tire. At trial in state court, Jane told the judge that a friend, Susie, told her that she saw Greg let the air out of Jane's tire. The judge disallowed Jane's testimony on that issue. Susie, however, who was in the courtroom also came and testified to that effect. The state court judge ruled in favor of Jane. Greg said that he was not giving up and that he would seek double damages on appeal in federal court. Jane and Greg live in different states when not attending school. After trial, Jane reported Greg's actions in letting the air out of her tire to the police who said that they would proceed with a criminal action against Greg. Was the judge correct in disallowing Jane's testimony regarding what Susie told her about the tire? A) No, the judge was wrong and should have considered that testimony B) Yes, the judge was correct to disallow the testimony because it involved a possible criminal action C) Yes, the judge was correct to disallow the testimony because it was hearsay D) Yes, the judge was correct to disallow the testimony because Susie's testimony was better evidence and she was in the courtroom E) Yes, the judge was correct to disallow the testimony because it was offered by a defendant, not an independent witness
82) Revenge. Jane, a first-year law student, while walking to school in inclement weather, accidentally slipped on ice knocking down Greg, another first-year law student, breaking his glasses. He was very angry with Jane and let the air out of one of her car tires. Greg also decided to sue Jane for negligence, claiming as damages $300 for his broken glasses. He decided that he already knew all about the law and did not need a lawyer. Greg sued Jane in state court. Jane, in the same lawsuit, brought an action against Greg for letting the air out of her tire. At trial in state court, Jane told the judge that a friend, Susie, told her that she saw Greg let the air out of Jane's tire. The judge disallowed Jane's testimony on that issue. Susie, however, who was in the courtroom also came and testified to that effect. The state court judge ruled in favor of Jane. Greg said that he was not giving up and that he would seek double damages on appeal in federal court. Jane and Greg live in different states when not attending school. After trial, Jane reported Greg's actions in letting the air out of her tire to the police who said that they would proceed with a criminal action against Greg. Greg goes to see Alex, a recent graduate who had just passed the bar, and asked Alex to represent him in a federal court appeal. What advice should Alex give to Greg regarding an appeal filed in federal court? Version 1
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A) He should tell Greg that a federal appeal looks promising and that he will be glad to represent Greg for an hourly rate of $400. B) He should tell Greg that the federal appeal looks good only if Greg can get Jane to admit she was negligent. C) He should tell Greg that the federal appeal looks good only if Susie does not come to testify in person. D) He should tell Greg that the federal appeal is not possible unless Greg first gets the trial court judge to certify the case to federal court. E) He should tell Greg to forget about a federal court appeal because an appeal from a state trial court would not be transferred to federal court.
83) Puppy Woes. Sam promised to sell Linda a Welsh Corgi puppy for $300 but backed out of the deal. Linda sued Sam in state court for breach of contract. Linda asked for a jury in her complaint. During jury selection, one juror, Ann, said that she did not think they could be fair to Linda because Linda did not appear to be a dog lover. Linda asked that Ann not hear the case, and the judge excused Ann. Linda also decided that another juror, Sandy, looked at her in a grumpy manner so she asked the judge to excuse that juror from serving. The judge did so. After the jury was chosen, Linda made a statement to the jury, as did Sam. Linda then called to the witness stand a friend of hers, Brenda, who heard the discussion held between Linda and Sam regarding the purchase of the puppy. Brenda testified under questioning by Linda that she heard Linda say that she would pay $300 for the puppy and that she also heard Sam say that he would sell the dog for that amount. Unfortunately for Linda, Brenda also testified in response to questioning by Sam that Sam distinctly told Linda that he would only sell the puppy to her if Linda came with cash for the puppy within seven days. Linda did not show up with the money for ten days and Sam had already sold the dog to someone else. The judge ruled in favor of Sam. In choosing the jury, Linda and Sam were engaged in _____. A) voir dire B) jury analysis C) jury review D) res ipsa loquitur E) shadowing
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84) Puppy Woes. Sam promised to sell Linda a Welsh Corgi puppy for $300 but backed out of the deal. Linda sued Sam in state court for breach of contract. Linda asked for a jury in her complaint. During jury selection, one juror, Ann, said that she did not think they could be fair to Linda because Linda did not appear to be a dog lover. Linda asked that Ann not hear the case, and the judge excused Ann. Linda also decided that another juror, Sandy, looked at her in a grumpy manner so she asked the judge to excuse that juror from serving. The judge did so. After the jury was chosen, Linda made a statement to the jury, as did Sam. Linda then called to the witness stand a friend of hers, Brenda, who heard the discussion held between Linda and Sam regarding the purchase of the puppy. Brenda testified under questioning by Linda that she heard Linda say that she would pay $300 for the puppy and that she also heard Sam say that he would sell the dog for that amount. Unfortunately for Linda, Brenda also testified in response to questioning by Sam that Sam distinctly told Linda that he would only sell the puppy to her if Linda came with cash for the puppy within seven days. Linda did not show up with the money for ten days and Sam had already sold the dog to someone else. The judge ruled in favor of Sam. The challenge to the juror who said that they could not be fair is referred to as a(n): A) Peremptory challenge. B) Challenge for cause. C) Stipulated challenge. D) Fairness challenge. E) Approved challenge.
85) Puppy Woes. Sam promised to sell Linda a Welsh Corgi puppy for $300 but backed out of the deal. Linda sued Sam in state court for breach of contract. Linda asked for a jury in her complaint. During jury selection, one juror, Ann, said that she did not think they could be fair to Linda because Linda did not appear to be a dog lover. Linda asked that Ann not hear the case, and the judge excused Ann. Linda also decided that another juror, Sandy, looked at her in a grumpy manner so she asked the judge to excuse that juror from serving. The judge did so. After the jury was chosen, Linda made a statement to the jury, as did Sam. Linda then called to the witness stand a friend of hers, Brenda, who heard the discussion held between Linda and Sam regarding the purchase of the puppy. Brenda testified under questioning by Linda that she heard Linda say that she would pay $300 for the puppy and that she also heard Sam say that he would sell the dog for that amount. Unfortunately for Linda, Brenda also testified in response to questioning by Sam that Sam distinctly told Linda that he would only sell the puppy to her if Linda came with cash for the puppy within seven days. Linda did not show up with the money for ten days and Sam had already sold the dog to someone else. The judge ruled in favor of Sam. The challenge to the juror who seemed grumpy is referred to as a(n):
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A) Peremptory challenge. B) Voluntary dismissal. C) Stipulated challenge. D) Involuntary dismissal. E) Perfunctory challenge.
86) Puppy Woes. Sam promised to sell Linda a Welsh Corgi puppy for $300 but backed out of the deal. Linda sued Sam in state court for breach of contract. Linda asked for a jury in her complaint. During jury selection, one juror, Ann, said that she did not think they could be fair to Linda because Linda did not appear to be a dog lover. Linda asked that Ann not hear the case, and the judge excused Ann. Linda also decided that another juror, Sandy, looked at her in a grumpy manner so she asked the judge to excuse that juror from serving. The judge did so. After the jury was chosen, Linda made a statement to the jury, as did Sam. Linda then called to the witness stand a friend of hers, Brenda, who heard the discussion held between Linda and Sam regarding the purchase of the puppy. Brenda testified under questioning by Linda that she heard Linda say that she would pay $300 for the puppy and that she also heard Sam say that he would sell the dog for that amount. Unfortunately for Linda, Brenda also testified in response to questioning by Sam that Sam distinctly told Linda that he would only sell the puppy to her if Linda came with cash for the puppy within seven days. Linda did not show up with the money for ten days and Sam had already sold the dog to someone else. The judge ruled in favor of Sam. The statements made to the jury by Linda and Sam immediately after the jury was chosen were _____. A) direct statements B) closing statements C) challenges for cause D) peremptory challenges E) opening statements
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87) Puppy Woes. Sam promised to sell Linda a Welsh Corgi puppy for $300 but backed out of the deal. Linda sued Sam in state court for breach of contract. Linda asked for a jury in her complaint. During jury selection, one juror, Ann, said that she did not think they could be fair to Linda because Linda did not appear to be a dog lover. Linda asked that Ann not hear the case, and the judge excused Ann. Linda also decided that another juror, Sandy, looked at her in a grumpy manner so she asked the judge to excuse that juror from serving. The judge did so. After the jury was chosen, Linda made a statement to the jury, as did Sam. Linda then called to the witness stand a friend of hers, Brenda, who heard the discussion held between Linda and Sam regarding the purchase of the puppy. Brenda testified under questioning by Linda that she heard Linda say that she would pay $300 for the puppy and that she also heard Sam say that he would sell the dog for that amount. Unfortunately for Linda, Brenda also testified in response to questioning by Sam that Sam distinctly told Linda that he would only sell the puppy to her if Linda came with cash for the puppy within seven days. Linda did not show up with the money for ten days and Sam had already sold the dog to someone else. The judge ruled in favor of Sam. The questioning of Brenda by Sam is called _____. A) counter-examination B) presumptive examination C) parallel examination D) direct examination E) cross-examination
88) Supreme Court. Jim, who is a bit eccentric, says that he is fed up with the way a certain employer in his town treats employees and that he is going to sue that employer in an effort to improve matters. Jim also says that he is going to start his case at the appellate court level, skipping over all those "lesser" judges. Jim says that those justices will surely hear him out and that he will also seek a jury. Although he is not a lawyer, Jim believes that the offenses of the employer are so severe that the justices will appreciate his attempt to make things better for the employees involved. Regardless of what court is involved, can Jim act as plaintiff for the employees? A) Yes, so long as he gets permission slips from them B) Yes, so long as they file no objection C) Yes, so long as he gives any money he receives to them D) No, because he lacks standing E) No, because venue is lacking
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89) Supreme Court. Jim, who is a bit eccentric, says that he is fed up with the way a certain employer in his town treats employees and that he is going to sue that employer in an effort to improve matters. Jim also says that he is going to start his case at the appellate court level, skipping over all those "lesser" judges. Jim says that those justices will surely hear him out and that he will also seek a jury. Although he is not a lawyer, Jim believes that the offenses of the employer are so severe that the justices will appreciate his attempt to make things better for the employees involved. Will an appellate court initially hear Jim's case deciding issues such as whether he has a claim and can act as a plaintiff? A) Yes, so long as a state trial court judge approves and certifies the case for the appellate court without holding a trial first B) Yes, but only if Jim can prove that he would have had to wait at least a year for a trial at the trial court level C) No, because Jim is required to first file the case in the appropriate trial court D) No, but only because Jim is not employed at the defending company E) No, but only because Jim did not have a lawyer
90) Supreme Court. Jim, who is a bit eccentric, says that he is fed up with the way a certain employer in his town treats employees and that he is going to sue that employer in an effort to improve matters. Jim also says that he is going to start his case at the appellate court level, skipping over all those "lesser" judges. Jim says that those justices will surely hear him out and that he will also seek a jury. Although he is not a lawyer, Jim believes that the offenses of the employer are so severe that the justices will appreciate his attempt to make things better for the employees involved. Will Jim get a jury at the appellate court level? A) Only if the opposing party agrees B) In some states but not in others C) Only if he is in federal court D) Only if he is in state court E) No
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91) Sexual Harassment ADR. Jenny is very angry with her supervisor, Sleaze, at the Mexican fast-food restaurant at which she works which is owned by an international company located in Mexico. He has been making inappropriate sexual comments to her and other employees. Jenny decides to sue and retains a lawyer, Brice. Brice talks with the owners of the restaurant and is informed that Jenny signed an agreement to arbitrate any claims. Brice tells Jenny that it is completely up to her and that if she wishes, she can disregard the arbitration agreement and proceed to court. Jenny informed Brice about other employees who had complained about sexual harassment and entered into mediation agreements. Brice promises her that he will get copies of all documents and everything that was taken down by the court reporter at those mediations. He also tells Jenny in response to her question about the possibility of mediation in her case to forget it because mediation is pretty much the same thing as arbitration. What is the effect of the arbitration agreement on Jenny's ability to file an action in court? A) The arbitration agreement would not affect Jenny's ability to file a court action in a sexual harassment case although it would bar her right to file a court action in other types of cases. B) The arbitration agreement would completely bar Jenny's ability to file a court action. C) By law the arbitration agreement may only delay for 60 days Jenny's ability to file a court action. D) By law the arbitration agreement may only delay for 6 months Jenny's ability to file a court action. E) More information is needed regarding the provisions of the arbitration agreement before it can be determined if it would bar an action in court.
92) Sexual Harassment ADR. Jenny is very angry with her supervisor, Sleaze, at the Mexican fast-food restaurant at which she works which is owned by an international company located in Mexico. He has been making inappropriate sexual comments to her and other employees. Jenny decides to sue and retains a lawyer, Brice. Brice talks with the owners of the restaurant and is informed that Jenny signed an agreement to arbitrate any claims. Brice tells Jenny that it is completely up to her and that if she wishes, she can disregard the arbitration agreement and proceed to court. Jenny informed Brice about other employees who had complained about sexual harassment and entered into mediation agreements. Brice promises her that he will get copies of all documents and everything that was taken down by the court reporter at those mediations. He also tells Jenny in response to her question about the possibility of mediation in her case to forget it because mediation is pretty much the same thing as arbitration. Can Brice obtain information from the previous mediators regarding what occurred at the previous mediations?
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A) He can obtain this information, but only if a court reporter was present at the previous mediations. B) He can get copies of any written documents reviewed but not accounts of statements. C) He can get accounts of statements but not copies of written documents. D) He can get the information only if the mediators in the other cases want to cooperate. E) He cannot get from the mediator copies of documents or accounts of what was said because of the confidential nature of mediation proceedings.
93) Sexual Harassment ADR. Jenny is very angry with her supervisor, Sleaze, at the Mexican fast-food restaurant at which she works which is owned by an international company located in Mexico. He has been making inappropriate sexual comments to her and other employees. Jenny decides to sue and retains a lawyer, Brice. Brice talks with the owners of the restaurant and is informed that Jenny signed an agreement to arbitrate any claims. Brice tells Jenny that it is completely up to her and that if she wishes, she can disregard the arbitration agreement and proceed to court. Jenny informed Brice about other employees who had complained about sexual harassment and entered into mediation agreements. Brice promises her that he will get copies of all documents and everything that was taken down by the court reporter at those mediations. He also tells Jenny in response to her question about the possibility of mediation in her case to forget it because mediation is pretty much the same thing as arbitration. Did Brice correctly tell Jenny that mediation is nearly the same as arbitration? A) He was incorrect. There are major differences between mediation and arbitration. B) He was correct because the only difference between the two involves the length of the proceeding. C) He was correct because the only difference between the two involves cost. D) He was correct because the only difference between the two involves whether a court reporter is present. E) He was correct because the only difference between the two involves the type of evidence that may be considered.
94)
A court acquires in personam jurisdiction over the plaintiff when:
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A) Service of process is issued. B) The plaintiff is given a copy of the complaint by the court. C) The plaintiff files a lawsuit with the court. D) The defendant files an answer. E) The plaintiff is injured within the state's border.
95)
Venue is determined by: A) State statute. B) The trial judge. C) The trial jury. D) The United States Constitution. E) Case law.
96)
The federal court system derives its authority from: A) The Bill of Rights. B) Article III of the United States Constitution. C) The U.S. Supreme Court. D) Executive order. E) The U.S. Congress.
97)
In order to ensure that a case or controversy exists, the plaintiff must show:
A) An adverse relationship between the parties. B) An actual legal dispute. C) It is a proper matter for judicial determination. D) An adverse relationship between the parties and an actual legal dispute. E) An adverse relationship between the parties, an actual legal dispute, and it is a proper matter for judicial determination.
98)
The parties to a lawsuit can submit their cases to arbitration:
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A) Voluntarily. B) To appeal a Supreme Court ruling. C) Through a binding agreement between the parties. D) After the execution of properly drafted settlement agreement. E) Voluntarily or through a binding agreement between the parties.
99) A type of ADR in which lawyers for all parties present their arguments to a neutral third party, who then offers a nonbinding opinion as to what the verdict would be is called: A) Med-arb. B) Private trial. C) Mediation. D) Minitrial. E) Arbitration.
100)
Which of the following is not one of the ways an arbitrator’s award may be set aside?
A) The award was the result of corruption, fraud, or other undue means. B) The arbitrator displayed bias or corruption. C) The arbitrator refused to postpone the hearing despite sufficient cause, refused to hear relevant evidence, or otherwise misbehaved to prejudice the rights of one of the parties. D) The arbitrator exceeded his or her authority or failed to use that authority to make a mutual, final, and definite award. E) The parties do not agree that the arbitrator’s award was fair.
101)
The United States Court system traces it roots back to which country? A) England B) Germany C) Switzerland D) China E) Japan
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102) The United States Congress is determining whether to change the tax code for U.S. businesses. Two business entities who will be directly impacted want to sue. What threshold requirement will this situation not pass? A) Ripeness B) Jurisdiction C) Standing D) Case or controversy E) This situation meets all threshold requirements.
103) Which form of jurisdiction determines which court system may hear a particular type of case? A) Subject matter jurisdiction B) In personam jurisdiction C) Appellate jurisdiction D) In loquitur jurisdiction E) Quasi jurisdiction
104)
What does a forum-selection clause do?
A) It allows the parties to choose the actual court in which they will pursue litigation. B) It allows the parties to specify the law that will govern their dispute. C) It waives the subject matter jurisdiction of certain courts. D) It specifies for the parties that federal court is the only venue in which to bring a lawsuit. E) It requires mandatory arbitration.
ESSAY. Write your answer in the space provided or on a separate sheet of paper. 105) Define the term "in personam" jurisdiction, discuss where corporations are generally subject to that type of jurisdiction, and discuss long-arm jurisdiction.
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106) Alice, a resident of Michigan, claims that Pet Food Company Inc. put out some dog food that made her dog, Champ, sick. Champ is a prize-winning poodle. He survived the pet food fiasco but only after traveling to a veterinarian in Florida specializing in poodles and having two very expensive surgeries. Additionally, his ability to sire has been impaired, and Alice will have no more breeding fees from Champ. Her damages are $80,000. Pet Food Company Inc. is incorporated in Delaware, with its principal place of business in Michigan. Alice asks you whether she can sue in federal court. What would you tell her and why?
107)
Identify the items that should appear in a complaint.
108) Cindy struck her co-worker Hank with her car in the company parking lot, breaking his leg. The accident happened because without warning, Cindy's brakes failed. Hank was out of work as a bookkeeper for one week, but otherwise recovered without incident. He sued Cindy for one million dollars for his injuries. Cindy decides to do nothing in response to the lawsuit because she sees no way that she can win. Is she right? Why or why not? What would you suggest she do with respect to Hank’s civil lawsuit against her? Why is it important that Cindy proceed immediately at this point in the litigation?
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109) While riding her new bicycle, Cindy accidentally ran over jogger Bruce's foot. He sues. Cindy is suspicious that he is not hurt as badly as he claims. What would Cindy want to know before trial, and how can she and her lawyer find out this information? Fully discuss and explain the discovery process, including the specific methods to obtain information via discovery.
110) According to the text, what are four advantages of alternative dispute resolution (ADR) over traditional litigation?
111) How is arbitration, a form of alternative dispute resolution, similar to and different from a court trial?
112) According to the text, what are three criticisms of arbitration when compared to traditional litigation?
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113) Jackie is hiring Ron to do clean up and maintenance as an independent contractor for her building, which has several tenants. She is aware that Ron has sued some previous building owners. He does a good job, however, and she would like to hire him. Ron has agreed to sign an arbitration agreement. How should Jackie structure the agreement so that it will be enforced?
114) Cindy and Chloe have a dispute regarding ownership of a dog, Rascal. Cindy removed Rascal's tags in order to give him a bath. Knowing what was coming, Rascal made a run for it and ended up at Chloe’s home down the street. When Cindy saw Chloe walking Rascal, she demanded his return. Chloe refused. A lawyer in the neighborhood suggested either an early neutral case evaluation or mediation in an attempt to resolve the feud. Describe mediation and early neutral case evaluation. Which would you recommend and why?
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Answer Key Test name: Chap 03_5_The Essentials_Kubasek 1) FALSE A court must have several types of jurisdiction to decide any particular case. 2) TRUE If a defendant has property in a state, a plaintiff may file suit against the defendant’s property instead of against the owner. For example, suppose a Utah resident has not paid property taxes on a piece of land she owns in Idaho. Idaho courts have in rem jurisdiction (Latin for “jurisdiction over the thing”) over the property. Thus, an Idaho state court has the power to seize the property and sell it to pay the property taxes in an in rem proceeding. 3) TRUE A federal district court established a "sliding-scale" standard for determining whether a business with Internet connections satisfies the minimum-contacts standard. This sliding-scale test was created in Zippo Manufacturing Co. v. Zippo Dot Com, Inc. and is now most often used as the test that determines whether a company conducting business over the Internet is subject to personal jurisdiction in a certain state. In the Zippo case, the court stated that “the likelihood that personal jurisdiction can be constitutionally exercised is directly proportionate to the nature and quality of commercial activity that an entity conducts over the Internet.” 4) FALSE Subject-matter jurisdiction is a court's power to hear certain kinds of cases. Cases may fall under state jurisdiction, exclusive federal jurisdiction, or concurrent (state and federal) jurisdiction. Version 1
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5) FALSE State courts have the power to hear all cases not within the exclusive jurisdiction of the federal court system. The state court system has a broad range of jurisdiction; most cases fall under state court jurisdiction. 6) FALSE Concurrent federal jurisdiction means that both state and federal courts have jurisdiction over a case. Concurrent jurisdiction covers two types of cases: federal-question and diversity-of-citizenship cases. 7) FALSE Once a case is in the proper court system, venue determines which trial court in the system will hear the case. Venue is a matter of geographic location that each state’s statutes determine. 8) FALSE A person who has the legal right to bring an action in court has standing (or standing to sue); and for a person to have standing, the outcome of the case must personally affect him or her. The reason the American legal system requires this personal stake in the outcome is the belief that the plaintiff’s personal stake stimulates her to present the best possible case. 9) TRUE The case-or-controversy (or justifiable controversy) requirement ensures that courts do not render advisory opinions. Courts can give final judgments that solve existing problems; they cannot provide rulings about hypothetical situations. 10) FALSE The justices of the United States Supreme Court have lifetime appointments. 11) FALSE The United States circuit courts of appeal are known as intermediate courts of appeal. Version 1
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12) FALSE The defendant responds to the complaint with an answer. In this document, the defendant denies, affirms, or claims no knowledge of the accuracy of the plaintiff’s allegations. 13) FALSE If the defendant believes he has a claim against the plaintiff, he includes a counterclaim with the answer. In the counterclaim, the defendant states the facts supporting his claim and asks for relief. 14) FALSE A reply is an answer to a counterclaim. In the reply, the plaintiff admits, denies, or claims a lack of knowledge as to the accuracy of the facts of the defendant's counterclaim. 15) TRUE In most states, a party has a certain, limited number of peremptory challenges. These peremptory challenges allow a party to challenge a certain number of potential jurors without giving a reason. 16) FALSE In Batson v. Kentucky, the United States Supreme Court ruled that racebased peremptory challenges in criminal cases violate the equal protection clause of the Fourteenth Amendment to the U.S. Constitution. 17) TRUE Either party may appeal the judge's decision on posttrial motions, or on her or his final judgment.Sometimes, both parties appeal the same decision. 18) FALSE If a judge agrees with the majority's decision but for different reasons, she may write a concurring opinion stating the reasons she used to reach the majority's conclusion. Judges disagreeing with the majority may write a dissenting opinion, giving their reasons for reaching a contrary conclusion. Version 1
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19) FALSE Every year thousands of individuals file appeals with the United States Supreme Court, but the Court hears, on average, only 80 to 90 cases each year. To file an appeal to the U.S. Supreme Court, a party files a petition asking the Court to issue a writ of certiorari, an order to the lower court to send to the Supreme Court the record of the case. The Court issues very few writs. 20) FALSE The term ADR refers to the resolution of legal disputes through methods other than litigation, such as negotiation, mediation, arbitration, summary jury trials, minitrials, neutral case evaluations, and private trials. 21) TRUE Courts generally support the use of ADR, which alleviates some of the pressure on the overwhelming court dockets. 22) FALSE Lawyers, professors, and other professionals typically serve as arbitrators. 23) FALSE Because the arbitrator was hired to resolve a dispute between two parties, the arbitrator is more likely to make a compromise ruling instead of a win-lose ruling. 24) FALSE Med-arb is a dispute resolution process in which the parties agree to start out in mediation and, if the mediation is unsuccessful on one or more points, to move on to arbitration. 25) FALSE
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With early neutral case evaluation, the parties select a neutral third party and explain their respective positions to this neutral person, who then evaluates the strengths and weaknesses of the case. The parties use this evaluation to reach a settlement. 26) FALSE When a plaintiff files a case involving concurrent jurisdiction in state court, the defendant has a right of removal. This right entitles the defendant to transfer the case to federal court, but it is the defendant’s choice regarding transfer. 27) FALSE The federal court system derives its power from Article III, Section 2 of the United States Constitution. 28) FALSE A case is ripe if a judge’s decision is capable of affecting the parties immediately. 29) FALSE A business may want to avoid the uncertainty associated with a jury decision; many forms of ADR givethe participants more control over the resolution of a dispute. 30) FALSE The arbitrator’s decision is called an award, even if no monetary compensation is awarded. 31) FALSE In mediation, the disputing parties select a neutral party to help facilitate communication and suggest ways for the parties to solve their dispute. Therefore, the distinguishing feature of mediation is that the parties voluntarily select a neutral third party to help them work together to resolve the dispute. 32) FALSE
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If mediation is not successful, the parties can turn to litigation or arbitration to resolve their dispute. However, nothing said during the mediation can be used in another dispute resolution method; the mediation process is confidential. 33) FALSE If an appellate court concludes that the trial court's ruling was incorrect and remands the case, the trial court will conduct the new trial or hearing. 34) D Trial courts, or courts of original jurisdiction, have the power to hear and decide cases when they first enter the legal system. In these courts, the parties present evidence and call witnesses to testify. 35) C A question of fact is a question about an event or characteristic related to the case. Juries in trial courts determine questions of fact. 36) A Service of process is the procedure by which the plaintiff presents the defendant with a copy of the complaint and summons. 37) C Most states have enacted long-arm statutes that enable the court to serve defendants outside the state as long as the defendant has sufficient minimum contacts within the state. Each state has its own minimumcontact requirements, but most state statutes hold that acts such as committing a tort or doing business in the state are sufficient to allow the state to serve a defendant. 38) E In rem jurisdiction means “jurisdiction over the thing.” If a defendant has property in a state, a plaintiff may file suit against the defendant’s property instead of against the owner. 39) B Version 1
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When a plaintiff files a case involving concurrent jurisdiction in state court, the defendant has a right of removal. This right entitles the defendant to transfer the case to federal court. Thus, either party to a case involving concurrent jurisdiction can put the case in the federal court system: the plaintiff can file the case in federal court initially, or, if the case was initially filed in state court, the defendant can transfer the case to federal court by exercising her right of removal. 40) D Cases may fall under state jurisdiction, exclusive federal jurisdiction, or concurrent jurisdiction, and state courts have the power to hear all cases not within the exclusive jurisdiction of the federal court system. 41) C Federal courts may have concurrent jurisdiction with state courts, and federal courts have exclusive jurisdiction over a few cases. 42) D The federal court system has exclusive jurisdiction over very few cases: admiralty cases, bankruptcy cases, federal criminal prosecutions, lawsuits in which one state sues another state, claims against the United States, and patent, trademark, and copyright cases. Additionally, federal courts have exclusive jurisdiction over claims arising under federal statutes that specify exclusive federal jurisdiction. 43) C A diversity-of-citizenship case must satisfy two conditions: (1) the plaintiff(s) does(do) not reside in the same state as the defendant(s) and (2) the controversy concerns an amount in excess of $75,000. Courts use the location of a party’s residence to determine whether diversity of citizenship exists. Most federal court cases are based on diversity of citizenship. 44) B
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A business may reside in two states: the state of its incorporation and the state of its principal place of business. 45) B Federal-question cases require an interpretation of the United States Constitution, a federal statute, or a federal treaty. For example, suppose a plaintiff alleges that a North Carolina campaign-financing law violates his First Amendment (to the U.S. Constitution) free speech rights. Because this case raises a federal question, it falls under concurrent jurisdiction, and both state and federal courts have the power to hear it. 46) D Once a case is in the proper court system, venue determines which trial court in the system will hear the case. Venue is a matter of geographic location that each state’s statutes determine. Usually, the trial court for the county where the defendant resides is the appropriate venue. If a case involves property, the trial court where the property is located is also an appropriate venue. Finally, if the focus of the case is a particular incident, the trial court where the dispute occurred is an appropriate venue. The plaintiff initially chooses from among the appropriate venues when she files the case. 47) B Once a case is in the proper court system, venue determines which trial court in the system will hear the case. Venue is a matter of geographic location that each state’s statutes determine. Usually, the trial court for the county where the defendant resides is the appropriate venue. 48) D A person who has the legal right to bring an action in court has standing (or standing to sue). For a person to have standing, the outcome of a case must personally affect him or her. 49) D
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A case is ripe if a judge’s decision is capable of affecting the parties immediately. Usually the issue of ripeness arises when one party claims that the case is moot—in other words, there is no point in the court's hearing the case because no judgment can affect the situation between the parties. 50) A To minimize extra costs associated with future litigation, many businesses will include in their contracts a forum-selection clause, a choice-of-law clause, or both. 51) B In the federal court system, the trial courts, or courts of original jurisdiction, are U.S. district courts. The United States has 94 districts; each district has at least one trial court of general jurisdiction. 52) A United States Supreme Court justices have lifetime appointments. 53) B The United States Supreme Court is the final appellate court (i.e., the court of last resort) in the federal court system. Nine justices, who have lifetime appointments, make up the high court. The Court hears appeals of cases from the court of last resort in a state system. The Court will not, however, hear cases considering questions of pure state law. The Court also functions as a trial court on rare occasions. 54) E Intermediate courts of appeal in state courts systems are analogous to federal circuit courts of appeal. They exist in approximately one-half of the states in the United States. The names of these courts vary, but most states call them courts of appeal or superior courts. Because approximately one-half of the states lack intermediate courts of appeal, appeals from trial courts in these states go directly to the state court of last resort. Version 1
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55) C The case-or-controversy (or justifiable controversy) requirement ensures that courts do not render advisory opinions. Courts can give final judgments that solve existing problems; they cannot provide rulings about hypothetical situations. 56) D The summons tells the defendant that if he or she does not respond to the lawsuit within a certain time period, the plaintiff will receive a default judgment. A default judgment is a judgment in favor of the plaintiff that occurs when the defendant fails to answer the complaint and the plaintiff's complaint alleges facts that would support such a judgment. 57) E A defendant uses an affirmative defense when his or her answer admits that the facts contained in the complaint are accurate but also includes additional facts that justify the defendant's actions and provide a legally sound reason to deny relief to the plaintiff. For example, if a woman sued a man for battery because he punched her in the face, he might claim that he hit her only because she aimed a gun at him and threatened to shoot. His claim that he was acting in self-defense is an affirmative defense. 58) B After the discovery process, either party can file a motion for summary judgment. This motion asserts that no factual disputes exist and that if the judge applied the law to the undisputed facts, her only reasonable decision would be in favor of the moving party.The judge grants this motion if, after examining the evidence, she finds no factual disputes. If, however, she finds any factual issues about which the parties disagree, she denies the motion and sends the case to trial. 59) B
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After filing the initial pleadings and motions, the parties gather information from each other through discovery. 60) B Interrogatories are written questions that one party sends to the other to answer under oath. 61) A The parties to a lawsuit may obtain testimony from a witness before trial through a deposition. At a deposition, attorneys examine a witness under oath. A court reporter (stenographer) records every word the witness and attorneys speak, and both parties receive a copy of the testimony in document form. 62) B The parties may use depositions when a witness is elderly, moving, or ill and thus may be unavailable at the time of the trial. 63) B Hearsay is testimony about what a witness heard another person say. Hearsay is impermissible because the opposing attorney cannot question the person who made the original statement to determine the statement’s veracity. 64) A First, the plaintiff's attorney questions the witness in direct examination and asks the witness questions to elicit facts that support the plaintiff's case-in-chief. Direct examination questions must relate to matters about which the witness has direct knowledge. 65) C The term alternative dispute resolution (ADR) refers to the resolution of legal disputes through methods other than litigation, such as negotiation, mediation, arbitration, summary jury trials, minitrials, neutral case evaluations, and private trials. 66) A Version 1
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ADR methods are generally faster and cheaper than litigation. According to the National Arbitration Forum, the average time from filing a complaint to judgment through litigation is 25 months. Because ADR is faster, it is usually cheaper. 67) D An extension of negotiation is mediation. In mediation, the disputing parties select a neutral party to help facilitate communication and suggest ways for the parties to solve their dispute. 68) D The primary advantage of mediation is that it helps the disputing parties preserve their relationships. A second advantage is the possibility of finding creative solutions. A third advantage is the high level of autonomy mediation gives the participants. 69) C The arbitrator typically provides a decision within 30 days of the arbitration hearing. 70) E The arbitrator's decision is called an award, even if no monetary compensation is awarded. 71) D The Federal Arbitration Act (FAA), the federal law enacted to encourage the use of arbitration, explicitly lists four grounds on which an arbitrator's award may be set aside: (1) The award was the result of corruption, fraud, or other undue means; (2) the arbitrator displayed bias or corruption; (3) the arbitrator refused to postpone the hearing despite sufficient cause, refused to hear relevant evidence, or otherwise misbehaved to prejudice the rights of one of the parties; (4) the arbitrator exceeded his or her authority or failed to use that authority to make a mutual, final, and definite award. 72) C Version 1
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The arbitration hearing is similar to a trial. Both parties present their cases to a neutral third party; parties may represent themselves or use legal counsel. During this presentation, the parties may introduce witnesses and documentation, cross-examine the witnesses, and offer closing statements. However, arbitration is also different from a trial in several ways. First, the arbitrator often takes a much more active role in an arbitration hearing than a judge takes in a trial, and the arbitrator can question witnesses. Second, no official written record of the hearing is kept in most arbitrations. 73) A The primary method of securing arbitration is through a binding arbitration clause, a provision in a contract that mandates that all disputes arising under the contract must be settled by arbitration. The clause also typically states how the arbitrator will be selected. If parties have a binding arbitration agreement, the parties must resolve the dispute through arbitration. Both federal and state courts must uphold agreements to arbitrate. 74) A Med-arb is a dispute resolution process in which the parties agree to start out in mediation and, if the mediation is unsuccessful on one or more points, to move on to arbitration. In some cases, the same neutral third party may participate in both the mediation and the arbitration. 75) A A summary jury trial is an abbreviated trial that leads to a nonbinding jury verdict. Two advantages are inherent in this method of dispute resolution. First, it is quick; a summary jury trial lasts only a day. Second, because a jury offers a verdict, both parties get a chance to see how their case would fare before a jury of their peers. 76) C
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With early neutral case evaluation, the parties select a neutral third party and explain their respective positions to the neutral third party, who then evaluates the strengths and weaknesses of the case. The parties use this evaluation to reach a settlement. 77) D Several states allow private trials, an ADR method in which a referee is selected and paid by the disputing parties to offer a legally binding judgment in a dispute. The cases are often heard privately to ensure confidentiality. 78) A Several states allow private trials, an ADR method in which a referee is selected and paid by the disputing parties to offer a legally binding judgment in a dispute. The referees do not have to have any specific training; however, because retired judges often serve as referees, this method is often referred to as “rent-a-judge.” 79) B For purposes of federal court diversity jurisdiction, a corporation's "principal place of business" refers to the place, often called the "nerve center," from which the corporation's high-level officers directed, controlled, and coordinated the corporation's activities. 80) A If the defendant believes he has a claim against the plaintiff, he includes this counterclaim with the answer. The form of a counterclaim is identical to the form of a complaint. The defendant states the facts supporting his claim and asks for relief. 81) C Hearsay is testimony about what a witness heard another person say and is impermissible because the opposing attorney cannot question the person who made the original statement to determine the statement's veracity. Version 1
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82) E The United States legal system has two parallel court structures: a federal system and a state system. Once a plaintiff files a case in one of the systems, the case remains in that system throughout the appeals process. 83) A Once the potential jurors have reported for jury duty, the voir dire, or jury selection, process begins. During voir dire, the judge and/or attorneys question potential jurors to determine whether they are able to render an unbiased opinion in the case. 84) B During voir dire, the judge and/or attorneys question potential jurors to determine whether they are able to render an unbiased opinion in the case. If a potential juror's response to a question indicates that she or he may be biased, either attorney may challenge, or ask the court to remove, that potential juror "for cause." 85) A In most states, each party has a certain number of peremptory challenges. Peremptory challenges allow a party to challenge a certain number of potential jurors without giving a reason. 86) E Once the attorneys have impaneled, or selected, a jury, the case begins with opening statements. In this phase of trial, each party’s attorney explains to the judge and jury what facts he or she intends to prove, the legal conclusions to which these facts lead, and how the fact finder should decide the case based on those facts. 87) E
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After direct examination, opposing counsel may cross-examine the witness. Opposing counsel, however, may ask only questions related to the witness’s direct examination. On cross-examination, attorneys can ask leading questions. Attorneys try to show inconsistencies in the witness’s testimony, cast doubt on the claims of the plaintiff’s case, and elicit information to support the defendant’s case. 88) D A person who has the legal right to bring an action in court has standing (or standing to sue), and for a person to have standing, the outcome of a case must personally affect him or her. The reason the American legal system requires this personal stake in the outcome is the belief that the plaintiff’s personal stake stimulates her to present the best possible case. 89) C Trial courts, or courts of original jurisdiction, have the power to hear and decide cases when they first enter the legal system. In these courts, the parties present evidence and call witnesses to testify. 90) E Courts of appellate jurisdiction, or appellate courts, have the power to review previous judicial decisions to determine whether trial courts erred in their decisions. Appellate courts do not hold trials. Instead, appellate judges review transcripts of trial court proceedings and occasionally consider additional oral and written arguments from each party. 91) E A constraint on binding arbitration clauses is that they must be drafted in such a way as to ensure that the courts do not see them as being unconscionable. An unconscionable contract provision has been defined as one in which the terms are “manifestly unfair or oppressive and are dictated by a dominant party.” The doctrine has been used most often to strike down binding arbitration clauses in consumer and employment contracts. Version 1
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92) E A business may prefer alternative dispute resolution (ADR) such as mediation because it is confidential. 93) A The distinguishing feature of mediation is that the parties voluntarily select a neutral third party to help them work together to resolve the dispute, whereas arbitration involves the resolution of a dispute by a neutral third party outside the judicial setting. 94) C In personam jurisdiction (literally, “jurisdiction over the person”) is a court’s power to render a decision affecting the rights of the specific persons before the court. A court acquires in personam jurisdiction over the plaintiff when the plaintiff files a lawsuit with the court. 95) A Once a case is in the proper court system, venue determines which trial court in the system will hear the case. Venue is a matter of geographic location that each state’s statutes determine. 96) B The federal court system derives its authority from Article III of the United States Constitution and consists of three main levels: trial courts, intermediate appellate courts, and the court of last resort. 97) E The case-or-controversy (or justifiable controversy) requirement ensures that courts do not render advisory opinions. In order to ensure that a case or controversy exists, the plaintiff must show an adverse relationship between the plaintiff and defendant, an actual legal dispute, and it is a proper matter for judicial determination. In other words, courts can give final judgments that solve existing problems; they cannot provide rulings about hypothetical situations. 98) E Version 1
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Arbitration, a primary form of alternative dispute resolution (ADR), is the resolution of a dispute by a neutral third party outside the judicial setting. The parties to a lawsuit can submit their cases to arbitration voluntarily or through a binding agreement between the parties. 99) D A minitrial is a type of ADR in which lawyers for all parties present their arguments to a neutral third party, who then offers a nonbinding opinion as to what the verdict would be if the case went to trial. 100) E The Federal Arbitration Act (FAA), the federal law enacted to encourage the use of arbitration, explicitly lists four grounds on which an arbitrator’s award may be set aside: (1) The award was the result of corruption, fraud, or other undue means; (2) the arbitrator displayed bias or corruption; (3) the arbitrator refused to postpone the hearing despite sufficient cause, refused to hear relevant evidence, or otherwise misbehaved to prejudice the rights of one of the parties; (4) the arbitrator exceeded his or her authority or failed to use that authority to make a mutual, final, and definite award. 101) A The US traces its roots back to England. 102) A A case is ripe if a judge’s decision is capable of affecting the parties immediately. Here the case is not ripe because the change to the tax code has not been put into effect and is a hypothetical proposition. 103) A Subject-matter jurisdiction determines which court system may hear a particular case. Cases may fall under state jurisdiction, exclusive federal jurisdiction, or concurrent jurisdiction. 104) A
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In a forum-selection clause, the parties specify which court would hear a dispute over an alleged breach of the contract. 105) In personam jurisdiction references a court's power to render a decision affecting the rights of the persons or businesses before the court. Corporations are subject to in personam jurisdiction in three locations: the state of their incorporation, the location of their main offices, and the geographic areas in which they conduct business. Most states have enacted long-arm statutes, which enable the court to serve defendants outside the state as long as the defendant has sufficient minimum contacts within the state. 106) Alice cannot sue in federal court because Pet Food Company Inc.'s principal place of business is in Michigan, the same state in which she lives. 107) The first formal stage of a lawsuit is the pleading stage. The plaintiff’s attorney initiates a lawsuit by filing a complaint in the appropriate court. The complaint states the names of the parties to the action, the basis for the court's subject-matter jurisdiction, the facts on which the plaintiff bases the claim, and the relief sought. 108) Cindyis not correct. She should file an answer raising the brake failure as an affirmative defense. If she does not raise that affirmative defense in the answer, the judge may refuse to allow her to raise it later. Additionally, she would likely want to defend against the amount of damages sought. If she does nothing, the court will enter a default judgment against her.
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109) The parties gather information from each other through the discovery process. The discovery process enables the parties to learn about facts surrounding the case so that they are not surprised in the courtroom. Cindy would want to know Bruce's condition, his medical bills, any permanent injury, lost wages, etc. She could find out through the discovery process. That would include submitting interrogatories, requesting the production of medical records and other salient information, and taking depositions. 110) Students should choose from the following reasons: (1) It is usually faster and cheaper than traditional litigation. (2) Some forms of ADR can be structured so that a business may avoid the uncertainty associated with a jury decision. (3) A business may want to avoid setting a precedent through a court decision. (4) Because many forms of ADR are less adversarial than litigation, the parties are able to preserve a business relationship. (5) A business may prefer ADR because it is confidential.
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111) Arbitration, a primary form of alternative dispute resolution, is the resolution of a dispute by a neutral third party outside the judicial setting. Arbitration is often a voluntary process in that parties have a contractual agreement to arbitrate any disputes. This agreement may stipulate how the arbitrator will be selected and how the hearing will be administered. Arbitration is similar to a court trial in that both parties present their case to a neutral third party; they may represent themselves or use legal counsel; they may also introduce witnesses and documentation, crossexamine witnesses, and offer closing statements. Additionally, the arbitrator offers a legally binding decision. Arbitration is different from a court trial in that the arbitrator often takes a more active role and is more likely than a judge to question a witness; no official record of the hearing is kept; and the rules of evidence are typically relaxed. 112) Students should choose from the following criticisms: (1) Arbitration panels are being used more frequently, resulting in less efficiency and increased expense. (2) Because appealing an arbitration award is so difficult, injustice may occur. (3) By giving up the right to litigate, parties may be losing important civil rights or giving up important remedies without really understanding the implications of what they have done. (4) As it becomes more popular,arbitration will become more like litigation. (5) Because of the privacy involved with arbitration, companies are able to hide their disputes.
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113) Student responses will vary. The following are suggested answers: (1) Be clear and unmistakable in what is covered within the arbitration agreement. (2) Provide for a bilateral arbitration clause. (3) State explicitly which party will pay arbitration fees and make sure that it will not cost the employee more to arbitrate than it would cost to litigate. (4) Specify how the arbitrator will be selected. (5) Spell out the costs associated with the arbitration. (6) Avoid limitations on remedies. (7) Consider other potential parties when determining where to hold the arbitration. 114) Mediation occurs when the parties hire a mediator to help them voluntarily settle a dispute. In early neutral case evaluation, the parties hire a neutral third party and explain their situations to the neutral that evaluates the strengths and weaknesses of the case. The parties use the evaluation in an attempt to settle. Student opinions will likely vary in terms of whether they would recommend mediation or early neutral case evaluation.
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CHAPTER 4 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) Administrative law consists of both substantive and procedural rules. ⊚ true ⊚ false
2)
Administrative agencies are located at the stategovernment level only. ⊚ true ⊚ false
3) Administrative agencies are created by the judicial branch of government to carry out specific duties. ⊚ true ⊚ false
4)
Administrative agencies have legislative and judicial, but not executive, powers. ⊚ true ⊚ false
5) Administrative agencies typically act slower than the United States Congress in creating and enacting new laws. ⊚ true ⊚ false
6)
There is a right to a jury trial in administrative agency disputes. ⊚ true ⊚ false
7)
There is a right of appeal from a decision of an administrative law judge. ⊚ true ⊚ false
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8)
An administrative law judge's decision may not be directly appealed to a court. ⊚ true ⊚ false
9) The first step in formal rule making is publication in the Federal Register of a notice of proposed rule making by the agency. ⊚ true ⊚ false
10) The two most common types of administrative agency rule making are conditional and unconditional. ⊚ true ⊚ false
11) Independent administrative agencies, often called commissions, tend to have responsibility for making rules covering a broad spectrum of industries and activities. ⊚ true ⊚ false
12) The United States Senate must approve presidential nominees for them to become the administrative heads of agencies. ⊚ true ⊚ false
13) Independent agencies have a tendency to focus more on social regulation, whereas executive agencies are more often focused on economic regulation. ⊚ true ⊚ false
14) The Environmental Protection Agency (EPA) is an example of a hybrid administrative agency. ⊚ true ⊚ false
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15) The Small Business Administration (SBA) is an example of an executive agency. Use Exhibit 4-1 ⊚ true ⊚ false
16) The Administrative Agency Recorder is the official daily publication for administrative agencies. ⊚ true ⊚ false
17)
The primary type of rule making used by administrative agencies is informal rule making. ⊚ true ⊚ false
18) The United States Congress has the power to create, but not dissolve, an administrative agency. ⊚ true ⊚ false
19) The Government in Sunshine Act requires agency business meetings to be open to the public even if the agency is headed by a non-collegiate body, and the open-meeting requirement applies even when a quorum is not present. ⊚ true ⊚ false
20) Under the Privacy Act of 1974, a federal administrative agency may not disclose information about an individual to other agencies or organizations without that individual's written consent. ⊚ true ⊚ false
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MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 21) Administrative law consists of both substantive and _____ rules. A) de facto B) conditional C) illusory D) ex post facto E) procedural
22)
Administrative law involves all but which of the following? A) licenses B) permits C) equity D) hearings E) decision making
23) Which type of agency is generally defined as any body created by the legislative branch to carry out specific duties? A) An administrative agency B) An authoritarian agency C) A quasi-legal agency D) A procedural agency E) A ministerial agency
24)
What types of powers do administrative agencies have?
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A) Legislative and judicial B) Judicial and executive C) Executive and legislative D) Legislative, judicial, and executive E) None, since administrative agencies have only advisory authority (i.e., they advise the executive, legislative, and judicial branches of government regarding their particular areas of expertise, but must defer to the three branches of government to actually address those particular areas)
25) The _____ created the Interstate Commerce Commission (ICC), the first federal administrative agency. A) United States Supreme Court B) U.S. Congress C) U.S. president D) U.S. electorate (i.e., the voters), by referendum, E) individual states, by unanimous enactment and adoption,
26)
Due to anticompetitive conduct by railroads, what administrative agency was created? A) The Railroad Commission B) The Anticompetitive Agency C) The Interstate Commerce Commission D) The Commerce and Equity Commission E) The Railroad Rules Board
27)
What does enabling legislation provide for an administrative agency? A) The agency’s name, functions and specific powers B) The agency’s right to be funded by Congress C) The right of an agency to disband itself once its purpose is complete D) The ability of an agency to self-fund itself through appropriations E) The reporting structure of the agency to Congress
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28)
Today, _____ creates the most rules. A) the United States Congress B) the federal court system C) the fifty state court systems D) administrative agencies E) the U.S. president
29) What rules are designed to explain an agency's views concerning statutes for which the agency has responsibility? A) Interpretive B) Legislative C) Adjudicative D) Procedural E) Judicial
30) Leland is trying to determine if an agency's rules have the effect of law. What type of rules would you tell him have the effect of law? A) Judicial B) Adjudicative C) Procedural D) Interpretive E) Legislative
31) Which of the following would allow an administrative agency to investigate potential rules or statutory violations? A) A lawsuit B) A writ of certiorari C) A subpoena D) An indictment E) An information
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32) Tohima was implicated in a potential scheme to sell false securities. When it came time for Tohima to testify the agency issued a _____ which ordered Tohima to appear and bring with him specific documents. A) writ of mandamus B) writ of habeas corpus C) writ of certiorari D) subpoena duces tecum E) criminal indictment and summons
33) What do the initials “ALJ” represent in the context of administrative agencies and administrative law? A) Administrative Law Journal B) Administrative Law Jurisprudence C) Administrative Law Judge D) Agency Litigation Justice E) Agency Law Jurisprudence
34)
A binding decision issued by an administrative law judge (ALJ) is known as a(n) _____. A) verdict B) consent decree C) writ of certiorari D) order E) administrative decree
35)
How many people sit on a jury for an administrative hearing? A) 6 B) 8 C) 12 D) 9 E) None
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36) What usually happens to decisions of administrative law judges that are appealed to the federal court system? A) The decisions are usually upheld. B) The decisions are usually reversed. C) The decisions are usually remanded. D) The decisions are generally upheld as a matter of law unless the appellant (i.e., the party filing the appeal) requests a jury trial. E) None of these, since there is no right to appeal an administrative law judge's order.
37) An Administrative Law Judge (ALJ) will often try to convince the parties to reach a settlement via a(n) _____. A) agency-sponsored mediation B) agency-sponsored arbitration C) consent order D) committee order E) third-party settlement agreement
38)
How are administrative agencies classified? A) Binding or non-binding B) Independent or judicial C) Executive or independent D) Legislative or adjudicative E) Adjudicative or executive
39)
The United States _____ appoints administrative heads of executive agencies. A) Supreme Court B) House of Representatives C) Senate D) electorate (i.e., the voters) E) president
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40)
What is the purpose of having an administrative agency?
A) To allow the United States Congress to shift its focus to state laws and regulations B) To assist the U.S. Congress in regulating U.S. presidential powers C) To staff the agency with professionals who have special expertise in an area and can help make the appropriate regulations D) To assist the executive branch in overseeing federal legislation E) To establish new powers not set forth in the U.S. Constitution
41)
Which of the following is not a federal independent agency? Use Exhibit 4-1 A) The Commodity Futures Trading Commission B) The Equal Employment Opportunity Commission C) The National Labor Relations Board D) The Nuclear Regulatory Commission E) The Occupational Safety and Health Administration
42)
Which of the following is not considered a federal executive agency? Use Exhibit 4-1 A) The National Science Foundation B) The Equal Employment Opportunity Commission C) The Occupational Health and Safety Administration D) The Office of Personnel Management E) The Small Business Administration
43)
Which of the following is false regarding federal independent agencies?
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A) Independent agencies are governed by a board of commissioners. B) The United States president appoints the commissioners of independent agencies with the advice and consent of the U.S. Senate. C) The U.S. president may remove commissioners of federal independent agencies without cause. D) No more than a simple majority of an independent agency can be members of any single political patty. E) The agencies are generally not located within any department.
44)
Executive agencies tend to most often focus on which of the following? A) Social regulations B) Political regulations C) Economic regulations D) Safety regulations E) Policy implications of executive orders
45)
A _____ agency does not fall clearly into either independent or executive agency status. A) collaborative B) determinative C) dual D) cooperative E) hybrid
46)
The Environmental Protection Agency (EPA) is an example of a(n) __________ agency. A) independent B) executive C) dependent D) hybrid E) omnibus
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47) What are the two most common types of rulemaking performed by administrative agencies? A) procedural and substantive B) informational and substantive C) formal and informal D) judicial and substantive E) informal and procedural
48)
Another name for notice-and-comment rule making is known as _____ rule making. A) hybrid B) formal C) legislative D) informal E) executive
49)
When does an informal rule become effective? A) At least 15 days after publication of the final rule in the Federal Register B) At least 21 days after publication of the final rule in the Federal Register C) At least 30 days after publication of the final rule in the Federal Register D) At least 60 days after publication of the final rule in the Federal Register E) Never
50)
What types of comments must an agency respond to when it is proposing a new rule? A) It must respond to all comments. B) It must respond to only those comments it takes seriously. C) It must respond to only those comments brought by government officials. D) It must respond to those comments that significantly concern the proposed rule. E) Agencies do not have to respond to any comments received on a proposed new rule.
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51) What types of statements or notices are general in nature and give guidelines on ways in which an agency intends to proceed with rule making or enforcement activities? A) Purpose statements B) Interpretative statements C) Policy notices D) Statements of policy comments E) Policy statements
52) In _____, each concerned interest group and the agency itself sends a representative to bargaining sessions led by a mediator. After the parties achieve a consensus, that agreement is forwarded to the agency. A) arb-neg B) arb-med C) reg-neg D) med-arb E) binding mediation
53) When an agency is referred to as a "captured" agency, there is the belief that agency officials are unduly influenced by _____. A) past ties to the industry regulated by the agency B) their respective political parties and ideologies C) politicians in the state in which the agency is located D) politicians in states most affected by the regulations established by the agency E) the desires of the United States Congress
54) Which of the following is not considered an activity in which an administrative agency may be involved?
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A) Conducting research B) Issuing permits C) Managing property D) Advising E) Forming political action committees
55) Which of the following was the court ruling in Yan Ju Wang v. George Valverde, the case referenced in the textbook in which the plaintiff sued for a mandate compelling the Department of Motor Vehicles to set aside its revocation of the plaintiff's noncommercial driver's license based on her allegedly cheating on a commercial driver's license examination? A) The court ruled that the agency lacked statutory authority to revoke the plaintiff’s noncommercial driver’s license. B) The court ruled that the agency failed to provide a proper hearing prior to revoking the noncommercial license. C) The court ruled that the agency could not revoke the noncommercial license because the plaintiff was not criminally prosecuted. D) The court ruled that the agency could revoke the noncommercial license because the plaintiff was criminally prosecuted. E) The court ruled that the agency could revoke the noncommercial license because it was granted the statutory authority to do so.
56) A(n) _____ rule is a rule that does not create any new rights or duties but is merely a detailed statement of an administrative agency's interpretation of an existing law. A) quasi-judicial B) political affiliation C) foundational D) interpretative E) quasi-legislative
57) When the United States Congress sees a problem for which it believes new regulations are needed, it has the power to create a(n) _____ to deal with that problem.
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A) congressional caucus B) expert panel C) expert commission D) executive committee E) administrative agency
58)
The _____ has control over the budgets of all agencies. A) United States Office of Management and Budget B) Internal Revenue Service C) United States Congress D) United States president E) Administrative Regulatory Agency
59) How many days, if any, does the United States Congress have to review proposed agency rules? A) None B) 20 C) 30 D) 60 E) 90
60) In order to be upheld in court, an agency's fact finding must be supported by which of the following? A) Substantial evidence B) Reasonable suspicion C) Proof beyond reasonable doubt D) Probable cause E) Non-hearsay evidence
61)
Which of the following is incorrect regarding the Freedom of Information Act (FOIA)?
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A) Information may be obtained under the FOIA regarding how an agency receives and spends its money. B) Citizens are entitled to any records that the government has about them. C) Records involving national security are exempted from the FOIA. D) Information regarding the agency's personnel records may be obtained under the FOIA. E) Records involving an individual's private life are exempted from the FOIA.
62)
What does the term “FOIA” mean? A) Freedom of Interpretative Agency B) Freedom of Information Act C) Forward, Outward, Initiative Agency D) Formation of Interpretative Agency E) Formal, Open, Interpretative Act
63)
The Government in Sunshine Act requires that _____.
A) all actions taken by United States government agencies must be open to the public B) all executive sessions of the U.S. Congress must be open to the public C) administrative agencies must be open for at least forty (40) hours per day, and for at least five (5) days per week D) an agency business meeting must be open to the public if a collegiate body heads the agency E) administrative agencies must be immune from FOIA requests
64)
Under the Privacy Act, an individual may have the right to:
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A) compel an administrative agency to enter into a settlement agreement to avoid the publicity of a public trial. B) compel an administrative agency to have a dispute heard before a three-person tribunal of judges to avoid the publicity of a public trial. C) sue the government for Privacy Act violations. D) see and amend federal agency records. E) see and amend federal agency records, as well as sue the government for Privacy Act violations.
65) According to the United Nations and as discussed in the textbook, which of the following is true regarding e-government, meaning the delivery of government services through digital information technologies including the Internet? A) It is important because it reduces the cost of government while improving the quality of services and citizen access. B) It is important because although it increases the cost of government, it improves the quality of services and citizen access. C) It is important because it enables the government to keep closer track of perceived criminal activity. D) It is not important, because face-to-face interaction with government employees is more efficient and cost-effective. E) It is not important, because Internet sites cannot be adequately updated to address complex governmental issues.
66) New Agency. Debby just got a job as an assistant in a new federal agency called the Accounting Commission that was set up to regulate the accounting and auditing profession. The agency is headed by commissioners who serve for fixed terms and cannot be removed except for cause. Additionally, no more than a majority of the commissioners may be from the same political party. Her agency is getting ready to issue rules. The enabling legislation that set up the Accounting Commission specified that the agency could make rules but said nothing about the form of the rules. Debby's boss, Blaire, gave her some proposed rules and asked her to be sure that they were published and to take care of the next step in the approval process. Blaire also told her that at this point she was not very interested in hybrid rule making. Which of the following is the appropriate agency classification for the Accounting Commission?
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A) Executive B) Independent C) Quasi-judicial D) Legislative E) Judicial
67) New Agency. Debby just got a job as an assistant in a new federal agency called the Accounting Commission that was set up to regulate the accounting and auditing profession. The agency is headed by commissioners who serve for fixed terms and cannot be removed except for cause. Additionally, no more than a majority of the commissioners may be from the same political party. Her agency is getting ready to issue rules. The enabling legislation that set up the Accounting Commission specified that the agency could make rules but said nothing about the form of the rules. Debby's boss, Blaire, gave her some proposed rules and asked her to be sure that they were published and to take care of the next step in the approval process. Blaire also told her that at this point she was not very interested in hybrid rule making. Which of the following is the most likely type of rule making in which the Accounting Commission is involved? A) Informal B) Formal C) Legislative D) Regulatory E) Procedural
68) New Agency. Debby just got a job as an assistant in a new federal agency called the Accounting Commission that was set up to regulate the accounting and auditing profession. The agency is headed by commissioners who serve for fixed terms and cannot be removed except for cause. Additionally, no more than a majority of the commissioners may be from the same political party. Her agency is getting ready to issue rules. The enabling legislation that set up the Accounting Commission specified that the agency could make rules but said nothing about the form of the rules. Debby's boss, Blaire, gave her some proposed rules and asked her to be sure that they were published and to take care of the next step in the approval process. Blaire also told her that at this point she was not very interested in hybrid rule making. Which of the following would be the appropriate location for publication of the proposed rules?
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A) The Congressional Review B) The Congressional Record C) The Agency Periodical D) The Comment and Review Forum E) The Federal Register
69) New Agency. Debby just got a job as an assistant in a new federal agency called the Accounting Commission that was set up to regulate the accounting and auditing profession. The agency is headed by commissioners who serve for fixed terms and cannot be removed except for cause. Additionally, no more than a majority of the commissioners may be from the same political party. Her agency is getting ready to issue rules. The enabling legislation that set up the Accounting Commission specified that the agency could make rules but said nothing about the form of the rules. Debby's boss, Blaire, gave her some proposed rules and asked her to be sure that they were published and to take care of the next step in the approval process. Blaire also told her that at this point she was not very interested in hybrid rule making. After publication, what would be the next step in obtaining enactment of the proposed rules? A) A vote in the United States Congress B) Approval by the U.S. president through the issuance of an executive order C) A public hearing D) An opportunity for all interested parties to submit written comments E) A hearing before an administrative law judge (ALJ)
70) DUI Charge. Monique was licensed to train massage therapists. A new federal agency, the Aesthetic and Massage Commission, took very seriously its role of enforcing the statute enabling the Commission to do its work and providing that licensed massage therapists must refrain from "any act or conduct indicating bad faith, incompetence, dishonesty, or improper dealing." Monique, while driving home late one night from a party, was stopped by the police and arrested for driving under the influence of alcohol. She pled guilty to the offense. When the Aesthetic and Massage Commission discovered the offense, the officials of the agency met, decided that Monique might drink on the job, and that she might pose a danger to students. Accordingly, her license to teach massage therapy was revoked. Monique threatened to sue to retain her license and was told by the agency head that she had no right to appeal to court because of the nature of the Aesthetic and Massage Commission and that, in any event, action by an agency is always upheld. Which of the following is true regarding the statement of the agency that Monique had no right to appeal to court?
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A) The agency representative was wrong and if Monique cannot resolve the issue within the agency, she may appeal to court for judicial review. B) Because the agency was set up to protect the safety of the public, the agency representative is correct unless Monique can establish that she entered into a separate contractual arrangement with the agency when she was hired that gave her the right to appeal decisions to court. C) Further information is needed regarding whether the agency was an executive agency or an independent agency because while actions of an independent agency may be appealed to court, actions of an executive agency may not be appealed to court. D) Further information is needed regarding whether the agency was an executive agency or an independent agency because while actions of an executive agency may be appealed to court, actions of an independent agency may not be appealed to court. E) Because the agency was set up to protect the safety of the public, the agency representative is correct and Monique has no right to a court action and no right to enter into a contractual agreement with the agency regarding appeal rights.
71) DUI Charge. Monique was licensed to train massage therapists. A new federal agency, the Aesthetic and Massage Commission, took very seriously its role of enforcing the statute enabling the Commission to do its work and providing that licensed massage therapists must refrain from "any act or conduct indicating bad faith, incompetence, dishonesty, or improper dealing." Monique, while driving home late one night from a party, was stopped by the police and arrested for driving under the influence of alcohol. She pled guilty to the offense. When the Aesthetic and Massage Commission discovered the offense, the officials of the agency met, decided that Monique might drink on the job, and that she might pose a danger to students. Accordingly, her license to teach massage therapy was revoked. Monique threatened to sue to retain her license and was told by the agency head that she had no right to appeal to court because of the nature of the Aesthetic and Massage Commission and that, in any event, action by an agency is always upheld. Which of the following is true regarding the statement by the agency that assuming an appeal to court is available, agency action is always upheld?
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A) The agency representative is essentially correct because agency decisions are upheld in over 99% of the cases and may only be overturned if fraud on the part of the agency is proven. B) The agency representative is incorrect because agency decisions are usually struck down unless they are supported by clear and convincing evidence. C) The agency representative is incorrect because agency decisions are usually struck down unless it can be established that an appeal of an agency decision is frivolous and without reason. D) The agency representative is incorrect because agency decisions are struck down in approximately 50% of the cases on appeal. E) The agency representative is incorrect because while agency actions are usually upheld, they may be struck down if the agency, for example, exceeded its power.
72) DUI Charge. Monique was licensed to train massage therapists. A new federal agency, the Aesthetic and Massage Commission, took very seriously its role of enforcing the statute enabling the Commission to do its work and providing that licensed massage therapists must refrain from "any act or conduct indicating bad faith, incompetence, dishonesty, or improper dealing." Monique, while driving home late one night from a party, was stopped by the police and arrested for driving under the influence of alcohol. She pled guilty to the offense. When the Aesthetic and Massage Commission discovered the offense, the officials of the agency met, decided that Monique might drink on the job, and that she might pose a danger to students. Accordingly, her license to teach massage therapy was revoked. Monique threatened to sue to retain her license and was told by the agency head that she had no right to appeal to court because of the nature of the Aesthetic and Massage Commission and that in any event, action by an agency is always upheld. Which of the following would have reached the decision at her hearing before the administrative agency? A) An adjudicative law judge B) An administrative law judge C) A federal court judge D) A superior court judge E) A jury
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73) Four Paws Protection. The United States Congress created a new agency to more closely regulate testing of personal and cosmetic products on animals. Legislation was enacted naming the agency the "Animal Protection Commission" and setting forth the function of the agency and its specific powers. Congress provided the agency with the power to make rules, investigate violations, and adjudicate charges of wrongdoing. The agency proceeded to properly give notice and issue rules. The rules provided for civil as well as for criminal penalties. Agency personnel issued an order for Fluffy Shampoo Corporation to attend a hearing regarding its animal testing and to bring to the hearing all company documents pertaining to animal testing. Fluffy Shampoo resisted on the basis that the agency had no power to compel its attendance at a hearing or to require it to provide any documents. Fluffy Shampoo also claimed that criminal penalties may not flow from violation of agency rules. The agency proceeded to issue a ruling that Fluffy Shampoo cease all activity based upon its refusal to cooperate. Which of the following is the correct term for legislation passed by Congress specifying the name, functions, and specific powers of the Animal Protection Commission? A) Enabling legislation B) Enacting legislation C) Approving legislation D) Administrative regulation E) Agency regulation
74) Four Paws Protection. The United States Congress created a new agency to more closely regulate testing of personal and cosmetic products on animals. Legislation was enacted naming the agency the "Animal Protection Commission" and setting forth the function of the agency and its specific powers. Congress provided the agency with the power to make rules, investigate violations, and adjudicate charges of wrongdoing. The agency proceeded to properly give notice and issue rules. The rules provided for civil as well as for criminal penalties. Agency personnel issued an order for Fluffy Shampoo Corporation to attend a hearing regarding its animal testing and to bring to the hearing all company documents pertaining to animal testing. Fluffy Shampoo resisted on the basis that the agency had no power to compel its attendance at a hearing or to require it to provide any documents. Fluffy Shampoo also claimed that criminal penalties may not flow from violation of agency rules. The agency proceeded to issue a ruling that Fluffy Shampoo cease all activity based upon its refusal to cooperate. Which of the following is true regarding the claim of Fluffy Shampoo that the agency had no power to compel attendance and the provision of documents?
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A) Fluffy Shampoo is correct because while the agency had the right to request voluntary compliance and refer Fluffy Shampoo to law enforcement if Fluffy Shampoo would not voluntarily comply, the agency had no power to require compliance. B) Fluffy Shampoo is correct in that the agency could not require the provision of documents, but incorrect regarding the power of the agency to require attendance at a hearing. C) Fluffy Shampoo is correct in that the agency could not require attendance at a hearing, but incorrect regarding the power of the agency to require the provision of documents. D) Fluffy Shampoo is incorrect, and the agency had the power to issue a document called a subpoena requiring attendance at a hearing and a document called a subpoena duces tecum requiring that Fluffy Shampoo bring specified documents to the hearing. E) Fluffy Shampoo is incorrect, and the agency had the power to issue a document called a certified order requiring attendance at a hearing and a document called a summons requiring that Fluffy Shampoo bring specified documents to the hearing.
75) Four Paws Protection. The United States Congress created a new agency to more closely regulate testing of personal and cosmetic products on animals. Legislation was enacted naming the agency the "Animal Protection Commission" and setting forth the function of the agency and its specific powers. Congress provided the agency with the power to make rules, investigate violations, and adjudicate charges of wrongdoing. The agency proceeded to properly give notice and issue rules. The rules provided for civil as well as for criminal penalties. Agency personnel issued an order for Fluffy Shampoo Corporation to attend a hearing regarding its animal testing and to bring to the hearing all company documents pertaining to animal testing. Fluffy Shampoo resisted on the basis that the agency had no power to compel its attendance at a hearing or to require it to provide any documents. Fluffy Shampoo also claimed that criminal penalties may not flow from violation of agency rules. The agency proceeded to issue a ruling that Fluffy Shampoo cease all activity based upon its refusal to cooperate. Which of the following is true regarding the claim of Fluffy Shampoo that criminal penalties may not result from violation of agency rules?
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A) Fluffy Shampoo is correct. B) Fluffy Shampoo is incorrect, but any criminal penalties may not exceed a fine of $1,000. C) Fluffy Shampoo is incorrect, but any criminal penalties may not exceed a fine of $10,000. D) Fluffy Shampoo is incorrect regarding its claim that all agencies lack the authority to institute a criminal penalty, but correct in that the Animal Protection Commission cannot enforce a criminal penalty because an agency can only enforce a criminal penalty if human health or national security is involved. E) Fluffy Shampoo is incorrect, and criminal penalties may be imposed assuming statutory authority exists for the agency to do so.
76) Disappointed Applicant. Polly, who had a regular driver's license to operate an automobile, decided that she really wanted to drive a tractor-trailer truck. She thought that it would be nice to earn money while seeing the country. Polly had all applicable training and went to her state's department of motor vehicle office to take the test required in order to obtain a license to drive a tractor-trailer truck. While taking the test, in an effort to relieve stress, Polly was stretching her neck and looking around at the other nervous test takers. The proctor for the exam saw her and accused her of stretching and straining to look at the exam answers of other test takers. Her application to drive a tractor-trailer was denied. The local agency department head was also furious with Polly and proceeded to revoke her regular automobile driver's license as well. Applicable statutes provide as follows: (1) "the DMV may suspend or revoke the privilege of any person to operate a motor vehicle upon any of the grounds which authorize the refusal to issue a license"; (2) "the DMV may refuse to issue a license to any person who has 'committed any fraud in any application.'" Polly hears that you have just finished business law and asks for advice. She says that she had decided that she does not really want to drive a tractortrailer truck because of her neck problems but that she really would like to have her license to operate a regular automobile reinstated. What should Polly do next assuming her state's administrative scheme is the same as the federal scheme?
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A) She should appeal within the agency and later to court if she cannot receive a favorable agency determination. B) She should immediately appeal to court, bypassing any other agency proceedings. C) She should appeal within the agency, but no later court proceedings would be possible. D) She should file a writ to negate any results in connection with the first test because, by law, applicants are entitled to retake a licensure test at least once. E) At the moment, there is nothing else that Polly can do to obtain reinstatement of her license and she can only ask the agency for reconsideration of her position at a later date.
77) Disappointed Applicant. Polly, who had a regular driver's license to operate an automobile, decided that she really wanted to drive a tractor-trailer truck. She thought that it would be nice to earn money while seeing the country. Polly had all applicable training and went to her state's department of motor vehicle office to take the test required in order to obtain a license to drive a tractor-trailer truck. While taking the test, in an effort to relieve stress, Polly was stretching her neck and looking around at the other nervous test takers. The proctor for the exam saw her and accused her of stretching and straining to look at the exam answers of other test takers. Her application to drive a tractor-trailer was denied. The local agency department head was also furious with Polly and proceeded to revoke her regular automobile driver's license as well. Applicable statutes provide as follows: (1) "the DMV may suspend or revoke the privilege of any person to operate a motor vehicle upon any of the grounds which authorize the refusal to issue a license"; (2) "the DMV may refuse to issue a license to any person who has 'committed any fraud in any application.'" Polly hears that you have just finished business law and asks for advice. She says that she had decided that she does not really want to drive a tractortrailer truck because of her neck problems but that she really would like to have her license to operate a regular automobile reinstated. The statutes setting forth the authority of the agency are called _____ statutes. A) enabling B) authorization C) enforcement D) execution E) executory
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78) Disappointed Applicant. Polly, who had a regular driver's license to operate an automobile, decided that she really wanted to drive a tractor-trailer truck. She thought that it would be nice to earn money while seeing the country. Polly had all applicable training and went to her state's department of motor vehicle office to take the test required in order to obtain a license to drive a tractor-trailer truck. While taking the test, in an effort to relieve stress, Polly was stretching her neck and looking around at the other nervous test takers. The proctor for the exam saw her and accused her of stretching and straining to look at the exam answers of other test takers. Her application to drive a tractor-trailer was denied. The local agency department head was also furious with Polly and proceeded to revoke her regular automobile driver's license as well. Applicable statutes provide as follows: (1) "the DMV may suspend or revoke the privilege of any person to operate a motor vehicle upon any of the grounds which authorize the refusal to issue a license"; (2) "the DMV may refuse to issue a license to any person who has 'committed any fraud in any application.'" Polly hears that you have just finished business law and asks for advice. She says that she had decided that she does not really want to drive a tractortrailer truck because of her neck problems but that she really would like to have her license to operate a regular automobile reinstated. Assuming Polly seeks to appeal revocation of her license to drive an automobile through any available avenues, what is the most likely result? A) The agency decision will be upheld so long as it is determined that the agency head reasonably thought she was cheating, even if she was not. B) The agency decision will be upheld so long as it is determined that substantial evidence supported the agency head's decision that she was cheating, even if she was not. C) The decision will be reversed because Polly has decided that she no longer wants a license to drive tractor-trailer trucks. D) The appeal will be dismissed because Polly had no right to a review of the agency head's decision. E) The revocation of her license to drive automobiles will be reversed because the agency had no authority to take that step.
79)
Administrative law is made up of two types of rules. What are these types? A) Administrative and substantial B) Conditional and speculative C) Procedural and substantive D) Substantive and substantial E) Procedural and administrative
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80)
How is an administrative body usually defined?
A) Any body created by the legislative branch to carry out specific duties B) An entity created by the United States president to carry out specific duties C) An entity that is created by any of the three branches of government to carry out governmental business D) A body that has legislative powers only E) A body that is always executive in nature and reports to the U.S. president
81) What is the name of the statute that specifies the name, functions and specific powers of an administrative agency? A) An empowering statute B) An enabling statute C) A power statute D) An administrative powers statute E) A power of administration statute
82) What permits administrative agencies to issue rules that control individual and business behaviors? A) An order by the United States President B) An order by the United States House of Representatives C) Enabling statutes D) The United States Senate Judiciary Committee E) The United States Senate Committee on Rules and Administration
83) Independent agencies are often called _____ and tend to have more narrow authority over many facets of an industry. A) quasi-legislatures B) subcommittees C) quasi-judiciaries D) commissions E) judiciaries
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84) run?
What act did the United States Congress pass as a major limitation on how agencies are
A) The Limitations on Administrative Agencies Act B) The Administrative Procedures Act C) The Administrative Agency Reformation and Restoration Act D) The Limits on Government Act E) The Administrative Agency Rules and Regulations Act
85)
What is the publication where an agency’s informal rule makings are first initiated? A) The Congressional Register B) The Federal Register C) The Congressional Weekly D) Agency publications E) Legislative newsletters
86)
Which of the following is not a limit on an agency’s power? A) Political B) Statutory C) Judicial D) Economic E) Informational
ESSAY. Write your answer in the space provided or on a separate sheet of paper. 87) Why are administrative agencies sometimes referred to as the "fourth branch of government," and is this an accurate representation?
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88)
List the stages and requirements of informal agency rule making.
89)
List and describe the steps involved in formal rule making.
90)
List and describe the steps involved in hybrid rule making.
91) When may an agency claim an exemption from rule making requirements on the basis that public notice and comment procedures are "impracticable, unnecessary, or contrary to the public interest," and what steps must be taken to exercise the exemption?
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Answer Key Test name: Chap 04_5_The Essentials_Kubasek 1) TRUE Administrative law consists of both substantive and procedural rules created by administrative agencies. 2) FALSE Administrative agencies are bodies of the city, county, state, or federal government. 3) FALSE An administrative agency is generally defined as any body created by the legislative branch (e.g., Congress, a state legislature, or a city council) to carry out specific duties. 4) FALSE Administrative agencies have legislative, executive, and judicial powers. They may make rules for an entire industry, adjudicate individual cases, and investigate corporate misconduct. Because legislative, judicial, and executive powers have traditionally been placed in separate branches of government by the United States Constitution, the role of administrative agencies has led some to refer to agencies as the unofficial fourth branch of government. 5) FALSE Administrative agencies typically act more swiftly than the United States Congress in creating and enacting new laws. Today, administrative agencies create more rules than Congress and the courts combined. 6) FALSE Administrative law matters are heard only by an Administrative Law Judge (ALJ), as there is no right to a jury trial in administrative agencies. 7) TRUE Version 1
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After an administrative law judge renders a decision, an appeal to the full commission or the head of an agency may be filed, and that decision may then be appealed to the circuit court of appeals. 8) TRUE After an administrative law judge renders a decision, an appeal to the full commission or the head of an agency may be filed, and that decision may then be appealed to the circuit court of appeals. 9) TRUE The Administrative Procedures Act (APA) requires formal rule making when an enabling statute or other legislation mandates all regulations or rules to be enacted by an agency as part of a formal hearing process that includes a complete transcript. The first step in formal rule making is publication in the Federal Register of a notice of proposed rule making by the agency. 10) FALSE Under the Administrative Procedures Act (APA), there are very specific guidelines on rule making by agencies. The two most common types of rule making are informal and formal; a third type is known as hybrid. 11) FALSE One difference between executive agencies and independent agencies is the scope of their regulatory authority. Executive agencies tend to have responsibility for making rules covering a broad spectrum of industries and activities. Independent agencies, often called commissions, tend to have more narrow authority over many facets of a particular industry, focusing on such activities as rate making and licensing. 12) TRUE The United States Congress has significant control over administrative agencies because the U.S. Senate must approve presidential nominees for them to become the administrative heads of agencies. 13) FALSE Version 1
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Executive agencies have a tendency to focus more on social regulation, whereas independent agencies are more often focused on economic regulation. 14) TRUE The Environmental Protection Agency (EPA) was created as an independent agency, not located within any department of the executive branch. Yet it is headed by a single administrator who serves at the whim of the president. 15) TRUE The Small Business Administration is an executive agency (See Exhibit 4-1, “Major Administrative Agencies”). 16) FALSE The Federal Register is the official daily publication for rules, proposed rules, and notices of federal agencies and organizations, as well as executive orders and other presidential documents. 17) TRUE The primary type of rule making used by administrative agencies is informal rule making, or notice-and-comment rule making. Informal rule making applies in all situations in which the agency’s enabling legislation or other congressional directives do not require another form. 18) FALSE The United States Congress has the power to create or dissolve an administrative agency. 19) FALSE The Government in Sunshine Act requires administrative agency business meetings to be open to the public if the agency is headed by a collegiate body. A collegiate body consists of two or more persons, the majority of whom are appointed by the president with the advice and consent of the Senate. This open-meeting requirement applies only when a quorum is present. Version 1
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20) TRUE Under the Privacy Act of 1974, a federal administrative agency may not disclose information about an individual to other agencies or organizations without that individual's written consent. 21) E Administrative law consists of the substantive and procedural rules created by administrative agencies. 22) C Administrative law consists of the substantive and procedural rules created by administrative agencies (government bodies of the city, county, state, or federal government) involving applications, licenses, permits, available information, hearings, appeals, and decision-making. 23) A An administrative agency is generally defined as any body created by the legislative branch (e.g., Congress, a state legislature, or a city council) to carry out specific duties. 24) D Agencies have three types of power: legislative, judicial, and executive. They make rules for an entire industry, adjudicate individual cases, and investigate corporate misconduct. 25) B The first federal administrative agency, the Interstate Commerce Commission (ICC), was created by the United States Congress near the end of the nineteenth century. 26) C The first federal administrative agency, the Interstate Commerce Commission (ICC), was created by the United States Congress near the end of the nineteenth century. Congress felt that a regulatory body could best control the anticompetitive conduct of railroads. 27) A Version 1
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Congress creates administrative agencies through passage of enabling legislation, which is a statute that specifies the name, functions, and specific powers of the administrative agency. 28) D Today, administrative agencies actually create more rules than Congress and the courts combined. 29) A Administrative agencies may enact three types of rules: procedural, interpretive, and legislative. Interpretive rules are rules that explain how the agency views the meaning of the statutes for which the agency has administrative responsibility. 30) E Administrative agencies may enact three types of rules: procedural, interpretive, and legislative. Legislative rules are policy expressions that have the effect of law. 31) C Enabling statutes grant executive power to agencies to investigate potential violations of rules or statutes. Many times, companies cooperate with agencies and voluntarily furnish information. Other times, however, agencies must use their investigative powers, defined in their enabling legislation, to gather information. Such powers typically include the power to issue a subpoena. A subpoena is an order to appear at a particular time and place and provide testimony. 32) D
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Enabling statutes grant executive power to agencies to investigate potential violations of rules or statutes. Many times, companies cooperate with agencies and voluntarily furnish information. Other times, however, agencies must use their investigative powers, defined in their enabling legislation, to gather information. Such powers typically include the power to issue a subpoena duces tecum. A subpoena duces tecum is an order to appear and bring specified documents. 33) C Enabling statutes delegate judicial power to agencies to settle or adjudicate individual disputes that an agency may have with businesses or individuals. After investigation, the agency holds an administrative hearing before an administrative law judge (ALJ). 34) D An administrative law judge (ALJ) has the authority to render a binding decision, known as an order, after a hearing. 35) E None. Administrative law matters are heard only by an administrative law judge (ALJ) because there is no right to a jury trial in administrative agencies. 36) A Administrative law judge (ALJ) orders may be appealed to the federal court system. The courts, however, typically defer to the expertise of the agency and the associate ALJ. In other words, most orders by an ALJ are upheld. 37) C The Administrative Law Judge (ALJ) will try to convince the parties to reach a settlement via a consent order, but the judge also has the authority to render a binding decision an order after a hearing. 38) C Agencies are classified as either executive or independent. Version 1
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39) E When a new United States president is elected, he will typically place his appointees in charge of executive agencies. These agencies are generally located within the executive branch, under one of the cabinetlevel departments. Hence, executive agencies are referred to as cabinetlevel agencies. 40) C When the United States Congress sees a problem that it believes needs regulation, it may create an administrative agency to deal with that problem. The idea is that the agency can be staffed with people who have special expertise in the area the agency is regulating and therefor know what types of regulations are necessary to protect the citizens in that area. 41) E The Occupational Safety and Health Administration is not an independent agency (See Exhibit 4-1, "Major Administrative Agencies"). 42) B The Equal Employment Opportunity Commission is not an executive agency (See Exhibit 4-1, "Major Administrative Agencies"). 43) C Commissioners of federal independent agencies serve fixed terms and cannot be removed except for cause. 44) A Executive agencies have a tendency to focus more on social regulation, whereas independent agencies are more often focused on economic regulation. 45) E
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Some agencies do not fall clearly into one classification or the other. These agencies are typically referred to as hybrid agencies. Created as one type of agency, the body may share characteristics of the other. 46) D Some agencies do not fall clearly into one classification or the other. These agencies are typically referred to as hybrid agencies. Created as one type of agency, the body may share characteristics of the other. The Environmental Protection Agency (EPA), for example, was created as an independent agency, not located within any department of the executive branch. Yet it is headed by a single administrator who serves at the whim of the United States president. 47) C The two most common types of rulemaking are informal and formal, and there is a third type known as hybrid rule making. Hybrid rule making is an attempt to combine the best features of both formal and informal rule making. 48) D The primary type of rule making administrative agencies use is informal rule making, or notice-and-comment rule making. Informal rule making applies in all situations in which the agency’s enabling legislation or other congressional directives do not require another form. 49) C In informal rule making, the date on which the rule becomes effective must be at least 30 days after publication of the final rule in the Federal Register. 50) D Although the agency is not required to respond to all comments it receives, it is required to respond to comments that significantly concern the proposed rule. 51) E Version 1
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Policy statements are general statements about the directions in which an agency intends to proceed with respect to its rule-making or enforcement activities. These statements have no binding impact on anyone; they do not directly affect anyone’s legal rights or responsibilities. 52) C The exceedingly high number of challenges to regulations, as well as a growing belief that structured bargaining among competing interest groups might be the most efficient way to develop rules, has stimulated interest among a number of agencies in a relative new form of rule making often referred to as regulated negotiation, or "reg-neg." In regneg, each concerned interest group and the agency itself sends a representative to bargaining sessions led by a mediator. After the parties achieve a consensus, that agreement is forwarded to the agency. 53) A There is some concern that it will be difficult for regulators to ignore their past ties to industry and pass regulations that are in the public interest, especially when the regulations would increase costs to the industry or are opposed by the industry for other reasons. When people are discussing an agency in which they perceive this problem as existing, they often refer to the agency as being a "captured" agency. 54) E Agencies perform a variety of less well known but equally important tasks including advising, conducting research, issuing permits, and managing property. 55) A The court ruled that the Department of Motor Vehicles' interpretation of the enabling statute to authorize such action could not be correct because it would lead to untenable results. 56) D
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An interpretive rule is a rule that does not create any new rights or duties but is merely a detailed statement of an administrative agency’s interpretation of an existing law. 57) E When the United States Congress sees a problem that it believes needs regulation, it may create an administrative agency to deal with that problem. 58) C The United States Congress has control over the budgets of all agencies. 59) D In 1996, legislation was signed into law that gives the United States Congress 60 days to review proposed agency rules. 60) A Courts typically defer to an agency's fact finding, but the facts must be supported by substantial evidence. 61) D Any individual or business may make a Freedom of Information Act (FOIA) request to a federal government agency. However, one exception to public access to records pursuant to the FOIA involves internal agency matters (for example, personnel issues). 62) B The Freedom of Information Act (FOIA) does not apply to the United States Congress, the federal courts, the executive staff of the White House, state or local governments, or to private businesses. 63) D The Government in Sunshine Act requires that an agency business meeting be open to the public if a collegiate body heads the agency. A collegiate body consists of two or more persons, the majority of whom are appointed by the United States president with the advice and consent of the U.S. Senate. Version 1
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64) E Under the Privacy Act, an individual may have the right to see and amend federal agency records, as well as sue the government for Privacy Act violations. 65) A According to the United Nations and as discussed in the textbook, egovernment, which is defined as the delivery of government services through digital information technologies including the Internet, is important because it reduces the cost of government while significantly improving the quality of services and citizen access. 66) B The United States president appoints the commissioners of independent agencies with the advice and consent of the U.S. Senate, and these commissioners serve fixed terms and cannot be removed except for cause. No more than a simple majority of an independent agency can be members of any single political party. 67) A Informal rule making applies in all situations in which the agency's enabling legislation or other congressional directives do not require another form. 68) E An agency initiates informal rule making by publishing the proposed rule in the Federal Register, along with an explanation of the legal authority for issuing the rule and a description of how the public can participate in the rule-making process. 69) D
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The primary type of rule making administrative agencies use is informal rule making, or notice-and-comment rule making. Informal rule making applies in all situations in which the agency’s enabling legislation or other congressional directives do not require another form. An administrative agency initiates informal rule making by publishing the proposed rule in the Federal Register. After publication, opportunity is provided for all interested parties to submit written comments. These comments may contain data, arguments, or other information a person believes might influence the agency in its decision making. 70) A An appeal to the full commission or the head of an agency may then be filed, and that decision may be appealed to the circuit court of appeals. 71) E One basis for reversing an agency decision is that the agency exceeded the authority granted it by its enabling legislation. 72) B After investigation, the agency holds an administrative hearing before an administrative law judge (ALJ). 73) A Administrative agencies are created by the United States Congress through passage of enabling legislation, which is a statute that specifies the name, functions, and specific powers of the administrative agency. 74) D Agency powers typically include the power to issue a subpoena (i.e., an order to appear at a particular time and place and provide testimony) and a subpoena duces tecum (i.e., an order to appear and bring specified documents). 75) E If an individual or business fails to comply with agency rules, there are often civil as well as criminal penalties. Version 1
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76) A An individual or business that believes itself harmed by an administrative rule may challenge that rule in federal court once all administrative procedures have been exhausted. 77) A Enabling legislation is a statute that specifies the name, functions, and specific powers of the administrative agency. Enabling statutes grant agencies broad powers for the purpose of serving the “public interest, convenience, and necessity.” These broad powers include rule making, investigation, and adjudication. 78) E Courts can review whether an administrative agency exceeded the authority granted to it by its enabling legislation, as illustrated in the Yan Ju Wang v. George Valverde case referenced in the textbook. 79) C Administrative law consists of substantial and procedural rules created by administrative agencies 80) A An administrative agency is generally defined as any body created by the legislative branch (e.g., Congress, a state legislature, or a city council) to carry out specific duties 81) B The United States Congress creates administrative agencies through passage of enabling legislation, which is a statute that specifies the name, functions, and specific powers of the administrative agency. 82) C Congress creates administrative agencies through passage of enabling legislation, which is a statute that specifies the name, functions, and specific powers of the administrative agency. 83) D Version 1
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Independent agencies, often called commissions, tend to have more narrow authority over many facets of a particular industry, focusing on such activities as rate making and licensing. 84) B In 1946, Congress passed the Administrative Procedures Act (APA) as a major limitation on how agencies are run. 85) B An agency initiates informal rule making by publishing the proposed rule in the Federal Register, along with an explanation of the legal authority for issuing the rule and a description of how the public can participate in the rule-making process. 86) B There are four basic limits on agency power: political, statutory, judicial, and informational. 87) Because legislative, judicial, and executive powers have traditionally been placed in separate branches of government by the United States Constitution, the role of administrative agencies has led some to refer to agencies as the unofficial “fourth branch” of government. Administrative agencies are not actually a branch of government, primarily because all of their authority is merely delegated to them. Despite their delegated authority, administrative agencies remain under the control of the three traditional branches of government.
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88) The steps of informal agency rule making are as follows: 1.The proposed rule is published in the Federal Register along with an explanation of the legal authority for issuing the rule and a description of how the public can participate in the rule-making process. 2.Interested parties can file written comments. 3.After considering comments, the agency may alter the rule. 4.The final draft of the rule, with a statement of its basis and purpose, is published in the Federal Register along with the date on which it becomes effective, which must be at least 30 days after publication. 89) Notice of the proposed rule making is published by the agency in the Federal Register. Then, there is a public hearing at which witnesses give testimony on the pros and cons of the proposed rule and are subject to cross-examination. An official transcript of the hearing is kept. Based on information received at the hearing, the agency makes and publishes formal findings. On the basis of these findings, an agency may or may not promulgate a regulation. If a regulation is adopted, the final rule is published in the Federal Register. 90) Publication of a proposed rule is made in the Federal Register. Publication is followed by the opportunity for submission of written comments, and then there is an informal public hearing with a more restricted opportunity for cross-examination than that involved in formal rule making. The final rule is then published in the Federal Register prior to its enactment.
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91) The exemption that public notice and comment procedures are "impracticable, unnecessary, or contrary to the public interest" is used most commonly either when the issue is so trivial that there would probably be very little, if any, public input, or when the nature of the rule necessitates immediate action. Whenever an agency chooses to use this exception, it must make a "good-cause" finding and include in its publication of the final rule a statement explaining why there was no public participation in the process.
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CHAPTER 5 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) Federalism means that the federal government is the only government that can establish laws. ⊚ true ⊚ false
2) The U.S. Constitution established four branches of government: executive, legislative, administrative and judicial. ⊚ true ⊚ false
3) According to the Tenth Amendment to the U.S. Constitution, all powers that the Constitution neither gives exclusively to the states nor takes from the federal government are reserved for the federal government. ⊚ true ⊚ false
4)
The United States Congress cannot override a presidential veto. ⊚ true ⊚ false
5) The United States Congress has the power to enact legislation, but the president can veto a law that Congress passes. ⊚ true ⊚ false
6) The U.S. Constitution explicitly allows courts to review legislative and executive actions to determine whether they are constitutional. ⊚ true ⊚ false
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7) The power of legislative fiat allows courts to review the constitutionality of lower courts’ decisions. ⊚ true ⊚ false
8) The process of judicial review was established in the United States Supreme Court case Marbury v. Madison. ⊚ true ⊚ false
9) The Supremacy Clauseof the United States Constitution provides that the Constitution, laws and treaties of the United States constitute the supreme law of the land. ⊚ true ⊚ false
10) Sometimes when the state and federal governments have concurrent authority, the federal government can decide to regulate that area exclusively. In such a situation, the state law is unconstitutional according to the doctrine of federal delegation. ⊚ true ⊚ false
11) The Ninth Amendment to the United States Constitution is the primary source of authority for the federal regulation of business. ⊚ true ⊚ false
12) The NLRB v. Jones & Laughlin Steel Corp. case was the turning point for the United States Supreme Court's application of the Supremacy Clause to the regulation of business activities. ⊚ true ⊚ false
13) Police power consists of the residual powers retained by each state to safeguard the health and welfare of its citizenry. Version 1
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⊚ ⊚
true false
14) The Privileges and Immunities Clause of the United States Constitution gives the federal government the authority to collect taxes. ⊚ true ⊚ false
15) The United States Congress can use its spending power to achieve social welfare objectives. ⊚ true ⊚ false
16) The Fourth Amendment to the United States Constitution extends most of the provisions of the Bill of Rights to the states. ⊚ true ⊚ false
17) The first ten amendments to the United States Constitution do not substantially affect government regulation of business. ⊚ true ⊚ false
18) The rights established by the First Amendment to the United States Constitution are absolute. ⊚ true ⊚ false
19) The United States Supreme Court has ruled that the First Amendment to the U.S. Constitution protects corporate political speech less compared to the political speech of ordinary citizens. ⊚ true ⊚ false
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20) Courts analyze government restrictions on commercial speech according to a four-part test established in Central Hudson Gas & Electric Corp. v. Public Service Commission of New York. ⊚ true ⊚ false
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 21) The term "checks and balances" means that _____. A) the federal government can check state laws and ensure they comply with federal laws B) state and federal governments check each other’s legislation C) there is a balance of power between the federal branches of government so that one branch of government does not dominate the other branches D) the Bill of Rights balances out state powers with federal powers E) federal law is supreme over any state law passed
22) According to the United States Constitution, the authority to govern is divided between federal and state governments. This is known as _____. A) federalism B) democracy C) republicanism D) bipartisanship E) dualism
23) The United States Congress passed a law that the president does not support. The president can use his or her _____ power to overrule the law passed.
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A) federalism B) veto C) Bill of Rights D) subpoena E) supremacy
24) Chief Justice John Marshall wrote one of the most important opinions in United States Supreme Court history that established judicial review. What was the name of that case? A) Judicial Branch v. Executive Branch B) Oliver Wendell Holmes v. President Jackson C) Marbury v. Madison D) State of Florida v. The Federal Government E) Townsend v. Learned Hand
25) Which amendment to the United States Constitution provides that all powers that the Constitution neither gives exclusively to the federal government nor takes from the states are reserved for the states? A) The First Amendment B) The Second Amendment C) The Fifth Amendment D) The Sixth Amendment E) The Tenth Amendment
26) Because the federal government has only those powers granted to it by the United States Constitution, federal legislation that affects business must be based on what? A) Common law B) The legislative intent of the United States Congress C) Statutory law D) An expressed constitutional grant of authority E) Delegation of authority from the executive branch of government
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27)
How many branches of government are stipulated in the U.S. Constitution? A) One B) Two C) Three D) Four E) Five
28) What is the legal authority for dividing the federal government into three independent brances? A) The Bill of Rights B) The Commerce Clause C) The first three articles of the United States Constitution D) U.S. statutory law E) U.S. Supreme Court precedent
29) The common law process of _____ allows courts to review legislative and executive actions to determine whether they are constitutional. A) executive fiat B) judicial deference C) legislative deference D) judicial review E) res ipsa loquitur
30) Which clause of the United States Constitution provides that the Constitution, laws, and treaties of the U.S. constitute the supreme law of the land? A) The Privileges and Immunities Clause B) The Supremacy Clause C) The Commerce Clause D) The Fifth Amendment Due Process Clause E) The Fourteenth Amendment Due Process Clause
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31)
The Supremacy Clause is located in Article _____ of the United States Constitution. A) 1 B) 2 C) 3 D) 6 E) 7
32) The doctrine of _____ allows that if the state and federal government have concurrent authority, the federal government has the right to regulate in that area exclusively. A) prior appropriation B) supremacy C) privileges and immunities D) preemption E) federal review
33) What was the result in the Christy Brzonkala v. Antonio J. Morrison et al. case referenced in the textbook, in which the defendants alleged the unconstitutionality of civil remedies available under the federal Violence against Women Act? A) The United States Congress lacked the authority to regulate noneconomic, violent criminal conduct solely on the basis of that conduct’s aggregate effect on interstate commerce. B) The United States Congress validly passed the law pursuant to the First Amendment to the U.S. Constitution. C) The United States Congress validly passed the law pursuant to the Second Amendment to the U.S. Constitution. D) The United States Congress validly passed the law pursuant to the Fourth Amendment to the U.S. Constitution. E) The United States Congress validly passed the law pursuant to the Fourteenth Amendment to the U.S. Constitution.
34)
Which of the following is not an example of a state’s police powers?
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A) State criminal laws B) Zoning laws C) Regulations for the practice of medicine D) Building codes E) Federal criminal laws
35) Which of the following was the result in the Black Star Farms, LLC et al. v. Jerry Olive, Arizona Department of Liquor License and Control et al. case referenced in the textbook, in which it was alleged that an Arizona law limiting direct sales of wine by producers was unconstitutional on the basis that it discriminated against out-of-state wineries? A) The Arizona law discriminated against out-of-state wineries in violation of the dormant Commerce Clause. B) The Arizona law discriminated against out-of-state wineries in violation of the regular Commerce Clause. C) The Arizona law discriminated against out-of-state wineries in violation of the dormant Commerce Clause, but it was nevertheless a valid exercise of the state's police power. D) The Arizona law discriminated against out-of-state wineries in violation of the Equal Protection Clause of the Fourteenth Amendment. E) The Arizona law was valid and did not discriminate against out-of-state wineries.
36) The United States Congress decided to implement a new tax incentive for employers to hire more young adults. Believing that the state of California was in fine economic condition, Congress decided to exempt it from receiving the tax incentive. This is a violation of _____ of the U.S. Constitution. A) Article I, Section 8 B) Article IV, Section 2 C) Article I, Section 1 D) Article II, Section 10 E) Article III, Section 3
37)
In South Dakota v. Dole, what did the United States Supreme Court hold?
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A) South Dakota had the right to collect taxes on pineapples shipped from Hawaii. B) States have the right to tax other states through the Commerce Clause. C) States cannot tax other states. D) A federal statute that grants federal funds for state highways to only those states in which 21 is the legal drinking age is constitutional. E) Social welfare reforms that the government wants to implement must be approved by the states.
38) Carlos is a resident of Oklahoma. He chooses to attend the University of Michigan. Carlos can be charged out-of-state tuition based on what clause of the United States Constitution? A) The Interstate Commerce Clause B) The Dormant Commerce Clause C) The Full Faith and Credit Clause D) The Supremacy Clause E) The Privileges and Immunities Clause
39) Aletha was able to obtain a judgment against Marion in Aletha’s home state of Georgia. Marion lives in Chicago, Illinois. What clause would allow Aletha to travel to Illinois and have her judgment from Georgia upheld? A) The Full Faith and Credit Clause B) The Commerce Clause C) The Dormant Commerce Clause D) The Supremacy Clause E) The Privileges and Immunities Clause
40) Courts interpret the _____ Clause of the United States Constitution to mean that no law can be passed that will unreasonably interfere with existing contracts.
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A) Commerce B) Due Process C) Emoluments D) Privileges and Immunities E) Contract
41) Which constitutional amendment extends most of the provisions in the Bill of Rights to the states, prohibiting state interference in citizens’ exercise of their rights? A) The Thirteenth Amendment B) The Fourteenth Amendment C) The Twenty-first Amendment D) The Twenty-second Amendment E) The Twenty-seventh Amendment
42) Penny and Marshall are arguing about whether Penny has the right to bear arms. Marshall argues that there is no discussion of the right to bear arms in the United States Constitution. Penny could point to the _____, which indicates that the government cannot infringe on a citizens’ right to bear arms. Use Exhibit 5-2 A) First Amendment B) Second Amendment C) Fourth Amendment D) Fifth Amendment E) Fourteenth Amendment
43) Which constitutional amendment protects citizens from unreasonable searches and seizures and requires a finding of probable cause to issue a warrant? Use Exhibit 5-2 A) The First Amendment B) The Third Amendment C) The Fourth Amendment D) The Sixth Amendment E) The Tenth Amendment
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44) Belemey was on trial for conspiracy to commit murder. Belemey chose not to testify against himself for fear of self-incrimination. Which amendment protects Belemey’s right not to have to testify in court? Use Exhibit 5-2 A) The First Amendment B) The Second Amendment C) The Fifth Amendment D) The Tenth Amendment E) The Fourteenth Amendment
45) 2
Which constitutional amendment prohibits cruel and unusual punishment? Use Exhibit 5-
A) The Second Amendment B) The Fourth Amendment C) The Fifth Amendment D) The Eighth Amendment E) The Tenth Amendment
46)
_____ cannot deprive individuals of the freedoms protected by the Bill of Rights. A) Federal and state governments B) The federal government C) State governments D) The federal government, state governments, and private employers E) The federal government and private employers
47) Which of the following is included in the Central Hudson Gas & Electric Corp. v. Public Service Commission of New York test for commercial speech? Use Exhibit 5-2
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A) The principle that speech that is misleading is not protected by the First Amendment to the United States Constitution B) The principle that the government must show that a substantial governmental interest is served by a restriction on commercial speech C) The principle that any restriction on commercial speech must not be more extensive than necessary D) The principle that speech that is misleading is not protected by the First Amendment to the U.S. Constitution; the principle that the government must show that a substantial governmental interest is served by a restriction on commercial speech; and the principle that any restriction on commercial speech must not be more extensive than necessary E) None of the above
48) What type of speech does the First Amendment to the United States Constitutionnot protect? A) Defamation B) Obscenity C) Commercial speech D) Defamation, obscenity, and commercial speech E) Defamation and obscenity
49) Which of the following is true regarding the protection of "fighting words" under the First Amendment to the United States Constitution? A) Fighting words are unprotected speech under the First Amendment. B) Fighting words are protected speech under the First Amendment only if they are uttered by an individual citizen, not by a corporate representative. C) Fighting words are protected speech under the First Amendment only if they involve political activity. D) Fighting words are protected speech under the First Amendment only if they are made in connection with a protest march. E) Fighting words are protected speech under the First Amendment only if they are made in conjunction with self-defense.
50)
Which constitutional amendment protects freedom of religion?
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A) The First Amendment B) The Second Amendment C) The Fourth Amendment D) The Sixth Amendment E) The Eighth Amendment
51) Which of the following is relevant in determining whether a particular government statute violates the Establishment Clause of the United States Constitution? A) Whether the statute has a secular legislative purpose B) Whether the statute's principal or primary effect either advances or inhibits religion C) Whether the statute fosters an excessive government entanglement with religion D) Whether the statute has a secular legislative purpose; whether the statute's principal or primary effect either advances or inhibits religion; and also whether the statute fosters an excessive government entanglement with religion E) Whether the statute has a secular legislative purpose and whether the statute's principal or primary effect either advances or inhibits religion; but not whether the statute fosters an excessive government entanglement with religion
52) What does the Establishment Clause of the First Amendment to the United States Constitutionprovide? A) That government cannot make a law prohibiting the free exercise of religion B) That government cannot make a law respecting an establishment of religion C) That government cannot make a law referencing religion in any manner D) That government cannot make a law prohibiting the free exercise of religion; that government cannot make a law respecting an establishment of religion; and that government cannot make a law referencing religion in any manner E) None of the above
53) What does the Free Exercise Clause of the First Amendment to the United States Constitution provide?
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A) That government cannot make a law prohibiting the free exercise of religion B) That government cannot make a law establishing a religion C) That government cannot make a law referencing religion in any manner D) That government cannot make a law prohibiting the free exercise of religion; that government cannot make a law establishing a religion; and that government cannot make a law referencing religion in any manner E) None of the above
54) A search is unreasonable if the government official conducting the search does not first obtain a _____ from a court. A) court order B) subpoena C) search warrant D) subpoena duces tecum E) writ of habeas corpus
55)
When can government agents obtain a search warrant? A) When they can establish reasonable cause B) When they can establish probable cause C) When they can establish cause to a substantial certainty D) Anytime they have an informant E) Anytime the judge is in his office and they show identification as government agents
56)
When may government agents search without a search warrant?
A) When law enforcement officials believe it likely that the items sought will be removed before they can obtain a warrant B) Outside of normal working hours for a judge C) When they can show that the suspect who lives in the residence at issue has been in jail previously D) When they can show that a felony is involved E) All of these choices are correct.
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57) Under the _____ exception to the search warrant requirement, if an industry has a long history of pervasive regulation, a warrantless search is not unreasonable. A) rational basis B) industry safety and compliance C) monitoring of sites D) pervasive regulation E) strict scrutiny
58)
What does the Fifth Amendment's protection against self-incrimination mean?
A) That a person only has to be a witness against himself or herself if a felony is involved B) That a person does not have to be a witness against himself or herself if a first offense is involved C) That a person does not have to be a witness against himself or herself if prison time is involved as opposed to a mere fine D) That a person does not have to be a witness against himself or herself in a criminal case E) That a person has to be a witness against himself or herself in a criminal case
59)
Which constitutional amendment protects against double jeopardy? A) The First Amendment B) The Second Amendment C) The Third Amendment D) The Fourth Amendment E) The Fifth Amendment
60) Geraldo has been acquitted in an embezzlement case brought against him by the federal government. Federal prosecutors would like to try Geraldo again for the same crime. What constitutional protection, if any, does Geraldo have?
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A) The Fifth Amendment’s prohibition against double jeopardy B) The Fifth Amendment’s protection against self-incrimination C) The First Amendment’s freedom of speech right D) The Fourth Amendment’s warrant requirement E) Geraldo has no constitutional protection, since he was acquitted in the embezzlement case but not found innocent of the charges.
61) Which amendment to the United States Constitution guarantees citizens both procedural due process and substantive due process? A) The First Amendment B) The Fourth Amendment C) The Fifth Amendment D) The Eight Amendment E) The Tenth Amendment
62) Which of the following refer(s) to the basic fairness of laws that may deprive an individual of her life, liberty, or property? A) Procedural due process B) Substantive due process C) Prospective due process D) Both procedural and substantive due process, but not prospective due process E) The Privileges and Immunities Clause of the United States Constitution
63) Elizabeth owns a home and farmland in the middle of Boxer County, Iowa. The government determines that Elizabeth’s farmland is a prime spot for a new interchange for the national highway system. The government can take Elizabeth’s property as long as there is just compensation under which of the following clauses?
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A) The Commerce Clause B) The Contracts Clause C) The Takings Clause D) The Compensations Clause E) The Privileges and Immunities Clause
64)
Which of the following is true regarding a constitutional right to privacy?
A) The United States Supreme Court has held that the Constitution does not provide a right to privacy. B) The U.S. Supreme Court has held that the Constitution provides a right to privacy. C) The Sixth Amendment to the Constitution specifically provides for a right to privacy. D) The Seventh Amendment to the U.S. Constitution specifically provides for a right to privacy. E) Both the Sixth and the Seventh Amendments to the U.S. Constitution specifically provide for a right to privacy.
65) The United States Congress implements a new law indicating that in order to vote, a person must be a citizen of the United States for more than 10 years and must have a valid driver’s license for the past 5 years. What is the best way for a citizen to bring a constitutional challenge against this new law? A) As a violation of equal protection under intermediate scrutiny analysis B) As a violation of procedural due process C) As a violation of freedom of expression D) As a violation of equal protection under strict scrutiny analysis E) As a violation of the privilege against self-incrimination
66) Suppose the New Jersey state legislature institutes a law that mothers of children in elementary school, but not fathers, are entitled to seven days off each year in order to attend school events. Several fathers bring a lawsuit challenging the law on equal protection grounds. Which level of scrutiny will the court apply to the law?
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A) Intermediate scrutiny B) Rational basis scrutiny C) Severe scrutiny D) Strict scrutiny E) Subjective scrutiny
67) Suppose Washington state passes a law prohibiting the importation of out-of-state apples in order to help in-state growers. Which of the following is the best constitutional argument for the out-of-state growers who wish to challenge the new law? A) That it violates the Dormant Commerce Clause B) That it violates the Takings Clause C) That it violates the First Amendment D) That it violates the Fourth Amendment E) That it violates both substantive and procedural due process
68) Junk Food. Mary Dogood, a member of the school board in ABC County, is appalled at the amount of junk food in the schools. She convinces the state legislature to pass a law that no stores may sell any unhealthy junk food within 500 feet of any school or day care center, arguing that such a regulation is a valid exercise of the state’s police power to protect its citizens. Convenience stores balk at the regulation and challenge it in court. What concept is addressed regarding the reference to “police power?” A) The residual powers retained by each state to safeguard the health and welfare of its citizenry B) The residual powers retained by the federal government to enforce valid laws and regulations C) The powers granted to local government to enter residences without a search warrant D) The powers granted to state governments to tax for the purposes of having law enforcement E) The powers granted to state government to imprison citizens of other states who commit crimes within a state
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69) Junk Food. Mary Dogood, a member of the school board in ABC County, is appalled at the amount of junk food in the schools. She convinces the state legislature to pass an ordinance that no stores may sell any unhealthy junk food within 500 feet of any school or day care center, arguing that such a regulation is a valid exercise of the state’s police power to protect its citizens. Convenience stores balk at the regulation and challenge it in court. In determining whether the law is constitutional, which of the following will a court likely ask? A) Whether the state regulation is needed for a compelling reason B) Whether the state regulation is rationally related to a legitimate state end C) Whether the state regulation is needed for an important reason D) Whether the state regulation will impact tax revenue E) Whether the state regulation is needed for a compelling reason and also whether the state regulation will impact tax revenue
70) Junk Food. Mary Dogood, a member of the school board in ABC County, is appalled at the amount of junk food in the schools. She convinces the state legislature to pass an ordinance that no stores may sell any unhealthy junk food within 500 feet of any school or day care center, arguing that such a regulation is a valid exercise of the state’s police power to protect its citizens. Convenience stores balk at the regulation and challenge it in court. What do courts generally presume regarding laws passed in accordance with states' police power? A) There is no presumption. B) That the law is valid C) That the law is invalid D) That the law is valid unless it involves a First Amendment right E) That the law is valid unless it involves the Commerce Clause
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71) Insurance. Susan, a trained nurse, was recently elected to the U.S. Senate. Susan is very concerned about the lack of insurance for many children and also working adults who cannot afford the insurance premiums. She proposes legislation that states are taxed sufficiently to provide health insurance coverage to children and that federal funds for state highways are denied to any state that does not also provide insurance coverage for uninsured adults. She also proposes that states with citizens earning higher than average incomes be taxed at a higher rate than other states. Bill, a senator, tells Susan that Congress lacks the authority to tax in this manner because the U.S. Constitution expressly reserves that right to the states. Ellen, another senator, tells Susan that Congress has no authority to link highway funds or any other funds with social welfare objectives. Sam, an administrative assistant, tells Susan that Congress is prohibited from taxing residents of one state at a higher rate than citizens of another state. Which of the following is true regarding Bill's statement? A) He is incorrect in saying that the U.S. Constitution expressly reserves the right to tax to the states, but he is correct in saying that Congress lacks the authority to tax in this manner because the president has issued an executive order prohibiting such taxation. B) He is incorrect. The U.S. Constitution contains no such reservation. C) He is incorrect because the prohibition is contained in a federal statute passed by Congress, not in the U.S. Constitution. D) He is partially correct. The U.S. Constitution prohibits taxation in areas in which states also tax, but most states are not taxing for insurance purposes at this time. E) He is incorrect in saying that the U.S. Constitution expressly reserves the right to tax to the states, but he is correct in saying that Congress lacks the authority to tax in this manner because Congress cannot lay taxes for any reason other than essential needs of the federal government. F) He is incorrect in saying that the U.S. Constitution expressly reserves the right to tax to the states, but he is correct in saying that Congress lacks the authority to tax in this manner because the president has issued an executive order prohibiting such taxation. G) He is incorrect because the prohibition is contained in a federal statute passed by Congress, not in the U.S. Constitution.
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72) Insurance. Susan, a trained nurse, was recently elected to the U.S. Senate. Susan is very concerned about the lack of insurance for many children and also working adults who cannot afford the insurance premiums. She proposes legislation that states are taxed sufficiently to provide health insurance coverage to children and that federal funds for state highways are denied to any state that does not also provide insurance coverage for uninsured adults. She also proposes that states with citizens earning higher than average incomes be taxed at a higher rate than other states. Bill, a senator, tells Susan that Congress lacks the authority to tax in this manner because the U.S. Constitution expressly reserves that right to the states. Ellen, another senator, tells Susan that Congress has no authority to link highway funds or any other funds with social welfare objectives. Sam, an administrative assistant, tells Susan that Congress is prohibited from taxing residents of one state at a higher rate than citizens of another state. Which of the following is true regarding Ellen's statement? A) Ellen is correct. B) Ellen is correct only if the state is making efforts to put social programs into effect and is not acting unreasonably in refusing to provide needed services. C) Ellen is partially correct in that Congress has no authority to link highway funds with social services, but any other funds may be linked to social services by executive order. D) Ellen is partially correct in that Congress has no authority to link highway funds with social services, but other funds may be linked to social services by an act of Congress. E) Ellen is incorrect.
73) Insurance. Susan, a trained nurse, was recently elected to the U.S. Senate. Susan is very concerned about the lack of insurance for many children and also working adults who cannot afford the insurance premiums. She proposes legislation that states are taxed sufficiently to provide health insurance coverage to children and that federal funds for state highways are denied to any state that does not also provide insurance coverage for uninsured adults. She also proposes that states with citizens earning higher than average incomes be taxed at a higher rate than other states. Bill, a senator, tells Susan that Congress lacks the authority to tax in this manner because the U.S. Constitution expressly reserves that right to the states. Ellen, another senator, tells Susan that Congress has no authority to link highway funds or any other funds with social welfare objectives. Sam, an administrative assistant, tells Susan that Congress is prohibited from taxing residents of one state at a higher rate than citizens of another state. Which of the following is true regarding Sam's statement?
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A) Sam is incorrect. The U.S. Congress has complete discretion on taxation. B) Sam is incorrect, but before the U.S. Congress taxes one state's residents at a higher rate than citizens of other states, a compelling need must be shown. C) Sam is incorrect, but before the U.S. Congress taxes one state's residents at a higher rate than citizens of other states, an important need must be shown. D) Sam is incorrect, but before the U.S. Congress taxes one state's residents at a higher rate than citizens of other states, a disparity of income of over 30% must be shown. E) Sam is correct.
74) Scruffy. Sam is engaged in the criminal activity of growing marijuana in his home. A couple of police officers, while randomly passing through the neighborhood, saw Sam go to the mailbox. They thought that he looked a little scruffy, and they were concerned that they had not made a sufficient number of arrests in the past month. They decided to "check out" Sam. Therefore, they immediately broke down Sam's door, searched his home, and arrested him. The police officer in charge told Sam that because marijuana was involved, he lost his rights against self-incrimination and that he might as well confess. Sam proceeded to confess to growing marijuana and a number of other crimes. The judge was so angry with Sam that he threw him in jail for two months without any kind of hearing. Sam's lawyer, who just graduated from law school, is not sure if the police acted legally in Sam's case by breaking down the door. Which of the following is true on that issue? A) The police acted legally so long as they can show that Sam really did look scruffy. B) The police acted legally so long as they can show that the street was truly chosen at random for patrol. C) The police acted legally so long as they can show that Sam had been in jail previously on a drug offense charge. D) The police acted legally so long as they can show that Sam had been in jail previously for any offense. E) The police violated Sam's Fourth Amendment rights.
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75) Scruffy. Sam is engaged in the criminal activity of growing marijuana in his home. A couple of police officers, while randomly passing through the neighborhood, saw Sam go to the mailbox. They thought that he looked a little scruffy, and they were concerned that they had not made a sufficient number of arrests in the past month. They decided to "check out" Sam. Therefore, they immediately broke down Sam's door, searched his home, and arrested him. The police officer in charge told Sam that because marijuana was involved, he lost his rights against self-incrimination and that he might as well confess. Sam proceeded to confess to growing marijuana and a number of other crimes. The judge was so angry with Sam that he threw him in jail for two months without any kind of hearing. Sam's lawyer questions whether Sam had lost his right against self-incrimination. Which of the following is true on that issue? A) Sam did not lose his right against self-incrimination. B) The office was correct. Sam lost his right against self-incrimination because marijuana was involved. C) Sam lost his right against self-incrimination because he did not immediately ask for a lawyer. D) Sam lost his right against self-incrimination because he did not immediately say he raised his right against self-incrimination. E) Sam lost his right against self-incrimination both because marijuana was involved and also because he did not immediately ask for a lawyer.
76) Scruffy. Sam is engaged in the criminal activity of growing marijuana in his home. A couple of police officers, while randomly passing through the neighborhood, saw Sam go to the mailbox. They thought that he looked a little scruffy, and they were concerned that they had not made a sufficient number of arrests in the past month. They decided to "check out" Sam. Therefore, they immediately broke down Sam's door, searched his home, and arrested him. The police officer in charge told Sam that because marijuana was involved, he lost his rights against self-incrimination and that he might as well confess. Sam proceeded to confess to growing marijuana and a number of other crimes. The judge was so angry with Sam that he threw him in jail for two months without any kind of hearing. Sam's lawyer is concerned that the judge has not granted Sam a hearing. Which of the following is a constitutional right that the judge has violated? A) Sam's right to substantive due process B) Sam's First Amendment rights C) Sam's right to procedural due process D) Sam's Fourth Amendment rights E) Sam's Second Amendment rights
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77) The United States Congress enacted, and the president signed, a new law. Later, the U.S. Supreme Court determined that the new law was unconstitutional. The constitutional system of _____ allows for each branch of government to keep a check over each other branch of government. A) ex post facto laws B) republicanism C) checks and balances D) federalism E) democratic socialism
78) Pursuant to _____, the United States Supreme Court can hear a lower court's case and determine the constitutionality of the lower court's ruling. A) the Commerce Clause B) the Privileges and Immunities Clause C) judicial review D) the federal government’s constitutional system of checks and balances E) the Bill of Rights
79) To determine whether Congress intended to provide exclusive regulation in a certain area, what will courts look to? A) Any oral and/or written evidence that bears a rational relation to the case at hand B) The Privileges and Immunities Clause of the United States Constitution C) The Dormant Commerce Clause of the U.S. Constitution D) The language of the statute and transcripts of congressional hearings E) The Due Process Clause of the Fourteenth Amendment to the U.S. Constitution
80) In its 1995 case United States v. Lopez, how did the United States Supreme Court rule in its interpretation of the commerce clause?
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A) That the United States Congress had exceeded its Commerce Clause authority when it passed the Gun-Free School Zones Act, a law banning the possession of guns within 1,000 feet of any school B) That the U.S. Congress retains all powers associated with regulating commerce, and that the U.S. Supreme Court would therefore no longer evaluate commerce clause claims C) That the U.S. Congress had continually overreached in its exercise of Commerce Clause powers D) That congressional oversight of the Commerce Clause should be delegated to a new independent administrative agency, the Commerce Clause Administrative Oversight Agency (CCAOA) E) None of the above
81) In its 1978 case First National Bank of Boston v. Bellotti, how did the United States Supreme Court rule regarding political speech? A) That corporations cannot engage in political speech or support any candidates B) That the United States Congress must amend the U.S. Constitution to allow for corporate political speech C) That states have the right to restrict corporate political speech, but the U.S. Congress does not have a corresponding right D) That the First Amendment to the U.S. Constitution protects corporate political speech to the same extent as ordinary citizens’ political speech. E) That corporations can engage in political speech but must limit such speech to major national campaigns such as presidential elections.
82) In overturning the lower court’s decision, the Court of Appeals in the Bad Frog Brewery v. New York Liquor Authority case determined that _____.
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A) fighting words are not protected speech under the First Amendment to the United States Constitution, but just because the frog on the product label was displaying its middle finger, this did not constitute fighting words B) the state failed to prove it was advancing its interests to a material degree C) free speech applies to advertisements, even if the product label is offensive to others D) commercial free speech protection does not apply to those products that are bad for the public, including alcohol, tobacco and drugs E) the New York State Liquor Authority has the right to determine what is appropriate in terms of labeling content in its state
ESSAY. Write your answer in the space provided or on a separate sheet of paper. 83) Explain the system of checks and balances established by the United States Constitution, and set forth your opinion as to whether such a system adequately supports a democratic form of government.
84) Explain the concept of the "Dormant Commerce Clause." Address whether a state law banning the importation of out-of-state apples in order to assist in-state growers would violate the Dormant Commerce Clause.
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85) Christen who just turned eighteen is out with several friends. They decide to see a movie, but it is sold out. Christen hid in the back of the theatre and yelled "Fire" as loudly as she could. Everyone ran out of the theatre, and a number got in their vehicles and left. Christen and her friends thought that seeing the movie was now possible. Unfortunately, a theatre employee saw Christen yelling, called the police, and she was arrested. Christen told the police officers that she was only exercising her free speech rights. She also told the police that the theatre employee lied and that she personally saw him stealing popcorn. The theatre employee told Christen that he was going to sue for defamation, and she told him that she would win based on her right to free speech. Discuss whether Christen is right on one or both counts and why.
86) Explain the Central Hudson Gas & Electric Corp. v. Public Service Commission of New York test for commercial speech and set forth your opinion as to whether the Central Hudson test should be expanded to provide additional protection for commercial speech.
87) When is a strict scrutiny standard used to examine laws, how is this standard applied, and what presumption do courts apply (if any) in cases involving this standard? Explain whether you believe the strict scrutiny standard should be applied when a state government institutes a law distinguishing between individuals or groups.
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Answer Key Test name: Chap 05_5_The Essentials_Kubasek 1) FALSE The U.S. Constitution establishes a system of government based on the principle of federalism, according to which the authority to govern is divided between federal and state governments. 2) FALSE The U.S. Constitution allocates the power of the federal government among the three branches of government. The first three articles of the Constitution establish three independent branches of the federal government: the legislative, executive, and judicial branches. The Constitution ensures that each branch maintains a separate sphere of power to prevent any one branch from obtaining undue power and monopolizing control of government. 3) FALSE According to the Tenth Amendment to the U.S. Constitution, all powers that the Constitution neither gives exclusively to the federal government nor takes from the states are reserved for the states. 4) FALSE The United States Congress can overturn a presidential veto with a twothirds vote of the members of Congress. 5) TRUE The United States Congress, the legislative or lawmaking branch of government, has the power to enact legislation, but the president can veto a law that Congress passes. 6) FALSE
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Although the U.S. Constitution does not explicitly allow courts to review legislative and executive actions to determine whether they are constitutional, early common law established this process, known as judicial review. 7) FALSE Judicial review allows courts to review the constitutionality of lower courts’ decisions. 8) TRUE Although the U.S. Constitution does not explicitly allow courts to review legislative and executive actions to determine whether they are constitutional, early common law established this process, known as judicial review. The process of judicial review was established in the United States Supreme Court case Marbury v. Madison. 9) TRUE The Supremacy Clause is located in Article VI of the U.S. Constitution. It provides that the Constitution, laws, and treaties of the United States constitute the supreme law of the land, “any Thing in the Constitution or Laws of any State to the Contrary notwithstanding." 10) FALSE Sometimes when the state and federal governments have concurrent authority, the federal government can decide to regulate that area exclusively. In such a situation, according to the doctrine of federal preemption, the state law is unconstitutional. To determine whether the United States Congress intended to provide exclusive regulation, courts look to the language of the statute and transcripts of congressional hearings. 11) FALSE
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The primary source of authority for the federal regulation of business is the commerce clause, located in Article I, Section 8 of the Constitution. This clause states that the United States Congress has the power to “regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes." 12) FALSE The NLRB v. Jones & Laughlin Steel Corp. case was the turning point for the United States Supreme Court's interpretation of the Commerce Clause. In that case, the Court ruled that the U.S. Congress could regulate labor relations at a manufacturing plant because a work stoppage at the plant would seriously affect interstate commerce. Since the NLRB v. Jones & Laughlin Steel Corp. case, Congress has regulated a broad range of business activities according to the Commerce Clause. 13) TRUE Police power consists of the residual powers retained by each state to safeguard the health and welfare of its citizenry.Typical exercises of a state’s police power include state criminal laws, building codes, zoning laws, sanitation standards for restaurants, and regulations for the practice of medicine. 14) FALSE Article I, Section 8 of the U.S. Constitution gives the federal government the “Power to lay and collect Taxes, Duties, Imports, and Excises." 15) TRUE As with its power to tax, Congress can use its spending power to achieve social welfare objectives. For example, in South Dakota v. Dole, the United States Supreme Court upheld a federal statute that grants federal funds for state highways to only those states in which 21 is the legal drinking age. 16) FALSE Version 1
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The Fourteenth Amendment to the United States Constitution extends most of the provisions of the Bill of Rights to the states, prohibiting state interference in citizens’ exercise of their rights. 17) FALSE The first ten amendments to the U.S. Constitution, known as the Bill of Rights, substantially affect government regulation of business. These amendments prohibit the federal government from infringing on individual freedoms. 18) FALSE Like other rights, First Amendment rights are not absolute. For example, in terms of the First Amendment right to freedom of speech, a person does not have the right to yell “Fire!” in a crowded theater when there is no fire, nor does the First Amendment protect false statements about another that are injurious to that person’s reputation. 19) FALSE In First National Bank of Boston v. Bellotti, the United States Supreme Court ruled that the First Amendment protects corporate political speech to the same extent as ordinary citizens’ political speech. 20) TRUE Not all corporate speech is political speech. Commercial speech is speech that conveys information related to the sale of goods and services. Courts analyze government restrictions on commercial speech according to a four-part test established in Central Hudson Gas & Electric Corp. v. Public Service Commission of New York. 21) C The United States Constitution establishes a system of checks and balances to keep each branch's powers from dominating the other branches. 22) A
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The United States Constitution establishes a system of government based on the principle of federalism, according to which the authority to govern is divided between federal and state governments. 23) B The United States president can use veto power to overrule laws passed by the legislative branch (i.e., the U.S. Congress). 24) C Chief Justice John Marshall wrote the opinion for the landmark 1803 United States Supreme Court case Marbury v. Madison. 25) E According to the Tenth Amendment to the United States Constitution, all powers that the Constitution neither gives exclusively to the federal government nor takes from the states are reserved for the states. 26) D Because the federal government has only those powers granted to it by the United States Constitution, federal legislation that affects business must be based on an expressed constitutional grant of authority. 27) C In addition to allocating authority between state and federal governments, the United States Constitution allocates the power of the federal government among the three branches of government. 28) C The first three articles of the United States Constitution establish three independent branches of the federal government: the legislative, executive, and judicial branches. The U.S. Constitution ensures that each branch maintains a separate sphere of power to prevent any one branch from obtaining undue power and monopolizing control of government. 29) D
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Although the United States Constitution does not explicitly allow courts to review legislative and executive actions to determine whether they are constitutional, early common law (particularly the landmark 1803 U.S. Supreme Court case Marbury v. Madison) established this process, known as judicial review. 30) B The Supremacy Clause of the United States Constitution provides that the Constitution, laws, and treaties of the U.S. constitute the supreme law of the land, "any Thing in the Constitution or Laws of any State to the Contrary notwithstanding." 31) D The Supremacy Clause of the United States Constitution, located in Article 6, provides that the Constitution, laws, and treaties of the United States constitute the supreme law of the land, "any Thing in the Constitution or Laws of any State to the Contrary notwithstanding." 32) D Sometimes when the state and federal governments have concurrent authority, the federal government can decide to regulate that area exclusively. In such a situation, according to the doctrine of federal preemption, the state law is unconstitutional. To determine whether the United States Congress intended to provide exclusive regulation, courts look to the language of the statute and transcripts of congressional hearings. 33) A The United States Supreme Court affirmed the lower courts' decisions, holding that the U.S. Congress may not regulate noneconomic, violent criminal conduct solely based on that conduct's aggregate effect on interstate commerce. 34) E
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Police power consists of the residual powers retained by each state to safeguard the health and welfare of its citizenry. Typical exercises of a state's police power include state criminal laws, building codes, zoning laws, sanitation standards for restaurants, and regulations for the practice of medicine. 35) E The United States Court of Appeals for the Ninth Circuit concluded that Arizona's statutory exceptions to its three-tier distribution system, which treated similarly situated in-state and out-of-state wineries the same and imposed no new impermissible burdens on out-of-state wineries, did not have the practical effect of favoring in-state economic interests over outof-state interests. 36) A Article I, Section 8, of the Constitution gives the federal government the "Power to lay and collect Taxes, Duties, Imports and Excises." The taxes laid by Congress, however, must be uniform across the states. Although tax collection allows the government to provide essential services, the government can also use taxes for other purposes. For example, to encourage the development of certain industries and discourage the development of others, the government can provide tax credits for firms entering favored industries. 37) D Article I, Section 8 of the United States Constitution grants the United States Congress spending power by authorizing it to “Pay the Debts and provide for the common Defense and general Welfare of the United States.” As with its power to tax, the U.S. Congress can use its spending power to achieve social welfare objectives. For example, in South Dakota v. Dole, the U.S. Supreme Court upheld a federal statute that grants federal funds for state highways to only those states in which 21 is the legal drinking age. Version 1
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38) E The Privileges and Immunities Clause of the United States Constitution prohibits states from discriminating against citizens of other states when those nonresidents engage in ordinary and essential activities. States can, however, allow state universities to charge higher tuition to out-of-state students because residents pay taxes that fund state universities, while out-of-state students do not. 39) A Article IV, Section 1 of the United States Constitution contains the Full Faith and Credit Clause, which states that "Full Faith and Credit shall be given in each State to the public Acts, Records, and judicial Proceedings of every other State." This provision requires courts in all states to uphold contracts and public acts established in other states. 40) E Article I, Section 10 of the United States Constitution contains the Contract Clause, which states that government may not pass any “Law impairing the Obligation of Contracts.” In its application, courts interpret this clause to mean that no law can be passed that will unreasonably interfere with existing contracts. 41) B The Fourteenth Amendment to the United States Constitution extends most of the provisions in the Bill of Rights to the states, prohibiting state interference in citizens' exercise of their rights. Thus, the federal and state governments cannot deprive individuals of the freedoms protected by the Bill of Rights. 42) B The Second Amendment to the United States Constitution states that the government cannot infringe on citizens' right to bear arms (See Exhibit 5-2, "Summary of the Bill of Rights"). 43) C Version 1
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The Fourth Amendment to the United States Constitution protects citizens from unreasonable searches and seizures and ensures that the government issue warrants only with probable cause (See Exhibit 5-2, "Summary of the Bill of Rights"). 44) C The Fifth Amendment to the United States Constitution protects against self-incrimination, meaning that in a criminal case, the defendant does not have to testify in court as a witness against himself or herself (See Exhibit 5-2, "Summary of the Bill of Rights"). 45) D The Eighth Amendment to the United States Constitutionprohibits cruel and unusual punishment (See Exhibit 5-2, "Summary of the Bill of Rights"). 46) A The federal and state governments cannot deprive individuals of the freedoms protected by the Bill of Rights. The constitutional amendments established in the Bill of Rights are a limit only on the actions of government—they do not limit the behavior of private employers. This distinction is commonly misunderstood by many citizens. 47) D The Central Hudson Gas & Electric Corp. v. Public Service Commission of New York test for commercial speech is as follows: (1) does the speech concern an illegal activity? Is it misleading? (2) Is the government interest served by the restriction on commercial speech substantial? (3) Does the regulation directly advance the government interest asserted? (4) Is the regulation more extensive than necessary to serve the government interest?(See Figure 5-2, “The Central Hudson Test for Commercial Speech.”) 48) E
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The First Amendment to the United States Constitutiondoes not protect defamation (speech that harms the reputation of another), nor does it protect obscenity. Courts analyze government restrictions on commercial speech according to a four-part test established in Central Hudson Gas & Electric Corp. v. Public Service Commission of New York. 49) A The First Amendment to the United States Constitution does not protect fighting words. According to the U.S. Supreme Court, “The English language has a number of words and expressions which by general consent are ‘fighting words’ when said without a disarming smile. . . . Such words, as ordinary men know, are likely to cause a fight.” 50) A The First Amendment to the United States Constitution contains two provisions that protect citizens' freedom of religion: The Establishment Clause and the Free-Exercise Clause. 51) D In the 1971 case Lemon v. Kurtzman, the U.S. Supreme Court codified the following three tests to determine whether a particular government statute violates the Establishment Clause: (1) Does the statute have a secular legislative purpose? (2) Does the statute's principal or primary effect either advance or inhibit religion? (3) Does the statute foster an excessive government entanglement with religion?To determine whether the statute fosters an excessive government entanglement with religion, courts examine the character and purpose of the institutions benefited, the nature of the aid that the government provides, and the resulting relationship between the government and the religious authority. 52) B The First Amendment’sEstablishment Clause maintains that government "shall make no law respecting an establishment of religion." Version 1
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53) A The First Amendment’s Free-Exercise Clause states that government cannot make a law "prohibiting the free exercise" of religion. 54) C A search is unreasonable if the government official conducting the search does not first obtain a search warrant from a court. A search warrant is a court order that authorizes law enforcement agents to search for or seize items specifically described in the warrant. 55) B Government officials can obtain search warrants only if they can show probable cause to believe that the search will uncover specific evidence of criminal activity.In other words, the government officials must have a sufficient reason based on known facts to obtain a warrant. 56) A When law enforcement officials believe it is likely that the items sought will be removed before they can obtain a warrant, they may conduct a search without a warrant.Law enforcement officials frequently conduct automobile searches without a warrant according to this rule. 57) D Although administrative searches usually require search warrants, courts have established an exception to this rule. Under the pervasiveregulation exception, if an industry has a long history of pervasive regulation, a warrantless search is not unreasonable. In such industries, administrative agencies can use warrantless searches to ensure that firms uphold regulations. 58) D The Fifth Amendment protects against self-incrimination, meaning that in a criminal case, the defendant does not have to testify in court as a witness against himself or herself. 59) E Version 1
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The Fifth Amendment to the United States Constitution protects against double jeopardy. 60) A The Fifth Amendment to the United States constitution protects against double jeopardy, meaning that the government cannot try a person more than once for the same crime. 61) C The Due Process Clause of the Fifth Amendment to the United States Constitutionguarantees two types of due process: procedural and substantive. 62) B Substantive due process refers to the basic fairness of laws that may deprive an individual of her life, liberty, or property.To satisfy the substantive due process requirement, the government must have a proper purpose for enacting laws the restrict individuals’ liberty or the use of their property. 63) C The Fifth Amendment's Takings Clause provides that when government takes private property for public use, it must pay the owner just compensation, or fair market value, for her property. 64) B The Ninth Amendment to the United States Constitution states, “The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people.” Although this amendment does not expressly guarantee the right to privacy, courts have interpreted the Ninth Amendment, together with the First, Third, Fourth, and Fifth Amendments, as providing individuals with a right to privacy. In Griswold v. Connecticut, the U.S. Supreme Court ruled that a Connecticut law prohibiting the use of contraceptives was unconstitutional because it violated individuals’ right to privacy. Version 1
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65) D If a law prevents individuals from exercising a fundamental right, or if the law's classification scheme involves suspect classifications, the action will be subject to strict scrutiny.Suspect classifications include classifications based on race, national origin, and citizenship. 66) A If the law's classification scheme is based on gender or on the legitimacy of children, courts use intermediate scrutiny.According to this standard, the law is constitutional only if it is substantially related to an important government objective. 67) A Sometimes a state’s use of its police power affects interstate commerce. If the purpose of a state law is to regulate interstate commerce or to discriminate against interstate commerce, the law is usually unconstitutional. Likewise, if a law substantially interferes with interstate commerce, it is generally unconstitutional. This restriction on states' authority to pass laws that substantially affect interstate commerce is called the Dormant Commerce Clause. 68) A Police power consists of the residual powers retained by each state to safeguard the health and welfare of its citizenry.Typical exercises of a state’s police power include state criminal laws, building codes, zoning laws, sanitation standards for restaurants, and regulations for the practice of medicine. 69) B
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In balancing these competing interests, a court generally asks whether the state regulation is rationally related to a legitimate state end.If it is, the court then asks whether the regulatory burden imposed on interstate commerce is outweighed by the state’s interest in enforcing the legislation. The court may also inquire whether there is a less drastic alternative available to attain the legitimate state purpose. 70) B Although the Supremacy Clause establishes the sovereignty of federal law, courts generally presume that laws passed in accordance with states' police power are valid. 71) B Article I, Section 8 of the United States Constitution gives the federal government the “Power to lay and collect Taxes, Duties, Imports, and Excises.” Although tax collection allows the federal government to provide essential services, the government can also use taxes for other purposes and can use its spending power to achieve social welfare objectives. 72) E Article I, Section 8 of the United States Constitution grants the U.S. Congress spending power by authorizing it to “pay the Debts and provide for the common Defense and general Welfare of the United States.” As with its power to tax, Congress can use its spending power to achieve social welfare objectives. For example, in South Dakota v. Dole, the U.S. Supreme Court upheld a federal statute that grants federal funds for state highways to only those states in which 21 is the legal drinking age. 73) E
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Article I, Section 8 of the United States Constitution gives the federal government the “Power to lay and collect Taxes, Duties, Imports, and Excises.” The taxes imposed by the U.S. Congress, however, must be uniform across the states. In other words, the government cannot impose higher taxes on residents of one state than it imposes on those of another. 74) E The Fourth Amendment to the United States Constitution guarantees the right to be “secure in their persons, their homes, and their personal property.” Thus, it prohibits the government from conducting unreasonable searches of individuals and seizing their property to use as evidence against them. A search is unreasonable if the government official conducting the search does not first obtain a search warrant from a court. 75) A The Fifth Amendment to the United States Constitutionprotects against self-incrimination, meaning that in a criminal case, the defendant does not have to testify in court as a witness against himself or herself. 76) C Procedural due process, guaranteed by the Fifth Amendment to the United States Constitution, requires the government to use fair procedures when taking the life, liberty, or property of an individual or corporation. At a minimum, procedural due process entitles a person to notice of any legal action against her and to a hearing before an impartial tribunal. 77) C The Constitution also establishes a system of checks and balances. Each branch’s powers keep the other branches from dominating the government. 78) C Version 1
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Judicial review also allows courts to review the constitutionality of lower courts’s decisions. 79) D Sometimes, however, when the state and federal governments have concurrent authority, the federal government can decide to regulate that area exclusively. In such a situation, according to the doctrine of federal preemption, the state law is unconstitutional. To determine whether Congress intended to provide exclusive regulation, courts look to the language of the statute and transcripts of congressional hearings. 80) A In the 1995 case United States v. Lopez marked a significant change in the nearly 60-year trend in the Supreme Court’s interpretation of the commerce clause. In Lopez, the Court ruled that Congress had exceeded its commerce clause authority when it passed the Gun-Free School Zone Act, a law banning the possession of guns within 1,000 feet of any school. In its ruling, the Court said that Congress could not regulate in an area that had “nothing to do with commerce, or any sort of enterprise.” 81) D In First National Bank of Boston v. Bellotti, the United States Supreme Court ruled that the First Amendment protects corporate political speech to the same extent as ordinary citizens' political speech. 82) B The First Amendment to the United States Constitution does not protect fighting words. According to the U.S. Supreme Court, "The English language has a number of words and expressions which by general consent are 'fighting words' when said without a disarming smile. . . . Such words, as ordinary men know, are likely to cause a fight."
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83) The United States Constitution establishes the system of checks and balances. Each branch's powers keep the other branches from dominating the government. Congress, the legislative branch, has the power to enact legislation, but the president can veto a law that Congress passes. The legislature, however, can overturn a presidential veto with a two-thirds vote of the members of Congress. Also, if Congress passes a bill and the president signs it, the judiciary can strike it down as unconstitutional. Student answers on the issue of whether or not this system supports a democratic form of government will vary. 84) The Dormant Commerce Clause is a restriction on a state's authority to pass laws that substantially affect interstate commerce. Sometimes a state's use of its police power affects interstate commerce. If the purpose of a state law is to regulate interstate commerce or to discriminate against interstate commerce, the law is usually unconstitutional. Likewise, if a law substantially interferes with interstate commerce, it is generally unconstitutional. A law banning the importation of out-of-state apples in order to assist in-state growers would likely violate the Dormant Commerce Clause because it discriminates against out-of-state activity without sufficient reason. 85) While the First Amendment to the United States Constitution protects freedom of speech, this right is not absolute. For that reason, Christen did not have the right to yell “Fire” when there actually was no fire. Additionally, the First Amendment does not protect defamatory speech, false statements about another that are injurious to that person's reputation.
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86) Commercial speech is speech that conveys information related to the sale of goods and services. Courts analyze government restrictions on commercial speech according to the following four-part test established in Central Hudson Gas & Electric Corp. v. Public Service Commission of New York: 1.(1) Does the speech concern an illegal activity? Is it misleading? 2.(2) Is the government interest served by the restriction on commercial speech substantial? 3.(3) Does the regulation directly advance the government interest asserted? 4.(4) Is the regulation more extensive than necessary to serve the government interest? Student opinion on whether the test should be expanded to provide additional protection for commercial speech will vary. 87) If a law prevents individuals from exercising a fundamental right, or if the law's classification scheme involves suspect classifications, the action will be subject to strict scrutiny. Suspect classifications include classifications based on race, national origin, and citizenship. Courts uphold suspect classifications only if they are necessary to promote a compelling state interest. In cases involving suspect classifications, courts do not begin their analysis with a presumption that the classification is constitutional, so few laws pass the strict-scrutiny standard. Student opinion on whether the strict-scrutiny standard should always apply in cases implicating equal protection issues will vary.
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CHAPTER 6 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) The Foreign Corrupt Practices Act (FCPA) prohibits payments to foreign officials to influence an official act or decision corruptly or to influence a foreign government. ⊚ true ⊚ false
2) The government is not always a party to a criminal action. Criminal actions can be brought by regular citizens. ⊚ true ⊚ false
3)
Government’s involvement is what distinguishes criminal trials from civil proceedings. ⊚ true ⊚ false
4) case.
The burden of proof in a civil case is much higher than the burden of proof in a criminal ⊚ ⊚
5)
true false
In strict liability crimes, mens rea is required. ⊚ true ⊚ false
6) White-collar crimes are nonviolent acts against society that occur most frequently in the non-business content. ⊚ true ⊚ false
7) According to some estimates, one in three American households is the victim of whitecollar crime every year.
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⊚ ⊚
true false
8) Extortion is the offering, giving, soliciting, or receiving of money or any object of value for the purpose of influencing the judgment or conduct of a person in a position of trust. ⊚ true ⊚ false
9)
Fraud generally requires scienter. ⊚ true ⊚ false
10) If you sign your mother's name to a check made out to her, you may have committed forgery. ⊚ true ⊚ false
11)
Embezzlement usually occurs when an employee steals money. ⊚ true ⊚ false
12) In China, officials found guilty of extortion and accepting bribes are subject to life imprisonment or even the possibility of being put to death. ⊚ true ⊚ false
13) Under the common law, a corporation could be found guilty of a crime due to the existence of mens rea. ⊚ true ⊚ false
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14) For a corporation to be held criminally liable for the acts of an employee, the prosecutor must show that the employee was acting within the scope of her or his employment; however, the prosecutor need not demonstrate that the employee was acting with the purpose of benefiting the corporation. ⊚ true ⊚ false
15) A corporate executive cannot be held criminally liable if he or she did not know about the company's criminal violation. ⊚ true ⊚ false
16) After being arrested and read their Miranda rights, defendants are taken to the police station for arraignment, a procedure during which the name of the defendant and the alleged crime are recorded in the investigating agency’s or police department’s records. ⊚ true ⊚ false
17) Before 1991, criminal sentencing was determinate; however, since 1991, there has been a discernable trend toward indeterminate sentencing. ⊚ true ⊚ false
18) The grand jury consists of a group of citizens who consider evidence in a criminal case to determine if there is enough evidence to bring a defendant to trial. ⊚ true ⊚ false
19) If a defendant enters a nolo contendere plea, he or she does not admit guilt but agrees to the charges. ⊚ true ⊚ false
20)
Racketeering has been defined broadly to include almost all criminal actions.
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⊚ ⊚
true false
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 21) What is the burden of proof to establish in a criminal case? A) Proof beyond a reasonable doubt B) Proof by rational persuasion C) Indisputable proof D) Criminal recklessness or negligence E) A preponderance of the evidence
22)
Which term in criminal law means “the guilty act?” A) Writ of habeas corpus B) Res ipsa loquitur C) Actus reus D) Mens rea E) Ex post facto
23)
Mens rea means _____. A) wrongful state of mind B) negligence C) actus reus D) strict liability E) liability without fault
24) If a business were to sell cigarettes or alcohol to a minor, this would be an example of _____.
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A) criminal recklessness B) criminal negligence C) strict liability D) proof by the greater weight of the evidence E) proof by a preponderance of the evidence
25) Sam, a new police officer, was criticized by his supervisor for failing to make a sufficient number of arrests. Sam went into a section of town known for criminal activity, picked up several suspicious-looking individuals, read them their Miranda rights, and arrested them hoping that they would confess to something. Alice, one of the detainees, was scared; hoping to cut a deal, she immediately confessed to burglarizing a local pawnshop. Which of the following is Alice's best defense at trial? A) That the officer failed to have probable cause to arrest her B) That the officer violated her First Amendment rights C) That the officer failed to obtain a form signed by Alice verifying that she understood her Miranda rights as read D) That the officer failed to have articulable suspicion to arrest her E) That a confession prior to an initial appearance is invalid
26)
Strict liability is _____.
A) civil, but not criminal, wrongdoing B) punishment imposed by a court that is more severe than the punishment imposed by state-structured sentencing guidelines C) liability without fault D) punishment imposed by a court that is more severe than the punishment imposed by federal-structured guidelines E) liability based on proof beyond a reasonable doubt
27) Douglas committed a crime for which he was found guilty and will serve a 10-year sentence in the penitentiary. What type of crime was this?
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A) A civil offense B) A petty offense C) A misdemeanor D) A felony E) An adjudicatory offense
28) If Tabitha commits a crime that is punishable by less than one year of imprisonment, this is known as a(n) _____. A) misdemeanor B) felony C) Petty offense D) civil offense E) adjudicatory offense
29) If a person commits a minor offense such as violating a building code, this is known as a(n) _____. A) felony B) petit misdemeanor C) ex post facto misdemeanor D) petty offense E) city or municipal felony
30)
What is the purpose of the Foreign Corrupts Practices Act?
A) To keep United States government officials from being corrupted by foreign powers B) To combat the bribery of foreign officials C) To allow state and federal court officials to bribe foreign officials to turn over needed prosecutorial documents D) To make legal the payments necessary to extradite foreign criminals E) To keep businesses from being bribed to manufacture their goods overseas
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31) Thomi told Belinda that if she did not pay him $10,000 by the week’s end, he would take incriminating documents he has against her to the local police. This type of behavior is known as _____. A) extortion B) negligence C) malfeasance D) fraud E) defalcation
32) Jolene, a sales representative, was worried about her work-related productivity so she made a series of entries in her records to show that she had more sales than she actually did. This is known as _____. A) defalcation B) fraudulent concealment C) false entries D) forgery E) pretexting
33) Due to the high cost of college, Raul and Philpe decided to counterfeit $100 bills to help pay for tuition. This is known as _____. A) mail fraud B) a Ponzi scheme C) false pretenses D) money kiting E) false token
34) Nicoli is the trustee of his nephew Adam’s trust fund, which was left to Adam after his parents were killed in an automobile accident. Nicoli found himself in financial hardship, so he took some of Adam’s trust fund money and used it to pay his own personal bills. This is considered _____.
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A) mail fraud B) defalcation C) a Ponzi scheme D) check kiting E) pretexting
35) Williams Investment Funds solicited clients for high-profit returns from a fictitious new internet business. William’s employees paid off the early investors from new funds raised to cover the costs. This type of fraudulent crime is known as _____. A) pretexting B) forgery C) extortion D) a Ponzi scheme E) mail fraud
36) In May 2019, the FBI arrested a group of mafia leaders for a series of scams that cost investors millions. The claim was that the mob bought large stakes in small companies and then bribed and coerced brokers to promote the stocks at inflated prices. This is known as _____. A) pretexting B) a Ponzi scheme C) defalcation D) mail fraud E) securities fraud
37) Ed goes door-to-door selling magazine subscriptions. Ed knows that he is simply taking money for subscriptions and has absolutely no intention of ever arranging for the provision of magazines. Which of the following offenses, if any, has he committed?
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A) Defalcation B) False entry C) False token D) False pretense E) A Ponzi scheme
38) Dillon contacted Joanna to discuss a new cell phone application. The application was not real, and the application was simply used to obtain information about Joanna’s phone use for a competitor. This is known as _____. A) false pretense B) false token C) technology kiting D) pretexting E) false entry
39) Ben, a bank teller, receives $1,000 from a customer for deposit into the customer's bank account. Instead of placing the money into the customer's account, Ben keeps the money for himself. Which of the following offenses has Ben committed? A) Forgery B) Larceny C) Grand larceny D) Embezzlement E) False pretense
40)
Which of the following is not considered a computer crime? A) Spyware B) Viruses C) Fraud D) Personal computer theft E) Pretexting
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41) A person who illegally accesses or enters another person's or a company's computer system to obtain information or to steal money is known as a(n) _____. A) insider B) cyber-burglar C) hacker D) cyber-trespasser E) Ponzi gamer
42) A hacker who tries to shut down the New York Stock Exchange would be charged with _____. A) embezzlement B) cyber terrorism C) bribery D) fraud E) false pretense
43) Which of the following is not covered under the Counterfeit Access Devise and Computer Fraud and Abuse Act? A) Unauthorized use of or access to a computer to obtain classified military or foreign policy information with the intent to harm the United States B) Modification of data that impedes medical treatment to individuals C) Alteration or modification of data in financial computers, causing a loss of $1,000 or more D) Actions of employees who spy on their co-workers through personal means E) Unauthorized use of a computer to collect financial or credit information protected under federal privacy law
44) Which of the following is true regarding the personal liability of corporate executives for a business crime?
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A) Corporate executives may never be held personally liable for a business crime. B) Corporate executives may only be held personally liable for a business crime if they benefited personally from their actions in executing the business crime. C) Corporate executives may be found personally liable for a business crime regardless of whether the business crime was committed for personal benefit or for the benefit of the corporation. D) A court may not assess criminal liability on a corporate executive unless the executive directly engaged in the specific criminal violation. E) Criminal liability may not be assessed against a corporate executive unless the executive directly engaged in the criminal activity and also profited personally and directly from the criminal activity.
45)
Criminal proceedings generally begin when an individual is _____. A) thought to have committed a crime B) arrested for a crime C) accused of a crime D) contemplating a crime E) read his or her Miranda rights
46) Which of the following is true regarding the Fourteenth Amendment to the United States Constitution? A) It is part of the Bill of Rights. B) Its safeguards apply only at the federal level. C) It extends most constitutional rights to defendants at the state level. D) It is a part of the Bill of Rights, its protections apply at the federal level, and its protections also apply at the state level. E) It is not a part of the Bill of Rights, and its protections apply only at the federal level.
47) Simon, a police officer, is called to the scene of an accident. Simon witnesses one of the people in the accident trying to stuff a white powdery substance down his pants. When Simon approaches the individual, the individual flees. Simon grabs the person and places him under arrest. This arrest will be upheld because Simon had _____ to arrest the individual.
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A) reasonable doubt B) articulable suspicion C) probable cause D) identifiable evidence E) suspicion beyond a doubt
48) The Miranda rights provide that a law enforcement officer must inform an arrested individual of which of the following beforethe officer questions the individual? A) That the individual must answer all of the officer’s questions or there will be a presumption of guilt at trial B) That statements made to a law enforcement officer before arraignment may not be used against him in court C) That the individual has the right to consult with an attorney before speaking to the officer D) That the individual will not have the assistance of legal counsel unless he or she can afford to pay for the services of an attorney E) That the right to legal counsel does not begin until after the defendant is arraigned
49) Ordinarily, a law enforcement official must obtain an arrest warrant that demonstrates probable cause or that a suspect committed or is about to commit a crime. Who issues the arrest warrant? A) A magistrate B) A prosecutor C) An appellate judge D) The officer’s commander E) The highest law enforcement official available at the time the warrant is needed
50) Valore is charged with embezzlement. Which of the following allows Valore to enter a plea that would not contest the charge, but not admit to guilt?
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A) Writ of habeas corpus B) Writ of certiorari C) Subpoena duces tecum D) Nolo contendere E) Voluntary dismissal without prejudice
51) If a grand jury issues an indictment against a defendant, the defendant then appears in court to answer the indictment in a proceeding called the _____. A) proceedings on the record B) indictment hearing C) information D) arraignment E) prosecutorial defense
52) Which of the following is incorrect regarding the Racketeer Influenced and Corrupt Organizations (RICO) Act? A) It has been a relatively inconsequential tool for addressing white-collar crime. B) It was originally enacted to combat organized crime. C) In effect, it prevents legitimate businesses from serving as covers for racketeering. D) It prohibits persons employed by or associated with an enterprise from engaging in a pattern of racketeering activity. E) Anyone whose business or property has been damaged by a pattern of racketeering activity can sue to recover treble damages and attorney fees in a civil action.
53)
Which of the following was created specifically to curb white-collar crime? A) The Racketeer Influenced and Corruption Organizations Act B) The False Claims Act C) The Sarbanes-Oxley Act of 2002 D) The White-Collar Enforcement Act E) None of these
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54) Courts have defined a pattern of racketeering under the Racketeer Influenced and Corrupt Organizations (RICO) Act as more than _____ action(s). A) one B) two C) three D) four E) twelve
55) Carla learns that her employer, a healthcare facility, is committing fraud against the government by filing false Medicare claims. Under which of the following laws might she personally receive a portion of any recovery obtained by the government? A) The Racketeer Influenced and Corrupt Organizations Act B) The False Claims Act C) The Sarbanes-Oxley Act of 2002 D) The Medicare Recovery Act E) The Healthcare Fraud Act
56) Enron, Arthur Anderson, WorldCom and Global Crossing where all reasons that the United States Congress passed which of the following Acts? A) The Racketeering Corruptions and Scandals Act B) The False Claims and Reporting Act C) The Sarbanes-Oxley Act of 2002 D) The White Collar Coalition Against Crime Act E) The Fraud in Corporations Act
57) Under the Sarbanes-Oxley Act of 2002, it is a felony for an auditor to willfully fail to maintain proper records of audits and work papers for at least _____ years.
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A) two B) three C) four D) five E) ten
58) Heidi decided to make extra money by offering to make securities investments for clients for a fee. She actually made no investments but used the funds from new clients to pay off existing clients. This worked well for a while, but her scheme came to light when her supply of new clients came to an end. Heidi is guilty of which of the following practices? A) Operating a Ponzi scheme B) Operating a bait and switch scheme C) Account kiting D) Pretexting E) Defalcation
59) A _____ is a hacker whose intention is the exploitation of a target computer or network to create a serious impact, such as the crippling of a communications network. A) computer offender B) data obstructer C) control obstructer D) cyber terrorist E) network thief
60)
Which of the following is incorrect regarding the Computer Fraud and Abuse Act?
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A) It prohibits the fraudulent transfer of computer passwords that could aid unauthorized access that affects interstate commerce. B) It prohibits modification of computer data impeding medical treatment to individuals. C) It prohibits unauthorized use of a computer to collect financial information protected under federal privacy law. D) It prohibits alteration of data in financial computers causing a loss of $100 or more. E) It prohibits use of a computer to obtain classified foreign policy information with the intent to harm the United States
61) data.
A _____ is a computer program that rearranges, damages, destroys, or replaces computer
A) poison pill B) tracker C) drone D) clone E) virus
62) In United States v. Park, what was the United States Supreme Court’s ruling regarding the criminal liability of the defendant Park, corporate president of a national food-chain corporation? A) That the defendant could not be held liable because it could not be proven beyond a reasonable doubt that he knew warehouse employees were failing to take proper steps to ensure sanitary conditions. B) That the defendant could not be held liable because it could not be proven by a preponderance of the evidence that he knew warehouse employees were failing to take proper steps to ensure sanitary conditions. C) That the defendant could not be held liable because he did not personally cause the contamination. D) That the defendant could be held liable because he hid evidence of the offenses. E) That the defendant could be held liable because he failed to ensure his company’s compliance with the law.
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63)
Which of the following is true regarding the grand jury system?
A) Under the United States Constitution, a grand jury is required in state felony cases. B) Under the U.S. Constitution, a grand jury is required in federal felony cases. C) The defendant may not waive his or her right to a grand jury. D) Under the U.S. Constitution, a grand jury is required in both state and federal felony cases, and the defendant may not waive his or her right to a grand jury. E) Under the U.S. Constitution, a grand jury is required in both state and federal felony cases, but the defendant may waive his or her right to a grand jury.
64) Constance and Patricia are arrested for soliciting sexual favors on a street corner, which is against the law in their state. After being arrested and read their Miranda rights, Constance and Patricia will be taken to the police station for _____. A) a formal complaint B) an information C) a first appearance D) a bond hearing E) booking
65) Cosmetic Profits. Sally is the executive vice president of Big Name Cosmetics Company. Through important and material, nonpublic information, she learns that the company is soon going to purchase a smaller chain of stores. It is expected that stock in Big Name Cosmetics will rise dramatically at that point. Sally immediately buys a number of shares of her company's stock. She also tells her friend Alice about the expected purchase of stores. Alice wanted to purchase stock in the company but lacked the funds with which to do so. Although she did not have the funds in Bank A, Alice decided to draw a check on Bank A and deposit the check in Bank B and then proceed to write a check on Bank B to cover the purchase of the stock. She hoped that she would have sufficient funds to deposit before the check was presented for payment. Of which offense is Sally guilty, if any, in purchasing stock of her company? A) She is guilty of insider trading. B) She is guilty of tipping. C) She is guilty of insider misappropriation. D) She is guilty of extortion. E) She is guilty of no offense.
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66) Cosmetic Profits. Sally is the executive vice president of Big Name Cosmetics Company. Through important and material, nonpublic information, she learns that the company is soon going to purchase a smaller chain of stores. It is expected that stock in Big Name Cosmetics will rise dramatically at that point. Sally immediately buys a number of shares of her company's stock. She also tells her friend Alice about the expected purchase of stores. Alice wanted to purchase stock in the company but lacked the funds with which to do so. Although she did not have the funds in Bank A, Alice decided to draw a check on Bank A and deposit the check in Bank B and then proceed to write a check on Bank B to cover the purchase of the stock. She hoped that she would have sufficient funds to deposit before the check was presented for payment. Of which of the following, if any, is Sally guilty of by providing information to Alice regarding the purchase? A) She is guilty of an insider trading violation by tipping the information. B) She is guilty of an insider trading violation by being tipped. C) She is guilty of an insider trading violation by both tipping and being tipped. D) She is guilty of criminal extortion. E) She is not guilty of any offense.
67) Cosmetic Profits. Sally is the executive vice president of Big Name Cosmetics Company. Through important and material, nonpublic information, she learns that the company is soon going to purchase a smaller chain of stores. It is expected that stock in Big Name Cosmetics will rise dramatically at that point. Sally immediately buys a number of shares of her company's stock. She also tells her friend Alice about the expected purchase of stores. Alice wanted to purchase stock in the company but lacked the funds with which to do so. Although she did not have the funds in Bank A, Alice decided to draw a check on Bank A and deposit the check in Bank B and then proceed to write a check on Bank B to cover the purchase of the stock. She hoped that she would have sufficient funds to deposit before the check was presented for payment. Of which of the following offenses, if any, is Alice guilty of by buying stock? A) She is guilty of insider trading because she tipped information. B) She is guilty of an insider trading violation because she traded on tipped information. C) She is guilty of extortion. D) She is guilty of larceny. E) She is not guilty of any offense.
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68) Cosmetic Profits. Sally is the executive vice president of Big Name Cosmetics Company. Through important and material, nonpublic information, she learns that the company is soon going to purchase a smaller chain of stores. It is expected that stock in Big Name Cosmetics will rise dramatically at that point. Sally immediately buys a number of shares of her company's stock. She also tells her friend Alice about the expected purchase of stores. Alice wanted to purchase stock in the company but lacked the funds with which to do so. Although she did not have the funds in Bank A, Alice decided to draw a check on Bank A and deposit the check in Bank B and then proceed to write a check on Bank B to cover the purchase of the stock. She planned to write a check on Bank B and deposit it with Bank A just before the check was presented to Bank A in an attempt to create an artificial balance. Of what offense, if any, is Alice guilty of by her method of payment? A) Ponzi scheme B) Insider-trading scheming C) Pretexting D) Check defalcation E) Check kiting
69) Divorce Fallout. Following a messy divorce, Dr. Fred has encountered significant financial difficulties. Dr. Fred has a friend named Slick Slim who tells Dr. Fred that he has been making lots of money by selling people a wristband that allegedly places pressure on a nerve that signals hunger resulting in a lack of appetite. Slick Slim tells Dr. Fred that, although the device does not really work, people who want to lose weight and look good in their bathing suits will do anything and that it sells like hotcakes. Slick Slim tells Dr. Fred that he will pay Dr. Fred five dollars for every band that Dr. Fred can sell to his patients. Dr. Fred proceeds to mail letters to patients suggesting the use of the band for weight loss. He also uses UPS to mail samples of the band to some patients along with letters encouraging purchase of the bands. Dr. Fred then proceeds to bill Medicare for office consultations he has with patients when they come in to purchase the bands. The scheme is wildly successful. Dr. Fred is able to entirely satisfy his alimony obligations within just a few months. Unfortunately, as patients begin to see that they are not having any weight loss, he has been receiving numerous complaints, and a friend of his told him that he could even be facing some criminal prosecution. By mailing correspondence to patients encouraging purchase of the band, which of the following offenses, if any, did Dr. Fred commit?
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A) He is guilty of false pretenses. B) He is guilty of false entry. C) He is guilty of defalcation. D) He is guilty of mail fraud. E) He is not guilty of any offense.
70) Divorce Fallout. Following a mes divorce, Dr. Fred has encountered significant financial difficulties. Dr. Fred has a friend named Slick Slim who tells Dr. Fred that he has been making lots of money by selling people a wristband that allegedly places pressure on a nerve that signals hunger resulting in a lack of appetite. Slick Slim tells Dr. Fred that, although the device does not really work, people who want to lose weight and look good in their bathing suits will do anything and that it sells like hotcakes. Slick Slim tells Dr. Fred that he will pay Dr. Fred five dollars for every band that Dr. Fred can sell to his patients. Dr. Fred proceeds to mail letters to patients suggesting the use of the band for weight loss. He also uses UPS to mail samples of the band to some patients along with letters encouraging purchase of the bands. Dr. Fred then proceeds to bill Medicare for office consultations he has with patients when they come in to purchase the bands. The scheme is wildly successful. Dr. Fred is able to entirely satisfy his alimony obligations within just a few months. Unfortunately, as patients begin to see that they are not having any weight loss, he has been receiving numerous complaints, and a friend of his told him that he could even be facing some criminal prosecution. Which of the following offenses, if any, did Dr. Fred commit when he used UPS to send correspondence and samples of the bands to patients? A) False pretenses B) False entry C) Defalcation D) Mail fraud E) None of these. He is possibly guilty of some state law offense, but mail fraud requires the use of the United States Postal Service.
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71) Divorce Fallout. Following a messy divorce, Dr. Fred has encountered significant financial difficulties. Dr. Fred has a friend named Slick Slim who tells Dr. Fred that he has been making lots of money by selling people a wristband that allegedly places pressure on a nerve that signals hunger resulting in a lack of appetite. Slick Slim tells Dr. Fred that, although the device does not really work, people who want to lose weight and look good in their bathing suits will do anything and that it sells like hotcakes. Slick Slim tells Dr. Fred that he will pay Dr. Fred five dollars for every band that Dr. Fred can sell to his patients. Dr. Fred proceeds to mail letters to patients suggesting the use of the band for weight loss. He also uses UPS to mail samples of the band to some patients along with letters encouraging purchase of the bands. Dr. Fred then proceeds to bill Medicare for office consultations he has with patients when they come in to purchase the bands. The scheme is wildly successful. Dr. Fred is able to entirely satisfy his alimony obligations within just a few months. Unfortunately, as patients begin to see that they are not having any weight loss, he has been receiving numerous complaints, and a friend of his told him that he could even be facing some criminal prosecution. By which of the following acts, if any, did Dr. Fred commit health care fraud? A) Dr. Fred did not commit any acts of health care fraud. B) By the submission of false claims to Medicare only C) By the receipt of kickbacks from Slick Slim only D) By the submission of false claims to Medicare and the receipt of kickbacks from Slick Slim E) By submitting false claims to Medicare, receiving kickbacks from Slick Slim, and merely discussing the matter with Slick Slim
72) Masked Bandit. Barry, who owned a small convenience store, was robbed when a masked bandit entered his store and demanded his cash while pointing a gun at him. As the bandit ran out of the store, Barry grabbed his own gun and shot the bandit in the leg. When the police arrived, Barry was arrested along with the thief. Barry claimed that no charges should be brought against him because his action in shooting the robber was justified. The police also searched the convenience store and found evidence of illegal drugs for which Barry was arrested. When Barry complained about the search, the officer in charge told him that because the state police were involved, federal constitutional rights were waived. Barry is trying to obtain legal representation in an attempt to get out of jail, but cannot afford a lawyer because he just spent all his funds buying the illegal drugs for resale that have now been confiscated by the police. Sam, another inmate, asks Barry if the officers explained his rights to him; but Barry only recalls being arrested, hustled into the police cruiser, and whisked off to jail. Which of the following is true regarding Barry's claim that he was engaged in a justifiable use of force?
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A) Barry is correct and no charges should be brought against him. B) Barry is correct only if he can establish that in addition to committing a felony, the bandit was armed with a deadly weapon. C) Barry is correct only if he can establish that in addition to committing a misdemeanor, the bandit was armed with some type of weapon. D) Barry is incorrect because he did not sustain bodily harm. E) Barry is incorrect because he did not use justifiable force.
73) Masked Bandit. Barry, who owned a small convenience store, was robbed when a masked bandit entered his store and demanded his cash while pointing a gun at him. As the bandit ran out of the store, Barry grabbed his own gun and shot the bandit in the leg. When the police arrived, Barry was arrested along with the thief. Barry claimed that no charges should be brought against him because his action in shooting the robber was justified. After the arrest, the officers searched his store and found marijuana. When Barry complained about the arrest and search, the officer in charge told him that because the state police were involved, federal constitutional rights were waived. Barry is trying to obtain legal representation in an attempt to get out of jail, but cannot afford a lawyer because he just spent all his funds buying the illegal drugs for resale that have now been confiscated by the police. Sam, another inmate, asks Barry if the officers explained his rights to him; but Barry only recalls being arrested, hustled into the police cruiser, and whisked off to jail. The bandit will likely be charged with a(n) _____ offense. A) felony B) misdemeanor C) liability without fault D) absolute liability E) strict liability
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74) Masked Bandit. Barry, who owned a small convenience store, was robbed when a masked bandit entered his store and demanded his cash while pointing a gun at him. As the bandit ran out of the store, Barry grabbed his own gun and shot the bandit in the leg. When the police arrived, Barry was arrested along with the thief. Barry claimed that no charges should be brought against him because his action in shooting the robber was justified. After the arrest, the officers searched his store and found marijuana. When Barry complained about the arrest and search, the officer in charge told him that because the state police were involved, federal constitutional rights were waived. Barry is trying to obtain legal representation in an attempt to get out of jail, but cannot afford a lawyer because he just spent all his funds buying the illegal drugs for resale that have now been confiscated by the police. Sam, another inmate, asks Barry if the officers explained his rights to him; but Barry only recalls being arrested, hustled into the police cruiser, and whisked off to jail. Which of the following is Barry's best defense, if any, regarding the arrest and search? A) That the police lacked probable cause B) That the police violated his Bertinelli rights C) That the police violated his right to nolo contendere D) That the police mistook his identity for that of a thief E) That the police entrapped him
75) Masked Bandit. Barry, who owned a small convenience store, was robbed when a masked bandit entered his store and demanded his cash while pointing a gun at him. As the bandit ran out of the store, Barry grabbed his own gun and shot the bandit in the leg. When the police arrived, Barry was arrested along with the thief. Barry claimed that no charges should be brought against him because his action in shooting the robber was justified. After the arrest, the officers searched his store and found marijuana. When Barry complained about the arrest and search, the officer in charge told him that because the state police were involved, federal constitutional rights were waived. Barry is trying to obtain legal representation in an attempt to get out of jail, but cannot afford a lawyer because he just spent all his funds buying the illegal drugs for resale that have now been confiscated by the police. Sam, another inmate, asks Barry if the officers explained his rights to him; but Barry only recalls being arrested, hustled into the police cruiser, and whisked off to jail. Which of the following is true regarding the officer's statement that since state police were involved, federal constitutional rights were waived?
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A) The officer was correct. B) The officer was correct only if it is proven that a felony was committed; otherwise, federal constitutional rights applied. C) The officer was correct only if it is proven that a misdemeanor was committed; otherwise, federal constitutional rights applied. D) The officer was incorrect, because the Sixth Amendment to the United States Constitution extends most federal constitutional rights to the state level. E) The officer was incorrect, because the Fourteenth Amendment to the United States Constitution extends most federal constitutional rights to the state level.
76) Masked Bandit. Barry, who owned a small convenience store, was robbed when a masked bandit entered his store and demanded his cash while pointing a gun at him. As the bandit ran out of the store, Barry grabbed his own gun and shot the bandit in the leg. When the police arrived, Barry was arrested along with the thief. Barry claimed that no charges should be brought against him because his action in shooting the robber was justified. After the arrest, the officers searched his store and found marijuana. When Barry complained about the arrest and search, the officer in charge told him that because the state police were involved, federal constitutional rights were waived. Barry is trying to obtain legal representation in an attempt to get out of jail, but cannot afford a lawyer because he just spent all his funds buying the illegal drugs for resale that have now been confiscated by the police. Sam, another inmate, asks Barry if the officers explained his rights to him; but Barry only recalls being arrested, hustled into the police cruiser, and whisked off to jail. Which of the following is true regarding Barry's right to counsel? A) Barry has a right to counsel, but only because felony charges are likely involved. B) Barry has a right to counsel, but only because misdemeanor charges are likely involved. C) Barry has a right to counsel, but only if he can establish that he has no previous criminal record. D) Barry has a right to counsel. E) Barry has no right to counsel.
77)
In a criminal proceeding, who files the charges against the defendant?
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A) The injured party B) The government C) The injured party’s attorney D) A corrections officer E) The judge who will oversee the case
78) Antony’s Pizza Palace is in violation of the city’s building code that requires all awnings over storefront windows to be bolted to the building’s exterior. What type of offense might Antony’s be charged with? A) A misdemeanor B) A felony C) A petty offense D) A city code misdemeanor violation E) A civil offense (more particularly, negligence)
79)
Originally, white-collar crimes were distinguished from other crimes because _____. A) they were committed by blue-collar workers B) they did not have to have the same criminal intent as other crimes C) of the social status of the offender D) through judicial precedent, the United States Supreme Court made the distinction E) through executive order, President William Howard Taft made the distinction
80) In his criminal trial for conspiracy to defraud a client, Leroy chose not to testify on his own behalf. He did so claiming the protection of the _____ Amendment to the United States Constitution, which includes the right not to incriminate oneself. A) First B) Fourth C) Fifth D) Eighth E) Fourteenth
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81) There are currently 47 states that have _____ for either public or private employees or both that allow protections to an employee if he or she reports known or suspicious wrongdoing to extremal governmental bodies. A) out-of-the shadows laws B) whistle-blower protections C) work-in-sunshine laws D) Sarbanes-Oxley protections E) employee safe harbor laws
ESSAY. Write your answer in the space provided or on a separate sheet of paper. 82) List the elements the government must prove in order to establish bribery of a public official under the federal statute criminalizing that offense.
83) Discuss the five ways described in the textbook to punish white-collar criminals, including the advantages and disadvantages of each type of punishment.
84) Define the term "criminal fraud" and discuss the three elements required to prove criminal fraud.
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85) What must a prosecutor show in order for a corporation to be held criminally liable for the acts of an employee?
86) Bobby, a struggling college student, was entering his favorite grocery store to buy a few things. A shabbily dressed young woman, who told him that she had no money and needed a few food items to eat, approached him. She suggested that Bobby buy some steaks for grilling and return with her to her apartment for dinner. Bobby told her that he did not have much money, but the young woman persisted and went into the store with him. While in the grocery store, Bobby put some steaks and other items in his backpack and, without paying for them, carried them out of the store in preparation for dinner. Unknown to Bobby, the young woman was actually an undercover police officer who arrested him for shoplifting. What is Bobby's best defense?
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Answer Key Test name: Chap 06_5_The Essentials_Kubasek 1) TRUE One type of bribery is the bribery of foreign officials. The purpose of the Foreign Corrupt Practices Act (FCPA) is to combat such bribery. The FCPA prohibits payments to foreign officials to influence an official act or decision corruptly or to influence a foreign government. You might think of the FCPA as an extension of the law to prevent the bribery of a public official. The FCPA allows the government to prosecute those who bribe foreign officials. 2) FALSE The purpose of criminal law is to punish an offender for causing harm to public health, safety, or morals. In a criminal proceeding, the government files the charges against the defendant. Thus, the government is always a party to a criminal action. Government involvement distinguishes criminal trials from civil proceedings. 3) TRUE The purpose of criminal law is to punish an offender for causing harm to public health, safety, or morals. In a criminal proceeding, the government files the charges against the defendant. Thus, the government is always a party to a criminal action. Government involvement distinguishes criminal trials from civil proceedings. 4) FALSE The burden of proof in a criminal case is beyond a reasonable doubt, which is a much higher standard than that of a civil case, which is a preponderance of the evidence. 5) FALSE
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When liability is assessed without the guilty-mind criterion (mens rea), it is known as liability without fault, or strict liability. Liability without fault involves actions that, regardless of the care taken, are deemed illegal to engage in. Such acts are specifically prohibited regardless of state of mind. For example, strict liability would apply if a business were to sell cigarettes to a minor. Although the business might not have intended to sell cigarettes or alcohol to a minor, thus lacking a guilty mind, the statutory violation still allows liability to be imposed. 6) FALSE White collar crimes are nonviolent acts against society which occur most frequently in the business content. Mail fraud, bribery, embezzlement, and computer crimes are examples of offenses typically classified as white-collar crimes. 7) TRUE According to some estimates, one in three American households is the victim of white-collar crime every year. 8) FALSE Bribery is the offering, giving, soliciting, or receiving of money or any object of value for the purpose of influencing the judgment or conduct of a person in a position of trust. 9) TRUE Criminal fraud encompasses a variety of means by which an individual intentionally uses some sort of misrepresentation to gain an advantage over another person. Fraud generally requires the following three elements: (a) a material false representation made with intent to deceive (scienter); (b) a victim’s reasonable reliance on the false representation; and (c) damages. 10) TRUE
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Forgery is the fraudulent making or altering of any writing in a way that changes the legal rights and liabilities of another. Forgery is another type of fraud. 11) TRUE Embezzlement is the wrongful conversion of another’s property by one who is lawfully in possession of that property.Embezzlement is distinguished from larceny because the individual did not take the property from another; instead, he was already in possession of the property. Embezzlement usually occurs when an employee steals money. 12) TRUE On March 8, 1982, in response to a concern about a rise in white-collar crimes, Chinese officials added a resolution entitled “Severely Punishing Criminals Who Do Great Damage to the Economy” to the Chinese Criminal Code. The provision targeted top-ranking officials by providing that any state functionaries who extort, accept bribes, or exploit their office will no longer receive the fixed-term punishment (usually 10 years) allocated for bribery and extortion. Instead, those officials found guilty of extortion and accepting bribes would be sentenced to life imprisonment or possibly be put to death. 13) FALSE Under the common law, a corporation could not be considered a criminal because it was not an actual person and thus did not have a "mind." Consequently, it could not meet the mens rea (guilty-mind) requirement for a crime. Slowly, however, courts began to impose liability on corporations for strict-liability offenses, those offenses that do not require state of mind. Next, courts imposed liability on corporations by imputing the state of mind of the employees to the corporation. 14) FALSE Version 1
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For a corporation to be held criminally liable for the acts of an employee, the prosecutor must show that (a) the employee was acting within the scope of her or his employment; (b) the employee was acting with the purpose of benefiting the corporation; and (c) the act was imputed to the corporation. 15) FALSE Under the "responsible corporate officer" doctrine, a court may assess criminal liability on a corporate executive or officer even if he or she did not engage in, direct, or know about a specific criminal violation. Corporate executives sometimes have the responsibility and power to ensure the company’s compliance with the law. If the executive fails to meet this responsibility, the executive can be held criminally liable. 16) FALSE After being arrested and read their Miranda rights, defendants are taken to the police station for booking, a procedure during which the name of the defendant and the alleged crime are recorded in the investigating agency’s or police department’s records.Arraignment occurs later in pretrial criminal procedure. 17) FALSE Before 1991, sentencing was indeterminate, with judges allowed but not required to engage in free-form fact finding before selecting the appropriate punishment within broad statutory ranges. In 1991, however, there was a shift to determinate sentencing, under which federal sentences are determined largely by sentencing guidelines prescribing a specific range of possible penalties for each crime. 18) TRUE The grand jury does not determine guilt. It is simply a group of citizens who consider evidence of criminal conduct presented by the prosecutor and then determine whether there is enough evidence to try the defendant for the crime. Version 1
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19) TRUE If a defendant enters a nolo contendere plea, he or she does not admit guilt but agrees to the charges.The advantage of a nolo contendere plea over a guilty plea is that the former cannot be used against the defendant in a civil suit. 20) TRUE Racketeering has been defined broadly to include almost all criminal actions, such as acts of violence, fraud, bribery, securities fraud, and the provision of illegal goods and services. 21) A The burden of proof in a criminal case is proof beyond a reasonable doubt, a much higher standard than that of a civil case, which is a preponderance of the evidence. 22) C Actus reus(guilty act) is Latin for wrongful behavior. Actus reus is an essential element of criminal liability. 23) A Mens rea means wrongful state of mind. It is an essential element of criminal liability. 24) C In certain cases, liability may be assessed even without establishing the guilty-mind element normally required for criminal wrongdoing. Only certain crimes, typically violations of regulatory statutes, allow punishment to be assessed without the guilty-mind criterion. This is known as liability without fault, or strict liability. Liability without fault involves actions that, regardless of the care taken, are deemed illegal to engage in; such acts are specifically prohibited regardless of state of mind. 25) A
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A law enforcement officer should obtain an arrest warrant before an individual is taken into custody. Ordinarily, to obtain an arrest warrant, the law enforcement agent must demonstrate that there is probable cause, or a likelihood, that a suspect committed or is planning to commit a crime. 26) C When liability is assessed without the guilty-mind criterion, it is known as liability without fault, or strict liability. 27) D Felonies include serious crimes, such as murder, that are punishable by imprisonment for more than one year in a penitentiary or by death. 28) A Misdemeanors are less serious crimes punishable by fines and/or imprisonment for less than one year. 29) D Petty offenses, such as violating a building code, are minor misdemeanors and are usually punishable by a jail sentence of less than six months or a small fine. 30) B One type of bribery is the bribery of foreign officials, and the purpose of the Foreign Corrupt Practices Act (FCPA) is to combat such bribery.The FCPA prohibits payments to foreign officials to influence an official act or decision corruptly or to influence a foreign government. The FCPA allows the government to prosecute those who bribe foreign officials. 31) A Extortion, otherwise known as blackmail, is the making of threats for the purpose of obtaining money or property. Whereas bribery is offering someone something to obtain a desired result, extortion involves the threat of doing something if the target of the extortion does not relinquish money or a specific piece of property. Version 1
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32) C One example of a fraudulent crime, the crime of "false entries," is the making of an entry into the books of a bank or corporation that is designed to represent the existence of funds that do not exist. 33) E One example of a fraudulent crime, a false token, is a false document or sign of existence used to perpetrate a fraud, such as making counterfeit money. 34) B One example of a fraudulent crime, defalcation, is the misappropriation of trust funds or money held in a fiduciary capacity. 35) D One example of a fraudulent crime, a Ponzi scheme, involves an investment swindle in which high profits are promised from fictitious sources and early investors are paid off with funds raised from later ones. 36) E One of the FBI’s largest securities fraud crackdowns occurred in June 2000, when it arrested a group of mafia leaders for a series of scams that cost investors an estimated $25 million. Government officials claimed that the mob bought large stakes in small companies and then bribed and coerced brokers to promote the stocks to other investors at inflated prices. 37) D False pretense is the illegal obtaining of property belonging to another through materially false representation of an existing fact, with knowledge of the falsity of the representation and with the intent to defraud. 38) D
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One example of a fraudulent crime, pretexting, is using fraudulent means to obtain information about someone's phone use. 39) D Embezzlement is the wrongful conversion of another's property by one who is lawfully in possession of that property. Embezzlement is distinguished from larceny because the individual did not take the money from another; instead, he or she was already in possession of the property. 40) E Electronic fraud is not the only costly computer-related crime. Dealing with viruses, spyware, personal computer theft, and other computer crimes are expensive as well. 41) C A hacker is a person who illegally accesses or enters another person's or a company's computer system to obtain information or to steal money. 42) B A cyber terrorist is a hacker whose intention is the exploitation of a target computer or network to create a serious impact, such as the crippling of a communications network or the sabotage of a business or organization. The activity of a cyber terrorist can have an impact on millions of citizens if the terrorist’s attack is successful, particularly if it involves the computer systems of a major stock exchange, any bank, or any federal agency or government. 43) D
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Explanation: In an attempt to aid prosecutions of computer crimes, Congress passed the Counterfeit Access Device and Computer Fraud and Abuse Act of 1984 (also known as the Computer Fraud and Abuse Act, or CFAA). The act prohibits six broad categories of computer crimes: 1.Unauthorized use of or access to a computer to obtain classified military or foreign policy information with the intent to harm the United States or to benefit a foreign country. 2.Unauthorized use of a computer to collect financial or credit information protected under federal privacy law. 3.Unauthorized access to a federal computer and the use, modification, destruction, or disclosure of data it contains or the prevention of an authorized person’s use of such data. 4.Alteration or modification of data in financial computers, causing a loss of $1,000 or more. 5.Modification of data that impedes medical treatment to individuals. 6.Fraudulent transfer of computer passwords or similar data that could aid unauthorized access that either (a) affects interstate commerce or (b) permits access to a government computer. 44) C The beneficiary of the crime is irrelevant, because corporate executives and officers can be found to be personally liable regardless of whether the crimes were committed for their personal benefit or for the benefit of the corporation. 45) B The Sixth Amendment to the United States Constitution guarantees the right to a speedy and public trial. 46) C
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The Fourteenth Amendment to the United States Constitution extends most constitutional rights to defendants at the state level. 47) C A law enforcement officer should obtain an arrest warrant before an individual is taken into custody. Ordinarily, to obtain an arrest warrant, the law enforcement agent must demonstrate that there is probable cause, or a likelihood, that a suspect committed or is planning to commit a crime. 48) C Pursuant to the Miranda Rights, before questioning an arrested individual, a law enforcement officer must inform the individual of the following: "You have the right to consult with an attorney before speaking to the police and have an attorney present during any questioning now or in the future." 49) A A law enforcement officer should obtain an arrest warrant before an individual is taken into custody. Ordinarily, to obtain an arrest warrant, the law enforcement agent must demonstrate that there is probable cause, or a likelihood, that a suspect committed or is planning to commit a crime. A magistrate, the lowest-ranking judicial official, issues the arrest warrant. 50) D A defendant may enter a plea of nolo contendere, whereby the defendant does not admit guilt but agrees not to contest the charges. The advantage of a nolo contendere plea over a guilty plea is that the former cannot be used against the defendant in a civil suit. 51) D If the grand jury issues an indictment, the defendant appears in court to answer the indictment in a proceeding called the arraignment. 52) A Version 1
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The Racketeer Influenced and Corrupt Organizations (RICO) Act has served as one of the most important tools for fighting white-collar crime. 53) C Unlike RICO and the False Claims Act, the Sarbanes-Oxley (SOX) Act of 2002 was enacted specifically with the intent to curb white-collar crime. 54) A Demonstrating a claim under the Racketeer Influenced and Corrupt Organizations (RICO) Act requires proof of a pattern of racketeering, and courts have defined a pattern as more than one action. Thus, a onetime violator could not be prosecuted under RICO because there could be no pattern as yet. 55) B The False Claims Act allows employees to sue employers on behalf of the federal government for fraud against the government, with the employee retaining a share of the recovery as a reward for his or her efforts. 56) C The United States Congress passed the Sarbanes-Oxley (SOX) Act largely in response to the business scandals of the early 2000s, such as Enron, WorldCom, and Global Crossing, as well as the accounting firm Arthur Andersen. 57) D Under the Sarbanes-Oxley (SOX) Act of 2002, it is a felony to willfully fail to maintain proper records of audits and work papers for at least five years, and the punishment for not maintaining these records is up to 10 years' imprisonment. 58) A
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One example of a fraudulent crime is a Ponzi scheme, an investment swindle in which high profits are promised from fictitious sources and early investors are paid off with funds raised from later ones. 59) D A cyber terrorist is a hacker whose intention is the exploitation of a target computer or network to create a serious impact, such as the crippling of a communications network or the sabotage of a business or organization. The activity of a cyber terrorist can have an impact on millions of citizens if the terrorist’s attack is successful, particularly if it involves the computer systems of a major stock exchange, any bank, or any federal agency or government. 60) D The Computer Fraud and Abuse Act (CFAA) prohibits alteration of data in financial computers causing a loss of $1,000 or more. 61) E Destruction of data is one of the most serious problems facing companies today. A virus is a computer program that rearranges, damages, destroys, or replaces computer data. 62) E In United States v. Park, the United States Supreme Court ruled that corporate executives, including the defendant Park, can be criminally liable for failing to ensure a company's compliance with the law. 63) B In federal cases, a defendant accused of a felony has a constitutional right to a grand jury indictment. However, a felony prosecution may proceed by information if the defendant waives that right. The United States Supreme Court has held that indictment by a grand jury is not a fundamental right; as a result, states are not required to offer grand juries. 64) E Version 1
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After being arrested and read their Miranda rights, defendants are taken to the police station for booking, a procedure during which the name of the defendant and the alleged crime are recorded in the investigating agency’s or police department’s records. 65) A Illegal insider trading is generally a person's buying or selling of a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. 66) A Insider trading violations may also include "tipping" such information. 67) B Insider trading violations may also include securities trading by the person "tipped." 68) E Check kiting involves drawing checks on an account in one bank and depositing them in an account in a second bank when neither account has sufficient funds to cover the amounts drawn; and then, just before the checks are returned for payment to the first bank, the kiter covers them by depositing checks drawn on the account in the second bank. 69) D One of the most frequently prosecuted frauds is mail fraud, which is the use of mails to defraud the public. 70) D Using Federal Express (FedEx) or United Parcel Service (UPS) to further a fraudulent scheme can be prosecuted as mail fraud. Congress amended the mail fraud statute in 1994 to include commercial carriers as substitutes for the U.S. mail. 71) D
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An example of health care fraud is the submission of false claims to insurance plans such as Medicare or Medicaid. Additionally, some doctors prescribe unneeded equipment to patients and then receive kickbacks from the manufacturers of the equipment. 72) E Justifiable use of force is use of the degree of force necessary to prevent imminent death or great bodily harm to the defendant or to another or to prevent the imminent commission of a forcible felony. 73) A A felony is a serious crime, such as murder, rape, or robbery that is punishable by imprisonment for more than one year or death. 74) A Probable cause is an essential element for a valid arrest, search, or warrant. 75) E The Fourteenth Amendment to the United States Constitution extends most constitutional rights to defendants at the state level. 76) D When law enforcement agents arrest individuals, the officers must inform the individuals of their Miranda rights. The officers should have informed Barry of the following as part of his Miranda rights: "You have the right to consult an attorney before speaking to the police and have an attorney present during any questioning now or in the future." 77) B In a criminal proceeding, the government files the charges against the defendant. Thus, the government is always a party to a criminal action. 78) C Petty offenses, such as violating a building code, are minor misdemeanors and are usually punishable by a jail sentence of less than six months or a small fine. Version 1
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79) C One example of a fraudulent crime, defalcation, is the misappropriation of trust funds or money held in a fiduciary capacity. 80) C The Fifth amendment prohibits double jeopardy, the right not to incriminate oneself and the right to due process. See Exhibit 6-3 “Constitutional Provisions that Safeguard Criminal Defendant’s Rights. 81) B Forty-seven states currently have whistle-blower protection laws for either public or private sector employees or both. However, these laws are very different, so it is important for both employers and employees to know the law in their state. 82) One of the better-known white-collar crimes is bribery. Bribery is the offering, giving, soliciting, or receiving of money or any object of value for the purpose of influencing the judgment or conduct of a person in a position of trust. Bribery of a public official is a statutory offense under federal law. The purpose of this law against bribery is to maintain the integrity of the government. To demonstrate bribery of a public official, the government must show the following three elements: a) something of value was offered, given, or promised to; b) a federal public official with; c) intent to influence that person's judgment or conduct. The “thing of value” element has been construed very liberally; actual commercial value is not necessary. The definition of “public official” is also expansive. 83) Various ways to punish white-collar criminals include fines, incarceration, community service, disqualification from employment, and house arrest. Student responses will vary in terms of the advantages and disadvantages of each type of punishment.
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84) Criminal fraud encompasses a variety of means by which an individual intentionally uses some sort of misrepresentation to gain an advantage over another person. The three elements generally required to prove criminal fraud are: a) a material false representation made with intent to deceive; b) a victim's reasonable reliance upon the false representation; and c) damages. 85) Corporations can be held criminally accountable for almost any crime. However, they cannot be held liable for crimes that are punishable only by a prison sentence. For a corporation to be held criminally liable for the acts of an employee, the prosecutor must establish that: 1.a) The employee was acting within the scope of her or his employment 2.b) The employee was acting with the purpose of benefiting the corporation, and 3.c) The act was imputed to the corporation. 86) Bobby's best defense is the affirmative defense of entrapment. With the entrapment defense, the defendant argues that he or she would not have committed the crime or broken the law if not induced or tricked into doing so by law enforcement.
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CHAPTER 7 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) States laws may have slightly different definitions of each tort. ⊚ true ⊚ false
2)
The primary objective of tort law is to provide compensation for injured parties. ⊚ true ⊚ false
3)
The classifications of torts may be different in foreign countries. ⊚ true ⊚ false
4) Tort law assumes that people intend what could be considered the normal consequences of their actions. ⊚ true ⊚ false
5)
A defense to battery is that the person consented to the contact. ⊚ true ⊚ false
6)
The use of deadly force in defense of property is usually justified. ⊚ true ⊚ false
7)
The most common defense to battery is self-defense. ⊚ true ⊚ false
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8) The Communications Decency Act increases the liability of providers of interactive computer services for material disseminated by them but created by others. ⊚ true ⊚ false
9)
Privilege is not a defense in a defamation action. ⊚ true ⊚ false
10) Excessively watering your lawn, creating run-off and flooding your neighbor’s garden as a result, is considered a public nuisance. ⊚ true ⊚ false
11) To successfully bring a claim for intentional interference with contract, the plaintiff need not prove that he or she was injured as a result of the breach. ⊚ true ⊚ false
12)
Negligence is behavior that creates an unreasonable risk of harm to others. ⊚ true ⊚ false
13) The reasonable person standard is a measurement of the way members of society expect an individual to act in a given situation. ⊚ true ⊚ false
14) The courts generally hold that businesses have a duty of care to protect their customers against unforeseeable risks. ⊚ true ⊚ false
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15) If the plaintiff’s car is stopped at a red traffic light and is struck in the rear by a vehicle driven by the defendant, the defendant was negligent per se. ⊚ true ⊚ false
16)
Negligence per se literally means negligence in or of itself. ⊚ true ⊚ false
17) Res ipsa loquitur requires that the plaintiff produce direct evidence of the defendant's lack of due care. ⊚ true ⊚ false
18) In a modified comparative negligence defense, the defendant must be more than 50 percent at fault for the plaintiff to recover. ⊚ true ⊚ false
19)
There are two forms of comparative negligence: conditional and unconditional. ⊚ true ⊚ false
20) To use the assumption of the risk defense successfully, a defendant must prove that the plaintiff unwillingly encountered the risk of the actual harm the defendant caused. ⊚ true ⊚ false
21)
Most states have replaced comparative negligence with contributory negligence. ⊚ true ⊚ false
22)
There are two types of assumption of the risk: pure and modified.
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⊚ ⊚
23)
true false
Implied assumption of the risk means that the plaintiff implicitly assumed a known risk. ⊚ true ⊚ false
24) Good Samaritan statutes attempt to encourage selfless and courageous behavior by removing the threat of liability for individuals who offer aid to others in peril. ⊚ true ⊚ false
25)
Strict liability is liability due an intentional act or negligence. ⊚ true ⊚ false
26) Courts typically awardpunitive damages for pain and suffering, costs of repairing damaged property, medical expenses, and lost wages. ⊚ true ⊚ false
27) Punitive damages are awarded only when the defendant’s conduct is extremely outrageous. ⊚ true ⊚ false
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 28) How is a tort defined?
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A) A civil or criminal action against a person B) A civil or criminal action against a governmental entity C) A breach of contract where damages can be assessed D) A wrong or injury to another, other than a breach of contract E) A wrong or injury to either a person or a governmental entity that includes fines and minimal jail time
29)
What does the word “tort” mean? A) It is a French word meaning “wrong.” B) It is an English word that means “wrongful negligence.” C) It is a German word that means “purposeful intent.” D) It is an American word that comes from “torteno” that means “negligence.” E) It is an American word that means quasi-criminal wrongdoing.
30)
Which of the following is incorrect regarding the doctrine of res ipsa loquitur?
A) To establish res ipsa loquitur in most states, the plaintiff must demonstrate that the event was a kind that ordinarily does not occur in the absence of negligence. B) To establish res ipsa loquitur in most states, the plaintiff must demonstrate that other responsible causes, including the conduct of third parties and the plaintiff, have been sufficiently eliminated. C) To establish res ipsa loquitur in most states, the plaintiff must demonstrate that the indicated negligence is within the scope of the defendant’s duty to the plaintiff. D) The plaintiff’s proof of all the elements of res ipsa loquitur requires a finding of negligence. E) Once the plaintiff has demonstrated all of the elements of res ipsa loquitur, the burden of proof shifts to the defendant.
31)
Torts are generally classified as _____.
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A) purposeful, negligent, and intentional B) intentional, criminal, and purposeful C) intentional, civil and criminal D) strict liability, civil liability, and quasi-criminal liability E) intentional, negligent, and strict liability
32)
Which torts are the most willful? A) Criminal B) Semi-liability C) Intentional D) Negligence E) Strict-liability
33) If the defendant is careless such that someone else suffers a detriment, this type of tort is known as _____. A) a crime B) an intentional tort C) negligence D) strict liability E) quasi-criminal
34) A(n) _____ tort occurs when the defendant takes an action that is inherently dangerous and cannot ever be undertaken safely, no matter what precautions the defendant takes.autions the defendant takes. A) criminal B) quasi-criminal C) intentional D) negligence E) strict-liability
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35)
Which of the following is correct regarding the intent needed for an intentional tort?
A) The intent at issue is not intent to harm but, rather, is intent to engage in a specific act, which ultimately results in an injury, physical or economic, to another. B) The intent at issue is not intent to harm but, rather, is intent to engage in a specific act, which ultimately results in a physical, not merely economic, injury to another. C) The intent at issue is intent to harm that results in an injury, physical or economic, to another. D) The intent at issue is intent to harm that results in physical, not merely economic, injury to another. E) The intent at issue is not intent to harm and is not intent to engage in a specific act. Instead, negligence will suffice.
36)
Intentional torts are divided into which of the following three categories? A) Torts against persons, property, and animals B) Torts against property, economic interests, and roadways C) Torts against persons, economic interests, and strict liability D) Torts against persons, property, and economic interests E) Torts against in-state residents, out-of-state residents, and foreigners
37) Juliana is sitting at her desk when Roberto approaches her, screaming at her and raising his fist as if to hit her. Which, if any, tort could this be classified as? A) Negligence B) Assault C) Battery D) Strict liability E) There is no tort, Roberto did not hit Juliana.
38) Robby, who lives in San Diego, California, calls Bobby, who lives in Miami, Florida, on the telephone and threatens to break his nose. Which of the following is true?
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A) Robby's conduct constitutes battery. B) Robby's conduct constitutes assault. C) Robby's conduct constitutes both assault and battery. D) Robby's conduct does not constitute assault because there is no threat of immediate bodily harm. E) Robby's conduct does not constitute assault because contact has not yet happened.
39)
Which of the following is not a defense to battery? A) Self-defense B) Consent C) Defense of others D) Defense of property E) Defense of one's reputation
40) Kantia finds out her boyfriend Romeo is secretly seeing Sabrina. Kantia confronts Sabrina and strikes Sabrina with her large, heavy purse. Sabrina catches Kantia’s hand before she can swing at her again and pushes her back. What, if any, tort(s) has Sabrina committed? A) Sabrina has committed battery. B) Sabrina has committed both assault and battery. C) Sabrina has not committed assault or battery because she acted in self-defense. D) Sabrina cannot claim self-defense because she provoked Kantia by seeing her boyfriend. E) Sabrina cannot rely upon self-defense because her life was not in danger.
41)
Which is not an example of slander per se?
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A) A written poster hanging in the school cafeteria which states that the principal stole money from the school treasury B) Calling someone professionally incompetent C) Telling another person that someone has a loathsome, communicable disease D) Stating that another student has committed a crime for which imprisonment is possible E) Informing classmates that a female student in your business law class has engaged in sexual misconduct
42) In order for a plaintiff to win her case of slander and recover damages, what must she show? A) Specific monetary damages B) Some economic damages C) Nominal damages D) Special damages E) Consequential damages
43) Which of the following gives immunity to providers of interactive computer services for liability they might otherwise incur on account of material disseminated by them but created by others? A) The Internet Communications Act of 2000 B) The Interactive Computer Services Protection Act of 2004 C) The Communications Decency Act of 1996 D) The Internet Communications Protection Act of 1998 E) The Blog Protection Act of 2001
44)
Which of the following is an absolute defense to defamation?
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A) The statement is true. B) The statement was said on private property. C) The defendant did not know the plaintiff. D) The plaintiff was not present when the statement was made. E) The statement was made in a contributory negligence jurisdiction.
45) When a(n) _____ privilege exists, one cannot be sued for defamation for any false statements made, regardless of intent or knowledge of the falsity of the claim. A) per se B) res ipsa loquitur C) comparative D) absolute E) conditional
46) Under a conditional privilege, a party will not be held liable for defamation unless the false statement was made _____. A) with actual malice B) negligently C) in print D) publicly E) to an employer
47) Of the following, who would typically be public figures for the purposes of the public figure privilege to actions for defamation? A) Politicians B) Entertainers C) Business owners D) Politicians and entertainers E) Politicians, entertainers, and business owners
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48) This type of tort protects an individual right to keep certain things out of public view even if they are true. A) Assault B) Public information C) Defamation D) Invasion of privacy E) Strict liability
49) Anna is playing frisbee with her new puppy. Trying to see how far she can throw, Anna throws the frisbee into her neighbor’s yard. Anna’s neighbor has told her on several occasions not to come onto his property. What type of tort, if any, has she committed? A) Negligence B) Strict liability C) Trespass to real property D) Absolute liability E) Anna has not committed a tort, since she did not physically enter her neighbor’s property.
50)
Which of the following is not an intentional tort against economic interests? A) Disparagement B) Intentional interference with a contract C) Unfair competition D) Fraudulent misrepresentation E) Conversion
51) Mikey was angry with his restaurant competitor Leon because Leon kept taking all of Mikey’s business. Mikey falsely posted on his Facebook page that Leon’s restaurant actually belonged to the mob. This is the tort of _____.
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A) slander of quality B) slander of title C) negligence D) strict liability E) contributory negligence
52) Bob, who has a large trust fund, is angry with Alice because she stopped dating him. Alice ran a successful dog grooming shop, and Bob decided to open a dog grooming shop next door solely to run her out of business because he was angry over the break-up. Which of the following is correct regarding Bob's liability, if any, to Alice? A) Bob has committed the tort of unfair competition. B) Bob has committed the tort of intentional interference with contract. C) Bob has committed the tort of unfair competition and the tort of intentional interference with contract. D) Bob has committed the tort of disparagement. E) Bob has not committed any torts.
53)
Which of the following is not an element of fraudulent misrepresentation?
A) A party knowingly, or with reckless disregard for the truth, misrepresented material facts and conditions. B) The injured party reasonably relied upon the misrepresentation. C) The injured party suffered damages because of relying on the misrepresentation. D) The injured party learned of the misrepresentation within one year of its occurrence. E) There is a direct link between the injuries suffered and reliance on the misrepresentation.
54) In order to establish a claim for negligence, the plaintiff must prove all but which of the following?
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A) The plaintiff was owed a duty. B) The plaintiff acted reasonably. C) The defendant breached the duty. D) The defendant was the cause of the injury. E) The plaintiff sustained damages.
55) In a tort action, the person who committed the wrongful action is referred to as a(n) _____. A) criminal B) third-party beneficiary C) incidental beneficiary D) tortfeasor E) misfeasor
56)
Which of the following is not a typical type of compensatory damage? A) Pain and suffering B) Costs of repairing damaged property C) Medical expenses D) Attorney fees E) Lost wages
57) What damages are a small amount of money given to recognize that a defendant did indeed commit a tort in a case in which there were no compensable damages suffered by the plaintiff? A) Nominal B) Compensatory C) Punitive D) Exemplary E) Liquidated
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58) What damages are given to punish the defendant and are generally only given when the defendant’s conduct is extremely outrageous? A) Compensatory B) Consequential C) Nominal D) Punitive E) Liquidated
59) Assume Bob is driving and suddenly has an unexpected heart attack, causing him to run over a student crossing the street and breaking the student's leg. Which of the following is correct regarding Bob's liability to the student? A) The student can recover merely by demonstrating that he was injured. Nothing else is required. B) The student may recover, but only if the student can show that he was in the marked crosswalk. C) It is unlikely that the student can recover because the accident could not have been avoided even with reasonable care. D) The student can recover, but only if he can prove that Bob had automobile liability insurance. E) The student can recover, but only if he can establish that he did not have any medical insurance.
60)
Which of the following is correct regarding intentional torts and negligent torts?
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A) Both intentional torts and negligent torts result from a person willfully taking actions that are likely to cause injury. B) Both intentional torts and negligent torts involve the failure to exercise reasonable care to protect another’s person or property. C) Both intentional torts and negligent torts automatically give rise to both civil and criminal liability. D) Negligent torts result from a person willfully taking actions that are likely to cause injury, while intentional torts involve the failure to exercise reasonable care to protect another’s person or property. E) Intentional torts result from a person willfully taking actions that are likely to cause injury, while negligent torts involve the failure to exercise reasonable care to protect another’s person or property.
61) The _____ standard is a measurement of the way members of society expect an individual to act in a given situation. A) reasonable person B) subjective juror C) beyond reproach D) perfect accountability E) reasonable accountability
62) While driving her car down the street, Susan sees a child playing near the road with no adult supervision. Which of the following is most likely correct regarding Susan’s duty, if any, to the child? A) Because the law holds that every United States citizen has a duty to help a stranger in peril, she must come to the child's assistance. B) She must come to the child's assistance, but only because a minor is involved. C) She has no duty to render assistance to the child. D) She must render assistance to the child, but only if she can do so without peril to herself. E) She must render assistance to the child, but only if she knows the child's parents.
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63) Tina negligently hits Susie with her car. Susie, rendered unconscious from the impact, is lying on the street. Which of the following is correct regarding whether Tina has a legal duty to come to the aid of Susie after the accident? A) Tina has no legal duty to come to Susie’s aid. B) Tina has a legal duty to come to Susie’s aid because she negligently hit her. C) Tina has a legal duty to come to Susie’s aid, but only if police do not arrive on the scene within a reasonable amount of time. D) Tina has a legal duty to come to Susie’s aid, but only if Susie has no medical insurance. E) Tina has a legal duty to come to Susie’s aid, but only if no one without a conflict of interest is willing to do so.
64) Tori, a prospective plaintiff in a civil action, becomes a client of the Dewey, Cheatem and Howe law firm. Tori’s case sits unexamined and without filing for over three years; as a result, her case can never be pursued due to a violation of the relevant statute of limitations period. If Tori wants to sue the law firm, what type of action should Tori bring? A) Intentional tort B) Breach of contract C) Mistake of fact D) Malpractice E) Strict liability
65)
The violation of a duty of care is called _____. A) an intentional tort B) breach of societal contract C) breach of duty D) strict liability E) absolute liability
66)
Which of the following are elements of causation?
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A) Actual cause and proximate cause B) Actual cause and significant cause C) Actual cause and probable cause D) Proximate cause and significant cause E) Proximate cause and probable cause
67)
Cause in fact is also known as _____ cause. A) proximate B) legal C) actual D) nominal E) exemplary
68) Which of the following represents the legal determination that the defendant's breach of duty resulted directly in the plaintiff's injury? A) Proximate cause B) Legal cause C) Apparent cause D) Actual cause E) Cause beyond reasonable doubt
69)
Which of the following is sometimes referred to as "but-for" causation? A) Proximate cause B) Significant cause C) Actual cause D) Legal cause E) res ipsa loquitur
70)
Proximate cause is also sometimes referred to as _____.
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A) actual cause B) cause in fact C) legal cause D) constructive cause E) contributory cause
71) Which of the following refers to the extent to which, as a matter of policy, a defendant may be held liable for the consequences of his actions? A) Proximate cause B) Actual cause C) Causation in fact D) Constructive cause E) Contributory cause
72) Hulio hits and injures Barbara when he accidently hits tennis balls over the fence while trying to impress his girlfriend. Barbara requires stitches from the ball hitting her above the eye. A week later, the stitches get infected. Will Hulio have to pay for the infected stitches? A) Yes, Hulio is strictly liable B) Yes, the infection was a foreseeable result of the negligence C) Yes, the infection is the but-for causation D) No, it is not foreseeable that the stitches would get infected E) No, too much time has passed
73) Which of the following types of damages is intended to reimburse a plaintiff for his or her losses? A) Compensatory B) Punitive C) Nominal D) Exemplary E) Liquidated
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74) Vivian sells phony stock certificates to Michael to make a quick buck and pay off her loan shark. When Vivian’s scheme is revealed and Michael sues her, the court awards Michael $10,000 for the money he lost and an additional $5,000 to punish Vivian for her wrongdoing. What type of damages are the $5,000? A) Compensatory B) Consequential C) Liquidated D) Nominal E) Punitive
75) Courts usually award punitive damages in cases in which the offender has committed _____. A) ordinary negligence B) a strict liability offense C) a res ipsa loquitur offense D) compensatory negligence E) gross negligence
76) Which of the following has been adopted by courts to aid plaintiffs in establishing negligence claims? A) Res ipsa loquitur only B) Negligence per se only C) Assumption of the risk only D) Res ipsa loquitur and negligence per se E) Res ipsa loquitur, negligence per se, and assumption of the risk
77)
When would a plaintiff use the doctrine of res ipsa loquitur?
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A) To allow the judge and jury to infer that more likely than not, the defendant's negligence was the cause of the plaintiff's harm, even though there is no direct evidence of the defendant's lack of due care B) To allow the judge and jury to infer that more likely than not, the defendant's negligence was not the cause of the plaintiff's harm C) To allow the judge and jury to presume the defendant is guilty of contributory negligence D) To allow the judge and jury to presume the defendant is guilty of comparative negligence E) To allow the judge and jury to presume the defendant destroyed evidence
78)
Assuming res ipsa loquitur applies, what is the effect of that doctrine? A) It requires a finding of negligence. B) It prohibits a finding of negligence. C) The burden of proof shifts to the plaintiff. D) The burden of proof shifts to the defendant. E) The burden of proof rises to proof beyond a reasonable doubt.
79)
Which of the following is true regarding the law of negligence in Germany?
A) It is the same as the law of negligence in the United States. B) It focuses only on conscious negligence. C) It focuses only on unconscious negligence. D) Courts distinguish between conscious and unconscious negligence, with defendants who have engaged in only conscious negligence being found not liable. E) Courts distinguish between conscious and unconscious negligence, with defendants who have engaged in only unconscious negligence being found not liable.
80)
What is the Latin term for “negligence in or of itself?”
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A) res ipsa loquitor negligence B) negligence propter hoc C) negligence per se D) habeas corpus negligence E) ex post facto negligence
81) Which of the following applies to cases in which the defendant has violated a statute enacted to prevent a certain type of harm from befalling a specific group to which the plaintiff belongs? A) Res ipsa loquitur B) Negligence per se C) The frustration of purpose doctrine D) Comparative negligence E) Assumption of the risk
82)
Which of the following is true regarding the comparative negligence doctrine?
A) It is not available today in any state. B) All states have a form of comparative negligence. C) States have determined that from a financial risk perspective, it is unfair to defendants. D) It applies in cases where both the defendant and the plaintiff were negligent. E) It was once available in all states but has been replaced in most states by the defense of assumption of risk.
83) Which of the following must the defendant prove in order to rely upon the defense of contributory negligence?
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A) Only that the plaintiff's conduct fell below the standard of care needed to prevent unreasonable risk of harm B) Only that a failure of the plaintiff was a contributing cause to the plaintiff's injury C) Only that the plaintiff violated the last-clear-chance doctrine D) That the plaintiff's conduct fell below the standard of care needed to prevent unreasonable risk of harm and that the plaintiff's failure was a contributing cause to the plaintiff's injuries E) That the plaintiff's conduct fell below the standard of care needed to prevent unreasonable risk of harm; that the plaintiff's failure was a contributing cause to the plaintiff's injuries; and that the plaintiff failed to abide by the last-clear-chance doctrine
84) The _____ doctrine allows the plaintiff to recover damages despite proof of contributory negligence as long as the defendant had a final clear opportunity to avoid the action that injured the plaintiff. A) assumption of the risk B) last-clear-chance C) modified comparative negligence D) modified contributory negligence E) pure comparative negligence
85) While crossing the street, Bobby does not go to a crosswalk but proceeds to illegally cross the street without even checking to see if any vehicles are coming. Steve sees Bobby in the street, notices that he is not in the crosswalk, and proceeds to hit Bobby with his vehicle because he believes that Bobby should be taught a lesson about how to cross the street. Steve does slow down somewhat and only causes Bobby some significant bruising, but Bobby is angry and sues. Which of the following is most likely to happen in a contributory negligence jurisdiction? A) Steve will not be held liable because Bobby was contributorily negligent. B) Bobby will be able to recover despite proof of contributory negligence on his part because Steve had a final clear opportunity to avoid the action that injured Bobby. C) Bobby will win because of comparative negligence. D) Steve will win because of the assumption of risk doctrine. E) Bobby will lose because Steve reduced his speed.
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86) Winona is working on her laptop in the library. Her laptop power cord extends across the floor, causing a tripping hazard. Luke walks by while texting on his phone and does not see the cord. He trips on the cord, pulling Winona’s laptop to the floor and cracking the screen as a result. If Winona sues Luke, does Luke have any defense? A) Yes, Luke was texting on his phone and not paying attention B) Yes, Winona assumed the risk of plugging in her laptop at the library C) Yes, Winona was contributorily negligent D) No, Luke was contributorily negligence E) No, Luke assumed the risk of texting while walking
87) Which of the following doctrines require(s) the court to determine the percentage of fault of the defendant and then hold the defendant liable for that percentage of the plaintiff's damages, with no requirement that the defendant be more than 50 percent at fault? A) Assumption of the risk B) Last-clear-chance C) Modified comparative negligence D) Pure comparative negligence E) Both modified comparative negligence and pure comparative negligence
88) Which of the following doctrines require(s) the court to determine the percentage of fault of the defendant and then hold the defendant liable for that percentage of the plaintiff’s damages, but with the requirement that the defendant be more than 50 percent at fault before the plaintiff can recover? A) Assumption of the risk B) Last-clear-chance C) Modified comparative negligence D) Pure comparative negligence E) Both modified comparative negligence and pure comparative negligence
89) According to the _____ defense, a defendant may avoid liability by establishing that the plaintiff voluntarily and unreasonably encountered the risk of the actual harm that the defendant caused.
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A) last-clear-chance B) assumption of the risk C) contributory negligence D) res ipsa loquitur E) negligence per se
90) Which of the following occurs when a plaintiff expressly agrees, usually in a written contract, to assume the risk posed by the defendant's behavior? A) Implied assumption of the risk B) Express assumption of the risk C) Contributory negligence D) Modified comparative negligence E) Pure comparative negligence
91)
Which of the following occurs when a plaintiff implicitly assumes a known risk? A) Implied assumption of the risk B) Express assumption of the risk C) Contributory negligence D) Modified comparative negligence E) Pure comparative negligence
92)
Which is the most difficult part of establishing the defense of assumption of the risk?
A) Showing that the plaintiff assumed the risk of the actual harm suffered B) Showing that the defendant was aware that the plaintiff assumed the risk C) Showing that the plaintiff was aware of applicable law D) Showing that the plaintiff signed the contract assuming the risk without duress E) Showing that the defendant was either contributorily or comparatively negligent (depending on the jurisdiction in which the case is tried)
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93) What statutes prescribe that people in peril who receive voluntary aid from others cannot hold those offering aid liable for negligence? A) Good Samaritan B) Last-clear-chance C) Assumption of the risk D) Sovereign immunity E) Professional malpractice
94) A _____ cause is an unforeseeable event which interrupts the causal chain between the defendant's breach of duty and the damages the plaintiff suffered. A) subordinate B) superseding C) parallel D) contributory E) comparative
95)
Which of the following is liability without fault? A) Contributory negligence B) Assumption of the risk C) Strict liability D) Modified comparative negligence E) Pure comparative negligence
96) For the imposition of strict liability, which of the following is a condition required of an activity? A) The activity involves negligence B) The activity involves trespassing C) The activity is undertaken by a minor D) The activity is so inherently dangerous that it cannot ever be safely undertaken E) The activity is heavily regulated
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97) In terms of strict liability theory, which of the following is an example of an inherently dangerous activity? A) Driving an automobile B) Driving a motorcycle C) Blasting dynamite in a populated area D) Burning trash E) Babysitting
98) Steven knows that his dog has bitten several people. Cindy comes to visit him but Steven does not tell her about the dog's propensities. Unfortunately, the dog bites Cindy and she is required to have some stitches in her ankle. Which of the following is the most likely result if Cindy sues Steven? A) Cindy will win on a negligence theory. B) Cindy will win on both negligence and strict liability theories. C) Cindy will lose because in a relative sense, she did not incur serious injuries. D) Cindy will lose because she assumed the risk of injury by coming near the dog. E) Steven will lose because of the assumption of the risk doctrine.
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99) Pet Police. Millie breeds German Shepherd dogs. Bernard, who lives down the street, took in a stray dog loosely identified as a Corgi-plus. The dog, Casanova, would definitely be classified as a mixed breed. Bernard allowed Casanova to roam freely. Unfortunately, Casanova went to visit Millie's pure-bred German Shepherd. Puppies resulted which were Shepherd and Corgi-plus puppies. Millie was incensed. She started a campaign to round up all of the stray dogs, including Casanova, and haul them off to the animal shelter. She picked up a few cats as well. She posted signs all over the neighborhood saying that no animal, neither dog, cat, nor fowl, should come into her yard and that she was going to begin shooting the next time, period. Understandably, Bernard and some of the other neighbors take offense. Bernard comes to Millie's house while she is working in the yard. He walks behind her and shoves her. Millie did not see him coming. Millie turned around and proceeded to have a heated conversation with Bernard. Millie drew her fist back and told Bernard that she was going to punch him in the nose. Millie started to punch Bernard but he stepped back, and all she managed to do was jab him in the shoulder, causing no actual pain. Sally, who was going by on the street, saw Millie attempting to hit Bernard. Sally came over and grabbed Millie's hands, pinning Millie's hands behind her back. Which of the following is true regarding Bernard's shoving of Millie in the back? A) By shoving her in the back, Bernard committed a battery. B) By shoving her in the back, Bernard committed a battery and an assault. C) By shoving her in the back, Bernard committed an assault. D) Bernard did not commit any torts because he did not actually harm Millie. E) Bernard did not commit any torts because he can rely on the self-defense theory since his pet was threatened.
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100) Pet Police. Millie breeds German Shepherd dogs. Bernard, who lives down the street, took in a stray dog loosely identified as a Corgi-plus. The dog, Casanova, would definitely be classified as a mixed breed. Bernard allowed Casanova to roam freely. Unfortunately, Casanova went to visit Millie's pure-bred German Shepherd. Puppies resulted which were Shepherd and Corgi-plus puppies. Millie was incensed. She started a campaign to round up all of the stray dogs, including Casanova, and haul them off to the animal shelter. She picked up a few cats as well. She posted signs all over the neighborhood saying that no animal, neither dog, cat, nor fowl, should come into her yard and that she was going to begin shooting the next time, period. Understandably, Bernard and some of the other neighbors take offense. Bernard comes to Millie's house while she is working in the yard. He walks behind her and shoves her. Millie did not see him coming. Millie turned around and proceeded to have a heated conversation with Bernard. Millie drew her fist back and told Bernard that she was going to punch him in the nose. Millie started to punch Bernard but he stepped back, and all she managed to do was jab him in the shoulder, causing no actual pain. Sally, who was going by on the street, saw Millie attempting to hit Bernard. Sally came over and grabbed Millie's hands, pinning Millie's hands behind her back. Millie's threat to punch Bernard in the nose constitutes a(n) _____. A) assault and battery B) battery C) assault D) justified retribution E) defamatory statement
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101) Pet Police. Millie breeds German Shepherd dogs. Bernard, who lives down the street, took in a stray dog loosely identified as a Corgi-plus. The dog, Casanova, would definitely be classified as a mixed breed. Bernard allowed Casanova to roam freely. Unfortunately, Casanova went to visit Millie's pure-bred German Shepherd. Puppies resulted which were Shepherd and Corgi-plus puppies. Millie was incensed. She started a campaign to round up all of the stray dogs, including Casanova, and haul them off to the animal shelter. She picked up a few cats as well. She posted signs all over the neighborhood saying that no animal, neither dog, cat, nor fowl, should come into her yard and that she was going to begin shooting the next time, period. Understandably, Bernard and some of the other neighbors take offense. Bernard comes to Millie's house while she is working in the yard. He walks behind her and shoves her. Millie did not see him coming. Millie turned around and proceeded to have a heated conversation with Bernard. Millie drew her fist back and told Bernard that she was going to punch him in the nose. Millie started to punch Bernard but he stepped back, and all she managed to do was jab him in the shoulder, causing no actual pain. Sally, who was going by on the street, saw Millie attempting to hit Bernard. Sally came over and grabbed Millie's hands, pinning Millie's hands behind her back. Millie's action in jabbing Bernard after she missed his noseconstitutes which of the following? A) Battery B) Nothing, because the conduct would not be deemed offensive C) Nothing, because she missed his nose and Bernard was not actually hurt D) Nothing, because by entering Millie's yard, Bernard consented to any offensive touching E) Nothing, because Bernard deserved what he received
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102) Pet Police. Millie breeds German Shepherd dogs. Bernard, who lives down the street, took in a stray dog loosely identified as a Corgi-plus. The dog, Casanova, would definitely be classified as a mixed breed. Bernard allowed Casanova to roam freely. Unfortunately, Casanova went to visit Millie's pure-bred German Shepherd. Puppies resulted which were Shepherd and Corgi-plus puppies. Millie was incensed. She started a campaign to round up all of the stray dogs, including Casanova, and haul them off to the animal shelter. She picked up a few cats as well. She posted signs all over the neighborhood saying that no animal, neither dog, cat, nor fowl, should come into her yard and that she was going to begin shooting the next time, period. Understandably, Bernard and some of the other neighbors take offense. Bernard comes to Millie's house while she is working in the yard. He walks behind her and shoves her. Millie did not see him coming. Millie turned around and proceeded to have a heated conversation with Bernard. Millie drew her fist back and told Bernard that she was going to punch him in the nose. Millie started to punch Bernard but he stepped back, and all she managed to do was jab him in the shoulder, causing no actual pain. Sally, who was going by on the street, saw Millie attempting to hit Bernard. Sally came over and grabbed Millie's hands, pinning Millie's hands behind her back. Assuming that Millie sues Sally, what would be the most likely result at trial? A) Sally will be convicted of assault. B) Sally will be convicted of battery. C) Sally will be convicted of assault and battery. D) Sally will not be convicted of anything because she did not actually hurt Millie. E) Sally will not be convicted of anything because she was acting in the defense of others.
103) Hair Stylist Woes. Maryann went to see her hair stylist, Candy. Maryann, who had black, curly hair, requested straight, blond hair. Candy told her that she could make that change, but there would be significant upkeep involved. Candy made the change, but Maryann did not do the upkeep required. She also falsely claimed that Candy did not do what Maryann asked her to do, that Candy lied to her, and that Candy was professionally incompetent. Maryann made the statements to friends of hers. She also wrote an editorial in her college newspaper to the effect that Candy's shop should be avoided at all costs because Candy was incompetent. In fact, Candy was a good hair stylist and enjoyed a good reputation up until the time that Maryann started her criticism. Candy threatened to sue Maryann for defamation, but Maryann told Candy that Candy could not prevail because Candy could not prove loss of income. Candy had to admit that while her reputation had been damaged somewhat, the damage was primarily among the college population. Her income kept increasing from other segments of the community, and she had suffered no net loss. The defamation printed in the school newspaper would be which of the following?
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A) Libel B) Slander C) Both libel and slander D) Neither libel nor slander, because an editorial was involved E) Neither libel nor slander, because the falsehood involved matters of appearance, not business-related matters
104) Hair Stylist Woes. Maryann went to see her hair stylist, Candy. Maryann, who had black, curly hair, requested straight, blond hair. Candy told her that she could make that change, but there would be significant upkeep involved. Candy made the change, but Maryann did not do the upkeep required. She also falsely claimed that Candy did not do what Maryann asked her to do, that Candy lied to her, and that Candy was professionally incompetent. Maryann made the statements to friends of hers. She also wrote an editorial in her college newspaper to the effect that Candy's shop should be avoided at all costs because Candy was incompetent. In fact, Candy was a good hair stylist and enjoyed a good reputation up until the time that Maryann started her criticism. Candy threatened to sue Maryann for defamation, but Maryann told Candy that Candy could not prevail because Candy could not prove loss of income. Candy had to admit that while her reputation had been damaged somewhat, the damage was primarily among the college population. Her income kept increasing from other segments of the community, and she had suffered no net loss. As far as the editorial is concerned, which of the following is true in regards to Maryann's statement that Candy cannot recover because she cannot show loss of income? A) Maryann is correct. B) Maryann is correct, but only if she can establish that she did not intend to cause economic loss to Candy. C) Maryann is incorrect because her actions would be considered liable per se. D) Maryann is incorrect because general damages would be presumed. E) Maryann is incorrect because Candy has proven special damages.
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105) Hair Stylist Woes. Maryann went to see her hair stylist, Candy. Maryann, who had black, curly hair, requested straight, blond hair. Candy told her that she could make that change, but there would be significant upkeep involved. Candy made the change, but Maryann did not do the upkeep required. She also falsely claimed that Candy did not do what Maryann asked her to do, that Candy lied to her, and that Candy was professionally incompetent. Maryann made the statements to friends of hers. She also wrote an editorial in her college newspaper to the effect that Candy's shop should be avoided at all costs because Candy was incompetent. In fact, Candy was a good hair stylist and enjoyed a good reputation up until the time that Maryann started her criticism. Candy threatened to sue Maryann for defamation, but Maryann told Candy that Candy could not prevail because Candy could not prove loss of income. Candy had to admit that while her reputation had been damaged somewhat, the damage was primarily among the college population. Her income kept increasing from other segments of the community, and she had suffered no net loss. Statements made by Maryann to her friends that were defamatory of Candy are what type of defamation? A) Libel B) Slander C) Both libel and slander D) Neither libel nor slander because an editorial was involved E) Neither libel nor slander because the falsehood involved matters of appearance, not business-related matters
106) Hair Stylist Woes. Maryann went to see her hair stylist, Candy. Maryann, who had black, curly hair, requested straight, blond hair. Candy told her that she could make that change, but there would be significant upkeep involved. Candy made the change, but Maryann did not do the upkeep required. She also falsely claimed that Candy did not do what Maryann asked her to do, that Candy lied to her, and that Candy was professionally incompetent. Maryann made the statements to friends of hers. She also wrote an editorial in her college newspaper to the effect that Candy's shop should be avoided at all costs because Candy was incompetent. In fact, Candy was a good hair stylist and enjoyed a good reputation up until the time that Maryann started her criticism. Candy threatened to sue Maryann for defamation, but Maryann told Candy that Candy could not prevail because Candy could not prove loss of income. Candy had to admit that while her reputation had been damaged somewhat, the damage was primarily among the college population. Her income kept increasing from other segments of the community, and she had suffered no net loss. As far as the statements Maryann made to her friends, which of the following is true in regards to her statement that Candy cannot recover because Candy has not suffered a loss of income?
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A) Maryann is correct. B) Maryann is correct, but only if she can show that she did not intend to cause Candy a loss of income. C) Maryann is incorrect because her statements constituted slander per se. D) Maryann is incorrect because general damages will not be presumed. E) Maryann is incorrect, but only because Candy cannot establish liable per se.
107) Cat Chaser. Annette, who is angry because her neighbor William allows his dog to chase her cat, decides that she wants to get even. She moves a number of farm animals into her backyard and begins playing music at all hours of the night. She also steals a nice lawn chair off William's deck. She intends to keep the chair. Annette further took a rake off William's deck that she plans to return after she finishes raking her leaves. William did not give her permission to take the rake. William is unhappy about the whole situation and wants to sue. Which of the following would be the most appropriate cause of action against Annette regarding the music? A) Trespass to personalty B) Conversion C) Private nuisance D) Negligence E) Harassment
108) Cat Chaser. Annette, who is angry because her neighbor William allows his dog to chase her cat, decides that she wants to get even. She moves a number of farm animals into her backyard and begins playing music at all hours of the night. She also steals a nice lawn chair off William's deck. She intends to keep the chair. Annette further took a rake off William's deck that she plans to return after she finishes raking her leaves. William did not give her permission to take the rake. William is unhappy about the whole situation and wants to sue. What claim would William have against Annette for taking the lawn chair? A) Trespass to personal property B) Conversion C) Private nuisance D) Negligence E) Harassment
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109) Cat Chaser. Annette, who is angry because her neighbor William allows his dog to chase her cat, decides that she wants to get even. She moves a number of farm animals into her backyard and begins playing music at all hours of the night. She also steals a nice lawn chair off William's deck. She intends to keep the chair. Annette further took a rake off William's deck that she plans to return after she finishes raking her leaves. William did not give her permission to take the rake. William is unhappy about the whole situation and wants to sue. What action would William have against Annette for taking the rake? A) Trespass to personal property B) Conversion C) Private nuisance D) Negligence E) Harassment
110) Diving Fiasco. Mike, who owns a dive shop in the United States, decides to take a group of his customers diving in U.S. waters. Mike is aware that sharks occasionally visit the area where the divers will be visiting. He is also aware that while stingrays are usually tame, they can become aggressive when fed. Mike does not reveal that information to the group of divers going with him. The divers go down into the water, and some have squid with which to feed the stingrays. During the dive, one of the stingrays becomes agitated and latches onto diver Susie's arm. Susie is so disconcerted that she drops her regulator (her breathing device) from her mouth and is in considerable difficulty. Another diver, Billy, encounters a shark, which snaps at him. While the shark does not actually bite Billy, the attack results in damage to his diving equipment. Mike, who is in charge of the dive, does nothing to help and leaves the other divers to return to the boat because the dive turned out to be more trouble than expected. Wendy, another diver on the trip, also returns to the boat without doing anything to help the divers in distress. Sam, on the other hand, goes to rescue the divers who are in distress. He manages to do so but in the process he pulls his back and requires medical care. All divers are very unhappy with Mike. Billy wants to sue Mike for damages because of his damaged equipment. Which of the following is the most likely result?
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A) He will win because Mike should have warned him about the occasional appearance of sharks. B) He will lose because Mike had no duty to warn him of anything. C) He will lose because he did not sustain physical injury. D) He will win, but only if he can establish that he had a contract with Mike whereby Mike would reveal harmful conditions. E) He will win, but only if he can establish that he did not have insurance to cover the equipment.
111) Diving Fiasco. Mike, who owns a dive shop in the United States, decides to take a group of his customers diving in U.S. waters. Mike is aware that sharks occasionally visit the area where the divers will be visiting. He is also aware that while stingrays are usually tame, they can become aggressive when fed. Mike does not reveal that information to the group of divers going with him. The divers go down into the water, and some have squid with which to feed the stingrays. During the dive, one of the stingrays becomes agitated and latches onto diver Susie's arm. Susie is so disconcerted that she drops her regulator (her breathing device) from her mouth and is in considerable difficulty. Another diver, Billy, encounters a shark, which snaps at him. While the shark does not actually bite Billy, the attack results in damage to his diving equipment. Mike, who is in charge of the dive, does nothing to help and leaves the other divers to return to the boat because the dive turned out to be more trouble than expected. Wendy, another diver on the trip, also returns to the boat without doing anything to help the divers in distress. Sam, on the other hand, goes to rescue the divers who are in distress. He manages to do so but in the process he pulls his back and requires medical care. All divers are very unhappy with Mike. Billy and Susie are annoyed that Mike did not come to their assistance. Which is true regarding Mike's duty to provide assistance to them during the dive? A) Mike had no duty to provide any assistance to them. B) Mike had a duty to come to their aid because he arranged the dive and was charging them. C) Mike had a duty to come to their assistance, but only if he had specifically agreed to do so prior to the dive. D) Mike had a duty to come to their assistance, but only if they were minors. E) Mike had a duty to come to their assistance, but only if no one else did.
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112) Diving Fiasco. Mike, who owns a dive shop in the United States, decides to take a group of his customers diving in U.S. waters. Mike is aware that sharks occasionally visit the area where the divers will be visiting. He is also aware that, while stingrays are usually tame, they can become aggressive when fed. Mike does not reveal that information to the group of divers going with him. The divers go down into the water, and some have squid with which to feed the stingrays. During the dive, one of the stingrays becomes agitated and latches onto diver Susie's arm. Susie is so disconcerted that she drops her regulator (her breathing device) from her mouth and is in considerable difficulty. Another diver, Billy, encounters a shark, which snaps at him. While the shark does not actually bite Billy, the attack results in damage to his diving equipment. Mike, who is in charge of the dive, does nothing to help and leaves the other divers to return to the boat because the dive turned out to be more trouble than expected. Wendy, another diver on the trip, also returns to the boat without doing anything to help the divers in distress. Sam, on the other hand, goes to rescue the divers who are in distress. He manages to do so but in the process he pulls his back and requires medical care. All divers are very unhappy with Mike. Which of the following is true regarding whether Wendy and Sam had a duty to come to the assistance of the divers in peril? A) Neither Wendy nor Sam had a duty to aid the divers in peril. B) Wendy and Sam had a duty to aid the divers in peril, but only if Mike refused to do so. C) Wendy and Sam did not have a duty to aid the divers in peril, unless they were the first to observe the problem. D) Wendy and Sam had a duty to aid the divers in peril, but only if they were acquainted with them before the dive. Wendy and Sam had no duty to help strangers. E) Wendy and Sam had a duty to aid the divers in peril if personal safety was involved, but not if the only issue was damage to property.
113) Blow-Up. Jeanie is hauling several containers of gasoline in her vehicle in preparation for riding her personal watercraft. On the way home, Jeanie stops at the automatic teller machine at her bank and exits her car. Holly pulls behind her and negligently rear-ends Jeanie's car. The car explodes and results in the bank building burning to the ground. The bank sues Holly for negligence, claiming that Holly should have to pay for the entire bank building. The bank claimed that it should be able to recover under the res ipsa loquitur doctrine. Which of the following is true regarding whether actual cause exists in the bank's action against Holly?
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A) Actual causation is present because the bank would not have been damaged if Holly had fulfilled her duty to drive properly. B) Actual cause is present because as a matter of policy, someone who rear-ends a vehicle is automatically responsible for the plaintiff’s damages. C) Actual cause is present because Holly was the legal cause of the bank burning. D) Actual cause is not present because Holly was not the legal cause of the bank burning. E) Actual cause is not present because Holly was not the proximate cause of the bank burning.
114) Blow-Up. Jeanie is hauling several containers of gasoline in her vehicle in preparation for riding her personal watercraft. On the way home, Jeanie stops at the automatic teller machine at her bank and exits her car. Holly pulls behind her and negligently rear-ends Jeanie's car. The car explodes and results in the bank building burning to the ground. The bank sues Holly for negligence claiming that Holly should have to pay for the entire bank building. The bank claimed that it should be able to recover under the res ipsa loquitur doctrine. Which of the following is true regarding whether Holly is the proximate cause of the bank burning? A) Holly is not the proximate cause of the bank burning because it was not foreseeable that Jeanie would have gasoline in the back of her car that would result in the fire. B) Holly is not the proximate cause of the accident because her actions were not the cause in fact of the accident. C) Holly's actions were not the proximate cause of the accident because actual causation cannot be established. D) Holly's actions were the proximate cause of the bank's burning because actual cause is present. E) Holly's actions were the proximate cause of the bank's burning because cause in fact can be established.
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115) Blow-Up. Jeanie is hauling several containers of gasoline in her vehicle in preparation for riding her personal watercraft. On the way home, Jeanie stops at the automatic teller machine at her bank and exits her car. Holly pulls behind her and negligently rear-ends Jeanie's car. The car explodes and results in the bank building burning to the ground. The bank sues Holly for negligence, claiming that Holly should have to pay for the entire bank building. The bank claimed that it should be able to recover under the res ipsa loquitur doctrine. Which of the following is true regarding the bank's claim that it should be able to recover under the res ipsa loquitur doctrine? A) The bank is correct because under that doctrine defendants are liable for any harm caused. B) The bank is correct, but only if Holly has sufficient insurance to cover the bank burning. C) The bank is correct, but only if it can be established that Holly was a repeat driving offender. D) The bank is incorrect because the thing does not speak for itself. E) The bank is incorrect because res ipsa loquitur is a defense.
116) Chewer. The state in which Susan lives has a statute prohibiting dogs running at large. All dogs are required to be on a leash whenever they are off the owner's premises. Susan's dog, while not on a leash, visits the home of a neighbor down the street. While there, the dog carries off an expensive pair of shoes belonging to Robert. The shoes are chewed and destroyed. A neighbor informed Robert of what had happened. Robert commented that he never should have left his $300 shoes lying on the deck in the first place but that he expects to be repaid by Susan. Robert found out that the dog had carried away a number of shoes and other articles in the neighborhood, chewing them to pieces. Susan did nothing to warn anyone. Robert thinks that she should be punished for her activities, which would perhaps deter her from allowing the dog to run loose. Upon which of the following theories will Robert likely rely in seeking recovery against Susan for his shoes? A) Negligence per se B) Res ipsa loquitur C) Stare decisis D) Both negligence per se and res ipsa loquitur E) Both contributory negligence and comparative negligence
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117) Chewer. The state in which Susan lives has a statute prohibiting dogs running at large. All dogs are required to be on a leash whenever they are off the owner's premises. Susan's dog, while not on a leash, visits the home of a neighbor down the street. While there, the dog carries off an expensive pair of shoes belonging to Robert. The shoes are chewed and destroyed. A neighbor informed Robert of what had happened. Robert commented that he never should have left his $300 shoes lying on the deck in the first place but that he expects to be repaid by Susan. Robert found out that the dog had carried away a number of shoes and other articles in the neighborhood, chewing them to pieces. Susan did nothing to warn anyone. Robert thinks that she should be punished for her activities, which would perhaps deter her from allowing the dog to run loose. Which of the following theories will Susan likely use to defend herself? A) Assumption of the risk B) Comparative negligence C) Res ipsa loquitur D) Negligence per se E) Res ipsa loquitur and negligence per se
118) Chewer. The state in which Susan lives has a statute prohibiting dogs running at large. All dogs are required to be on a leash whenever they are off the owner's premises. Susan's dog, while not on a leash, visits the home of a neighbor down the street. While there, the dog carries off an expensive pair of shoes belonging to Robert. The shoes are chewed and destroyed. A neighbor informed Robert of what had happened. Robert commented that he never should have left his $300 shoes lying on the deck in the first place but that he expects to be repaid by Susan. Robert found out that the dog had carried away a number of shoes and other articles in the neighborhood, chewing them to pieces. Susan did nothing to warn anyone. Robert thinks that she should be punished for her activities, which would perhaps deter her from allowing the dog to run loose. What type of damages would Robert seek in order to punish Susan and deter her from letting the dog run free in the future? A) Punitive B) Compensatory C) Nominal D) Liquidated E) Statutory
119)
Which of the following would be considered a strict-liability tort?
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A) Riding a bicycle to work B) Cleaning your car out at the carwash C) Using dynamite to blast a hole in the side of a mountain D) Going to a tennis match E) Putting paper in the copy machine
120) Famous tennis star John Connors was being paid millions of dollars by a sports drink company to use his name and likeness in its advertising. A competing company also used Connors’ picture in its advertisements, suggesting that Connors approved of its product, but without Connors’ permission. This is the tort of _____. A) public disclosure of private facts B) conversion C) appropriation for commercial gain D) intrusion on an individual’s affairs E) defamation
121)
Another name for exemplary damages is _____ damages: A) gross B) punitive C) consequential D) compensatory E) nominal
122) Monty had surgery to repair a torn ligament in his shoulder. Two weeks after his surgery he was still having pain, so he returned to the doctor’s office. X-rays showed a sponge that had been accidently left in his shoulder during surgery. Based on which negligence doctrine would Monty most likely sue?
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A) Negligence per se B) Res ipsa loquitur C) Trespass to person D) Contributory negligence E) Comparative negligence
123) Which doctrine allows the plaintiff to recover damages despite proof of contributory negligence if the defendant had a final clear opportunity to avoid the action that injured the plaintiff? A) Frustration of purpose B) Assumption of the risk C) Res ipsa loquitur D) Last-clear-chance doctrine E) Negligence per se
124) In terms of strict liability theory, which of the following would not be considered an abnormally dangerous activity? A) Keeping a wild animal as a pet B) Spraying chemicals on fruit trees C) Blasting dynamite in a populated area D) Storing nuclear fuel rods E) Working at a retail outlet mall
125) As a result of his car accident with a negligent driver, Rasheed secured a $75,000 verdict to compensate him for injuries to his body and his car. This award is for _____damages. A) consequential B) punitive C) exemplary D) compensatory E) nominal
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ESSAY. Write your answer in the space provided or on a separate sheet of paper. 126) List and discuss the three objectives of tort law.
127) Discuss what is needed in order to establish damages in defamation actions. Address whether special proof of damages is needed and, if so, under what circumstances.
128) Define absolute privilege in the context of defamation and give an example of when an absolute privilege would be applied.
129) Do individuals have a general duty to rescue strangers from perilous situations? Further, discuss whether or not you believe individuals should have a duty under tort law to rescue strangers from perilous situations and how you think the law should be written in that area.
130)
Identify and discuss the two separate elements of causation.
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131)
Identify the elements of negligence.
132) What does the term "res ipsa loquitur" mean, and what must a plaintiff demonstrate in order to prevail in his or her use of that doctrine?
133) Assume a jurisdiction has a law that all residential swimming pools must have a fence that is at least six feet tall surrounding the swimming pool. Cindy has a pool in her backyard, but she just had it built a few months ago and has not since had the extra money to build the fence. Unfortunately, one of the neighborhood children goes swimming in the pool and drowns. The parents of the child sue Cindy. Discuss how they would likely go about proving their case against Cindy and the elements that would be required to establish their case.
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Answer Key Test name: Chap 07_5_The Essentials_Kubasek 1) TRUE Tort law is primarily state law, so states may have slightly different definitions of each tort. 2) TRUE Although the primary objectives of criminal law are to punish wrongdoers and preserve order in society, the primary objective of tort law is to provide compensation for injured parties. 3) TRUE The classifications of torts may be different in foreign countries. For example, the Chinese legal system more narrowly defines the activities actionable under tort law compared to the United States. 4) TRUE In tort law, it is assumed that people intend what could be considered the normal consequences of their actions. For example, if Rob throws a rock toward a group of people, it would be assumed under the law that he intended to hit someone with the rock and that the person hit would be hurt, regardless of Rob’s intention merely to scare the group of people. 5) TRUE A party charged with a battery may argue that the offended party consented to the contact. Consent, as a defense, mitigates the element of “unwanted” required for battery liability. A person cannot commit a battery if the contact was consented to and therefore wanted. 6) FALSE Defense of property allows you to use reasonable force to defend your property from an intruder. However, the use of deadly force in defense of property is rarely, if ever, considered justified. Version 1
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7) TRUE The most common defense to battery is self-defense, responding to the force of another with comparable force to defend oneself. 8) FALSE The Communications Decency Act gives immunity to providers of interactive computer services for liability they might otherwise incur on account of material disseminated by them but created by others. 9) FALSE Privilege is an affirmative defense in a defamation action. An affirmative defense occurs when the defendant admits to the accusation but argues that there is a reason he should not be held liable. 10) FALSE A private nuisance occurs when a person uses her property in an unreasonable manner that harms a neighbor's use or enjoyment of his property. Using one's property in a manner that caused the neighbor to be subjected to flooding, vibrations, excessive noise, or smoke could lead to a nuisance claim. 11) FALSE To successfully bring a claim of intentional interference with contract, the plaintiff must prove that: a) a valid and enforceable contract between the two parties existed; b) the defendant party knew of the existence of the contract and its terms; c) the defendant intentionally undertook steps to cause one of the parties to breach the contract; and d) the plaintiff was injured as a result of the breach. 12) TRUE Negligence is behavior that creates an unreasonable risk of harm to others. Unlike intentional torts, which result from a person willfully taking actions that are likely to cause injury, negligent torts involve the failure to exercise reasonable care to protect another’s person or property. Version 1
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13) TRUE The reasonable person standard is a measurement of the way members of society expect an individual to act in a given situation. To determine the defendant’s duty of care, the judge or jury must determine the degree of care and skill that a reasonable person would exercise under similar circumstances. The judge or jury then uses this standard to evaluate the actions of the individual in the case. 14) FALSE The courts generally hold that businesses have a duty of care to protect their customers against foreseeable risks about which the owner knew or reasonably should have known. 15) TRUE If the plaintiff’s car is stopped at a red traffic light and is struck in the rear by a vehicle driven by the defendant, the defendant was negligent per se because the negligent act violated a statute or regulation. Negligence per se applies to cases in which the defendant has violated a statute enacted to prevent a certain type of harm from befalling a specific group to which the plaintiff belongs. If the defendant’s violation causes the plaintiff to suffer from the type of harm that the statute intends to prevent, the violation is deemed negligence per se. The plaintiff does not have to show that a reasonable person would exercise a certain duty of care toward the plaintiff. Instead, the plaintiff can offer evidence of the defendant’s violation of the statute to establish proof of the negligence. 16) TRUE
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Negligence per se (literally, “negligence in or of itself”) is a doctrine that helps plaintiffs succeed in negligence cases. Negligence per se applies to cases in which the defendant has violated a statute enacted to prevent a certain type of harm from befalling a specific group to which the plaintiff belongs. If the defendant’s violation causes the plaintiff to suffer from the type of harm that the statute intends to prevent, the violation is deemed negligence per se. The plaintiff does not have to show that a reasonable person would exercise a certain duty of care toward the plaintiff. Instead, the plaintiff can offer evidence of the defendant’s violation of the statute to establish proof of the negligence. 17) FALSE Res ipsa loquitur literally means “the thing speaks for itself.” The plaintiff uses this doctrine to allow the judge or jury to infer that, more likely than not, the defendant’s negligence was the cause of the plaintiff’s harm, even though there is no direct evidence of the defendant’s lack of due care. 18) TRUE According to a pure comparative negligence defense, the court determines the percentage of fault of the defendant, and the defendant is then liable for that percentage of the plaintiff's damages; however, when modified comparative negligence is applied, the defendant must be more than 50 percent at fault before the plaintiff can recover. 19) FALSE There are two forms of comparative negligence: pure and modified. According to a pure comparative negligence defense, the court determines the percentage of fault of the defendant, and the defendant is then liable for that percentage of the plaintiff's damages. Courts calculate damages according to modified comparative negligence in the same manner, except that the defendant must be more than 50 percent at fault before the plaintiff can recover. Version 1
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20) FALSE One defense available to defendants facing negligence claims is assumption of the risk. To use this defense successfully, a defendant must prove that the plaintiff voluntarily and unreasonably encountered the risk of the actual harm the defendant caused. In other words, the plaintiff willingly assumed as a risk the harm she suffered. 21) FALSE Most states have replaced contributory negligence with comparative negligence. As of the textbook’s publication, twenty-eight states have adopted modified comparative negligence and thirteen have adopted pure comparative negligence, leaving only nine states with contributory negligence. 22) FALSE There are two types of assumption of the risk: express and implied. 23) TRUE There are two types of assumption of the risk: express and implied. Express assumption of the risk occurs when the plaintiff expressly agrees (usually in a written contract) to assume the risk posed by the defendant’s behavior. In contrast, implied assumption of the risk means that the plaintiff implicitly assumed a known risk. 24) TRUE Laws in some states hold that people in peril who receive voluntary aid from others cannot hold those offering aid liable for negligence. These laws, commonly called Good Samaritan statutes, attempt to encourage selfless and courageous behavior by removing the threat of liability. 25) FALSE Strict liability is liability without fault. 26) FALSE Compensatory damages are typically awarded for pain and suffering, costs of repairing damaged property, medical expenses, and lost wages. Version 1
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27) TRUE Punitive damages are awarded to punish the defendant. They are given only when the defendant’s conduct is extremely outrageous. The purposes of punitive damages are both to punish the defendant and to deter him and others who are similarly situated from engaging in that kind of activity again. 28) D A tort is commonly defined as a wrong or injury to another, other than a breach of contract. 29) A Tort is a French word meaning “wrong.” 30) D Proof of all of the elements of negligence does not require a finding of negligence; instead, it merely permits it. Once the plaintiff has demonstrated all of the elements of negligence, the burden of proof shifts to the defendant, who must prove that he was not negligent to avoid liability. 31) E Torts are most commonly classified as intentional, negligent, or strictliability torts. 32) C Intentional torts are the most willful of torts. Intentional torts occur when the defendant takes an action intending certain consequences will result or knowing certain consequences are likely to result. 33) C Negligent torts occur when the defendant acts in a way that subjects other people to an unreasonable risk of harm. In other words, the defendant is careless such that someone else suffers a detriment. 34) E
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Strict-liability torts occur when the defendant takes an action that is inherently dangerous and cannot ever be undertaken safely, no matter what precautions the defendant takes. 35) A Intentional torts are the most willful of torts. Intentional torts are predicated on the common element of intent. The intent at issue is not intent to harm but, rather, is intent to engage in a specific act, which ultimately results in an injury, physical or economic, to another. 36) D Intentional torts are divided into the following three categories: a) torts against persons; b) torts against property; and c) torts against economic interests. 37) B An assault occurs when one person places another in fear or apprehension of an immediate, offensive bodily contact. 38) D An assault occurs when one person places another in fear or apprehension of an immediate, offensive bodily contact. 39) E Defense of one's reputation is not a defense to battery. 40) C The most common defense to battery is self-defense, responding to the force of another with comparable force in order to defend oneself. To use this defense successfully, you cannot use a greater level of force than is being used against you. 41) A A written poster hanging in the school cafeteria which states that the principal stole money from the school treasury would constitute libel rather than slander per se. 42) A Version 1
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To recover damages in a case of slander, the plaintiff must prove special damages; that is, the plaintiff must show specific monetary loss that resulted from the defamatory statements. 43) C The Communications Decency Act of 1996 gives immunity to providers of interactive computer services for liability they might otherwise incur on account of material disseminated by them but created by others. 44) A Truth is an absolute defense to defamation. In other words, one cannot be held liable for defamation, regardless of whether damages result, if the statement made was the truth. 45) D When an absolute privilege exists, one cannot be sued for defamation for any false statements made, regardless of intent or knowledge of the falsity of the claim. Absolute privilege arises in only a limited number of circumstances. 46) A Under a conditional privilege, a party will not be held liable for defamation unless the false statement was made with actual malice. A statement is made with actual malice if it is made with either knowledge of its falsity or reckless disregard for its truth. 47) D Public figures are individuals who are in the public eye, typically politicians and entertainers. Because these individuals have a significant impact on our lives, we want to encourage free discussion about them, so we do not hold people liable for making false statements about them as long as the statements were not made with malice. 48) D
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Invasion of privacy torts protect the individual’s right to keep certain things out of public view even if they are true. The four privacy torts are: a) false light; b) public disclosure of private facts; c) appropriation for commercial gain; and d) intrusion on an individual’s affairs or seclusion. 49) C The tort of trespass to realty, also called trespass to real property, occurs when a person intentionally: a) enters the land of another without permission; b) causes an object to be placed on the land of another without the landowner's permission; c) stays on the land of another when the owner tells him to depart; or d) refuses to remove something he placed on the property that the landowner asked him to remove. 50) E Intentional torts against economic interests include disparagement, intentional interference with contract, unfair competition, misappropriation, and fraudulent misrepresentation. Conversion is an intentional tort against property. 51) B Slander of title is a business tort that occurs when false published statements are related to the ownership of business property. 52) A The tort of unfair competition is the act of competing with another not to make a profit, but for the sole purpose of driving the other party out of business. 53) D
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To establish that a fraudulent misrepresentation exists, a party must demonstrate all of the following: a) A party knowingly, or with reckless disregard for the truth, misrepresented material facts and conditions; b) The party intended to have other parties rely on the misrepresentations; c)The injured party reasonably relied on the misrepresentations; d) The injured party suffered damages because of relying on the misrepresentations; and e) A direct link exists between the injuries suffered and reliance on the misrepresentations. 54) B To win a negligence case, the plaintiff must prove four elements: (1) duty, (2) breach of duty, (3) causation, and (4) damages (see Exhibit 71). A plaintiff who cannot establish all four of these elements will be denied recovery. 55) D In a tort action, the person who committed the wrongful action is often referred to as the tortfeasor. 56) D Compensatory damages are typically awarded for pain and suffering, costs of repairing damaged property, medical expenses, and lost wages. Surprisingly, attorney fees are not recoverable as compensatory damages, despite the fact that most plaintiffs could not bring an action against the tortfeasor without hiring an attorney. Because the plaintiffs in personal injury cases must usually pay their attorneys anywhere from one-third to one-half of their recovery, some argue that compensatory damages fail to meet the intended goal of properly compensating victims. 57) A
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Nominal damages are a small amount of money given to recognize that a defendant did indeed commit a tort in a case where there were no compensable damages suffered by the plaintiff. A plaintiff may receive nominal damages by simply failing to prove actual damages. 58) D Punitive damages are awarded to punish the defendant. They are given only when the defendant’s conduct is extremely outrageous. The purposes of punitive damages are both to punish the defendant and to deter him and others who are similarly situated from engaging in that kind of activity again. In awarding punitive damages, juries usually consider the egregiousness or willfulness of the tort and the wealth of the defendant. Obviously, the more wrongful the nature of the defendant’s act, the greater the desire to send a message that such behavior will not be tolerated; and the greater the wealth of the defendant, the higher the damages must be to actually punish the defendant. 59) C Negligence involves the defendant’s failure to exercise reasonable care to protect another's person or property. In the instant case, it would be difficult for the student (the plaintiff) to prove that the Bob (the defendant) failed to exercise reasonable care. The fact that Bob had an unexpected heart attack, resulting in the accident, does not demonstrate that Bob failed to exercise reasonable care. 60) E Unlike intentional torts, which result from a person willfully taking actions that are likely to cause injury, negligent torts involve the failure to exercise reasonable care to protect another’s person or property. 61) A
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The reasonable person standard is a measurement of the way members of society expect an individual to act in a given situation. To determine the defendant’s duty of care, the judge or jury must determine the degree of care and skill that a reasonable person would exercise under similar circumstances. The judge or jury then uses this standard to evaluate the actions of the individual in the case. 62) C In most situations, the law holds that individuals have no duty to rescue strangers from perilous situations. 63) B In most situations, the law holds that individuals have no legal duty to rescue strangers from perilous situations. In some cases, however, the courts hold that individuals have a legal duty to aid strangers in certain types of peril. For example, if Sam negligently hits Janice with his car and, as a result, Janice is lying in the street, Sam has a legal duty to remove her from that dangerous position. 64) D Clients who feel that they have suffered damages as a result of a professional's breach of her duty of care can bring a negligence action against her. These actions are frequently referred to as malpractice cases. 65) C Once the plaintiff has established that the defendant owes her a duty of care, she must prove that the defendant's conduct violated that duty. This violation is called a breach of duty. 66) A Causation is the third element of a successful negligence claim, and it has two separate elements: actual cause and proximate cause. 67) C Actual cause is the first element of causation required for a successful negligence claim. It is also known as cause in fact. Version 1
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68) D Actual cause is the first element of causation required for a successful negligence claim. It is the determination that the defendant's breach of duty resulted directly in the plaintiff's injury. 69) C Courts commonly determine whether a breach of duty actually caused the plaintiff’s injury by asking whether the plaintiff would have been injured if the defendant had fulfilled his or her duty. If the answer is no, then the actual cause of the plaintiff’s injury was the defendant’s breach. Actual cause is sometimes referred to as "but-for" causation because the plaintiff argues that the damages she suffered would not have occurred but for (except because of) the actions of the defendant. 70) C Proximate cause is the second element of causation required for a successful negligence claim. It is sometimes referred to as legal cause. 71) A Proximate cause is the second element of causation required for a successful negligence claim. Proximate cause, sometimes referred to as legal cause, refers to the extent to which, as a matter of policy, a defendant may be held liable for the consequences of his actions. 72) B In most states, proximate cause is determined by foreseeability. Proximate cause is said to exist only when both the plaintiff and the plaintiff’s damages were reasonably foreseeable at the time the defendant breached his duty to the plaintiff. Thus, if the defendant could not reasonably foresee the damages that the plaintiff suffered as a result of his action, the plaintiff’s negligence claim will not be sustained because it lacks the element of proximate causation. 73) A
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Damages are the final required element of a negligence action. The plaintiff must have sustained a compensable injury as a result of the defendant’s actions. Because the purpose of tort law is to compensate individuals who suffer injuries as a result of another’s action or inaction, a person cannot bring an action in negligence seeking only nominal damages. Rather, a person must seek compensatory damages, which are those damages intended to reimburse a plaintiff for her or his losses. 74) E In typical negligence cases, courts rarely award punitive damages, or exemplary damages, which are imposed to punish the offender and deter others from committing similar offenses. 75) E In the context of negligence, courts usually award punitive damages in cases in which the offender has committed gross negligence, an action committed with extreme reckless disregard for the property or life of another person. 76) D The plaintiff has the burden of proving all four elements of a negligence case. Direct evidence of negligence by the defendant, however, is not always available. For example, there may have been no witnesses to the negligent conduct, and other evidence may have been destroyed. Therefore, two doctrines have been adopted by courts to aid plaintiffs in establishing negligence claims: res ipsa loquitur and negligence per se. 77) A Res ipsa loquitur literally means “the thing speaks for itself.” The plaintiff uses res ipsa loquitur to allow the judge or jury to infer that, more likely than not, the defendant's negligence was the cause of the plaintiff's harm, even though there is no direct evidence of the defendant's lack of due care. 78) D Version 1
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Assuming the elements needed to establish res ipsa loquitur are satisfied, the burden of proof shifts to the defendant, who must prove that he was not negligent to avoid liability. 79) E In Germany, a defendant may be found not liable by reason of unconscious negligence. Unconscious negligence occurs when the defendant is either unaware that the act constitutes an offense or unaware that the act is occurring at all. 80) C Negligence per se means literally, "negligence in or of itself." This doctrine helps plaintiffs succeed in negligence cases. 81) B Negligence per se (literally, “negligence in or of itself”) is a doctrine that helps plaintiffs succeed in negligence cases. Negligence per se applies to cases in which the defendant has violated a statute enacted to prevent a certain type of harm from befalling a specific group to which the plaintiff belongs. 82) D Contributory negligence, a defense once available in all states but replaced today in most states by the defense of comparative negligence, applies in cases in which both the defendant and the plaintiff were negligent. 83) D
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Contributory negligence, a defense once available in all states but replaced today in most states by the defense of comparative negligence, applies in cases in which both the defendant and the plaintiff were negligent. In order to successfully assert the defense of contributory negligence, the defendant must prove that: a) the plaintiff's conduct fell below the standard of care needed to prevent unreasonable risk of harm and b) the plaintiff's failure was a contributing cause of the plaintiff's injury. 84) B If the defendant successfully proves contributory negligence, no matter how slight the plaintiff’s negligence, the plaintiff will be denied any recovery of damages. Because this defense seems unfair, many states have adopted the last-clear-chance doctrine. This doctrine allows the plaintiff to recover damages despite proof of contributory negligence as long as the defendant had a final clear opportunity to avoid the action that injured the plaintiff. 85) B If the defendant successfully proves contributory negligence, no matter how slight the plaintiff’s negligence, the plaintiff will be denied any recovery of damages. Because this defense seems unfair, many states have adopted the last-clear-chance doctrine. This doctrine allows the plaintiff to recover damages despite proof of contributory negligence as long as the defendant had a final clear opportunity to avoid the action that injured the plaintiff. 86) C
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Contributory negligence applies in cases in which both the defendant and the plaintiff were negligent. The defendant must prove that a) the plaintiff’s conduct fell below the standard of care needed to prevent unreasonable risk of harm and b) the plaintiff’s failure was a contributing cause of the plaintiff’s injury. Some defense lawyers argue that if a plaintiff involved in a car accident failed to wear her seat belt, that failure constitutes contributory negligence. 87) D According to a pure comparative negligence defense, the court determines the percentage of fault of the defendant. The defendant is then liable for that percentage of the plaintiff's damages. 88) C According to modified comparative negligence, the court must determine the percentage of fault of the defendant and then hold the defendant liable for that percentage of the plaintiff’s damages, but only if the defendant is more than 50 percent at fault for the plaintiff’s loss. 89) B To use the assumption of the risk defense successfully, a defendant must prove that the plaintiff voluntarily and unreasonably encountered the risk of the actual harm the defendant caused. In other words, the plaintiff willingly assumed as a risk the harm she suffered. 90) B Express assumption of the risk occurs when the plaintiff expressly agrees (usually in a written contract) to assume the risk posed by the defendant's behavior. 91) A Express assumption of the risk occurs when the plaintiff expressly agrees, usually in a written contract, to assume the risk posed by the defendant’s behavior. In contrast, implied assumption of the risk means that the plaintiff implicitly assumed a known risk. Version 1
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92) A To use the assumption of the risk defense successfully, a defendant must prove that the plaintiff voluntarily and unreasonably encountered the risk of the actual harm the defendant caused. In other words, the plaintiff willingly assumed as a risk the harm she suffered. The most difficult part of establishing the assumption of the risk defense is showing that the plaintiff assumed the risk of the actual harm she suffered. 93) A Laws in some states, called Good Samaritan statutes, hold that people in peril who receive voluntary aid from others cannot hold those offering aid liable for negligence. These laws attempt to encourage selfless and courageous behavior by removing the threat of liability. 94) B The defendant in a negligence suit can avoid liability by establishing a superseding cause. A superseding cause is an unforeseeable event that interrupts the causal chain between the defendant's breach of duty and the damages the plaintiff suffered. 95) C Strict liability is liability without fault. Today, the theory of strict liability is used most commonly when the plaintiff is claiming to have been injured by a product that was unreasonably dangerous. 96) D Strict liability is liability without fault. The law holds an individual liable under the theory of strict liability when the activity in which she engages satisfies three conditions: a) it involves a risk of serious harm to people or property; b) it is so inherently dangerous that it cannot ever be safely undertaken; and c) it is not usually performed in the immediate community. Instead of banning such activities, the law allows people to engage in these activities but holds them liable for all resulting harm. 97) C Version 1
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Strict liability is liability without fault. The law holds an individual liable without fault when the activity in which she engages satisfies three conditions: a) it involves a risk of serious harm to people or property; b) it is so inherently dangerous that it cannot ever be safely undertaken; and c) it is not usually performed in the immediate community. One example of an inherently dangerous activity is dynamite blasting in a populated area. 98) A Negligence is behavior that creates an unreasonable risk of harm to others. To win a negligence case, the plaintiff must prove four elements: a) the defendant owed a duty of care to the plaintiff; b) the defendant breached the duty of care he or she owed the plaintiff; c) the defendant caused harm to the plaintiff; and d) the plaintiff experienced damages as a result. In the instant case, Steven knew his dog had dangerous propensities, but he failed to warn Cindy or otherwise take precautionary measures that would have reduced or eliminated the likelihood of harm to her. 99) A A battery is an intentional, unwanted, offensive bodily contact. Almost any unwanted, intentional contact constitutes a battery. 100) C Torts against persons are intentional acts that harm an individual’s physical or mental integrity. One of the most common torts against persons, assault, occurs when one person places another in fear or apprehension of an immediate, offensive bodily contact. 101) A A battery is in intentional, unwanted, offensive bodily contact. Almost any unwanted, intentional contact constitutes a battery. 102) E
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A limited number of defenses are available in an action for a battery. One, defense of others, allows you to defend another by using the same degree of force that you could use to defend yourself. 103) A Defamation is the intentional publication (i.e., communication to a third party) of a false statement harmful to an individual's reputation. If the defamation is published in a permanent form, such as printed in a magazine or newspaper, it is known as libel. 104) D Defamation is the intentional publication (i.e., communication to a third party) of a false statement harmful to an individual’s reputation. If the defamation is published in a permanent form, such as printed in a magazine or newspaper, it is known as libel. In the case of libel, general damages are presumed. Thus, the victim would be entitled to compensation for the damages that are presumed to flow from defamation yet are hard to prove, such as the humiliation the victim would feel. 105) B Defamation is the intentional publication (i.e., communication to a third party) of a false statement harmful to an individual’s reputation. If the defamation is made orally, it is slander. 106) C As a general rule, to recover damages in a case of slander, the plaintiff must prove special damages; that is, the plaintiff must show specific monetary loss that resulted from the defamatory statement(s). One exception to the requirement of special damages when slander is involved occurs if the false statements constitute slander per se. Slander per se statements are considered so inherently harmful that general damages are presumed. One kind of slander per se statement is a claim that an individual is professionally incompetent. Version 1
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107) C A private nuisance is a type of intentional tort against property. A private nuisance occurs when a person uses her property in an unreasonable manner that harms a neighbor's use or enjoyment of his property. 108) B A private nuisance is a type of intentional tort against property. Conversion occurs when a person permanently removes personal property from the owner's possession and control. 109) A Trespass to personal property, also called trespass to personalty, is a type of intentional tort against property. A person commits trespass to personal property by temporarily exerting control over another's personal property or interfering with the true owner's right to use the property. 110) A Negligence is behavior that creates an unreasonable risk of harm to others. To win a negligence case, the plaintiff must prove four elements: a) the defendant owed a duty of care to the plaintiff; b) the defendant breached the duty of care he or she owed the plaintiff; c) the defendant caused harm to the plaintiff; and d) the plaintiff experienced damages as a result. In the instant case Mike, a professional diver, knew that sharks, inherently dangerous creatures, occasionally visited the dive area, yet he failed to warn Billy. As a result of this failure to warn, Billy experienced loss (damaged diving equipment). 111) B In terms of negligence liability and the corresponding duty of care, courts generally hold that businesses have a duty to protect their customers against foreseeable risks about which the owner knew or reasonably should have known. Version 1
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112) A In terms of negligence liability and the corresponding duty of care, in most situations the law holds that individuals have no duty to rescue strangers from perilous situations. 113) A Actual cause, also known as cause in fact, is one requirement of a successful negligence claim. Actual cause is the determination that the defendant's breach of duty resulted directly in the plaintiff's injury. 114) A Proximate cause, sometimes referred to as legal cause, is one requirement of a successful negligence claim. Proximate cause refers to the extent to which, as a matter of policy, a defendant may be held liable for the consequences of his actions. In most states, proximate cause is determined by foreseeability. 115) D Res ipsa loquitur literally means “the thing speaks for itself.” The plaintiff uses this doctrine to allow the judge or jury to infer that, more likely than not, the defendant’s negligence was the cause of the plaintiff’s harm, even though there is no direct evidence of the defendant’s lack of due care. To establish res ipsa loquitur in most states, the plaintiff must demonstrate that: a) the event was a kind that ordinarily does not occur in the absence of negligence; b) other responsible causes, including the conduct of third parties and the plaintiff, have been sufficiently eliminated; and c) the indicated negligence is within the scope of the defendant's duty to the plaintiff. 116) A
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Negligence per se (literally, “negligence in or of itself”) is a doctrine that helps plaintiffs succeed in negligence cases. Negligence per se applies to cases in which the defendant has violated a statute enacted to prevent a certain type of harm from befalling a specific group to which the plaintiff belongs. 117) B There are two forms of comparative negligence: pure and modified. According to a pure comparative negligence defense, the court determines the percentage of fault of the defendant. The defendant is then liable for that percentage of the plaintiff's damages. Courts calculate damages according to modified comparative negligence in the same manner, except that the defendant must be more than 50 percent at fault before the plaintiff can recover. 118) A The purposes of punitive damages are both to punish the defendant and to deter him and others who are similarly situated from engaging in that kind of activity again. The amount of punitive damages awarded in a particular negligence case is based on two factors: a) the severity of the wrongful conduct and b) the wealth of the defendant. 119) C Strict-liability torts occur when the defendant takes an action that is inherently dangerous and cannot ever be undertaken safely, no matter what precautions the defendant takes. 120) C Appropriation for commercial gain occurs when someone uses another person’s name, likeness, voice, or other identifying characteristic for commercial gain without that person’s permission. the property. 121) B punitive damages or exemplary damages, which are imposed to punish the offender and deter others from committing similar offenses. Version 1
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122) B Res ipsa loquitur literally means “the thing speaks for itself.” The plaintiff uses this doctrine to allow the judge or jury to infer that, more likely than not, the defendant’s negligence was the cause of the plaintiff’s harm, even though there is no direct evidence of the defendant’s lack of due care. 123) D The last-clear-chance doctrine allows plaintiff to recover damages despite proof of contributory negligence as long as the defendant had a final clear opportunity to avoid the action that injured the plaintiff. 124) E Strict liability is liability without fault. The law holds an individual liable without fault when the activity in which she engages satisfies three conditions: a) it involves a risk of serious harm to people or property; b) it is so inherently dangerous that it cannot ever be safely undertaken; and c) it is not usually performed in the immediate community. One example of an inherently dangerous activity is dynamite blasting in a populated area. 125) D Because the primary objective of tort law is to compensate victims, the primary type of damages are compensatory damages, damages designed to compensate the victim for all the harm caused by the person who committed the tort. 126) Tort law's primary objective is to provide compensation for injured parties. Second, it contributes to maintaining order in society because it discourages private retaliation by injured persons and their friends. A third objective of tort law is to give citizens a sense that they live in a just society.
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127) In the case of libel, general damages are presumed. Therefore, a victim is entitled to compensation for damages that are presumed to flow from defamation yet are hard to prove. If the defamation is slander, then the plaintiff must prove special damages in the form of specific monetary loss. An exception to the requirement of special damages occurs if false statements constitute slander per se. The kinds of statements considered slander per se are claims that the plaintiff a) has a loathsome communicable disease; b) has committed a crime for which imprisonment is a possibility; c) is professionally incompetent; or d) if a woman, has engaged in sexual misconduct. 128) When an absolute privilege exists, one cannot be sued for defamation for any false statements made, regardless of intent or knowledge of the falsity of the claim. The speech and debate clause of the United States Constitution gives an absolute privilege to individuals speaking on the U.S. House and Senate floors during congressional debate. This privilege exists because the U.S. Congress wants to get to the truth of the matters before it, and if people testifying before Congress had to fear they might be sued, they may be afraid to testify. Absolute privilege also arises during a judicial proceeding. Again, we do not want people to be afraid to testify in court, so we prohibit them from being sued for whatever occurs in the courtroom. 129) In most situations, the law holds that individuals have no duty to rescue strangers from perilous situations. Student responses will vary regarding what they believe the law should be.
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130) For a successful negligence claim, the plaintiff must prove that the defendant caused the plaintiff harm. The two elements of causation are actual cause and proximate cause. Actual cause is the determination that the defendant's breach of duty resulted directly in the plaintiff's injury. Proximate cause refers to the extent to which, as a matter of policy, a defendant may be held liable for the consequences of his actions. In most states, proximate cause is determined by foreseeability. 131) To win a negligence case, the plaintiff must prove four elements: a) the defendant owed the plaintiff a duty of care; b) the defendant breached the duty of care he or she owed the plaintiff; c) the defendant caused the plaintiff harm; and d) the plaintiff experienced damages as a result. 132) Res ipsa loquitur means "the thing speaks for itself." In most states, to establish res ipsa loquitur the plaintiff must demonstrate that: a) the event was the kind that does not ordinarily occur in the absence of negligence; b) other responsible causes, including the conduct of third parties and the plaintiff, have been sufficiently eliminated; and c) the indicated negligence is within the scope of the defendant's duty to the plaintiff. 133) The parents would likely rely upon the concept of negligence per se. They would likely be able to meet the elements of negligence per se, which are as follows: a) a statute defines the required standard of conduct; b) the statute was intended to prevent the type of harm that occurred; c) the child was a member of the class of persons that the statute was designed to protect; and d) the violation was the proximate cause of death.
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CHAPTER 8 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) Real property includes land and anything permanently attached to it. ⊚ true ⊚ false
2) The laws of intellectual property protect property that is primarily the result of mental creativity rather than physical effort. ⊚ true ⊚ false
3) The landowner has the legal ability to dig or mine minerals from the earth, and he may sell or give these rights to another person. ⊚ true ⊚ false
4) A landowner cannot be required to involuntarily transfer his or her property to the government, because compelling the landowner to do so would violate the Due Process Clause of the United States Constitution. ⊚ true ⊚ false
5) An easement is a revocable right that allows people to take things such as timber or crops from the land. ⊚ true ⊚ false
6) If a tenant subleases property to another party, the initial tenant is no longer liable for payment of the rent for the remainder of the lease term. ⊚ true ⊚ false
7)
A license is a right to use another's property that is both permanent and irrevocable.
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⊚ ⊚
true false
8) Condemnation is a legal process that is protected by the federal constitution and allows the government to take private property for the use of the public without paying the owner compensation for the property. ⊚ true ⊚ false
9)
Personal property can include land if it is gifted to the designated heir in a will. ⊚ true ⊚ false
10)
Tangible property includes items such as furniture, cars, and other goods. ⊚ true ⊚ false
11)
A bank account is an example of intangible property. ⊚ true ⊚ false
12) A donor makes a gift causa mortis based on the realization that, at some point in the distant future, he or she will ultimately die. ⊚ true ⊚ false
13) To register a domain name on the Internet, an application must be filed with the United States Patent and Trademark Office. ⊚ true ⊚ false
14)
A party may lose registration of a domain name by not using it for more than 30 days.
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⊚ ⊚
true false
15)
Trade dress is entitled to the same protection as a trademark. ⊚ true ⊚ false
16)
Copyrights protect ideas themselves. ⊚ true ⊚ false
17)
In order for a work to be copyrightable, it must be fixed, original, and creative. ⊚ true ⊚ false
18) A copyrighted work that is reproduced with the appropriate notice affixed is protected for ten years and is subject to indefinite renewal by the copyright holder. ⊚ true ⊚ false
19) The fair-use doctrine gives teachers unlimited protection from copyright liability, provided that they use copyrighted work exclusively for educational purposes. ⊚ true ⊚ false
20)
Cross-licensing of patents is illegal. ⊚ true ⊚ false
21) When a patent is issued for an object, it gives the holder the exclusive right to produce, sell, and use the object of the patent for the life of the holder plus 70 years. ⊚ true ⊚ false Version 1
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22)
A company’s client list may be considered a trade secret. ⊚ true ⊚ false
23)
Reverse engineering is an unlawful way to discover a trade secret. ⊚ true ⊚ false
24) Unlike United States eminent domain law, the German federal government may expropriate land for the public good without paying the landowner compensation. ⊚ true ⊚ false
25) In Kelo v. City of New London, the United States Supreme Court ruled that as a matter of law, the government violates the Fifth Amendment to the U.S. Constitution by taking private property and selling it for private development. ⊚ true ⊚ false
26)
Lost property and mislaid property are the same legal theories. ⊚ true ⊚ false
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 27) When describing “types” of property, which of the following is correct? A) Property is either city, state, or federal B) Property is either real, personal, or intellectual C) Property is either tangible, intangible, or specific D) Property is either defined, undefined, or mineral rights E) Property is real and imagined
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28)
Margo owns her home and barn in rural Kentucky. This type of property is _____. A) personal B) state C) real D) determined E) federal
29) Dillon owns 200 acres and has given Bob’s company the right to come and drill and extract oil. Dillion’s right to allow Bob’s company to enter his property and remove the materials is known as a(n) _____. A) subsurface right B) personal right C) conditional estate D) surface right E) entering easement
30)
Phil owns 150 acres in fee simple absolute. These 150 acres are known as his _____. A) interest by county B) interest by ownership C) estate D) leasehold E) ownership if a life estate
31) Real property ownership includes airspace above the land, water rights flowing across or beneath the land, and _____. A) trees growing next to the land B) the right to divert the water to deprive landowners downstream of use of the water C) walkways leading to the land D) mineral rights under the land E) roadways providing access to the land
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32) Which of the following is an estate that is the most complete a person can have and includes the exclusive right to ownership and possession? A) Leasehold estate B) Full and complete estate C) Conditional estate D) Fee simple absolute E) Life estate
33) Victoria owns a bed and breakfast gifted to her by her grandparents. Victoria has the right to run the bed and breakfast and make changes as she pleases as long as she never sells alcohol. This is known as what type of estate? A) Life estate B) Fee hold estate C) Leasehold estate D) Conditional Estate E) Fee simple absolute
34) Brynn has a life estate in her grandmother’s farm house. When Brynn passes away, what will happen to the property? A) The property goes to the county in which the land is located. B) The property goes to the state in which the land is located. C) The property goes to another party designated by the original grantor. D) The property is left to Brynn’s heirs E) The property is distributed through intestate succession.
35) Mechelle has a life estate in a property in rural Maine. Mechelle has allowed people to camp and park in the backwoods of the property, leaving piles of trash everywhere and thereby diminishing the value of the property. Mechelle is allowing what to happen?
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A) Adverse possession B) Ownership default C) Improper dominion D) Waste E) Eminent domain
36)
A(n) _____ is a person’s present right to property ownership and possession in the future. A) fee simple B) easement C) future interest D) conditional interest E) license
37)
Which of the following is incorrect regarding property interests in Vietnam?
A) Vietnam's new constitution asserts that the state owns all the land. B) The owner of the land must pay the equivalent of rent to the Vietnamese government for possession and use of the property. C) Transfer of property can occur only with the approval of neighboring landowners. D) A new owner can never be given a longer term of right or more extensive rights over the land than what the original owner had. E) A state official determines the price for which property will be transferred.
38)
Which of the following are estates that do not include the right to possess the property? A) Easements B) Profits C) Licenses D) Easements, profits, and licenses E) Easements and profits, but not licenses
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39) Georgia has given Timon the right to cross the back part of her property to access a road. This right Timon has is known as a(n) _____. A) easement B) license C) possessory interest D) profit E) lien
40) Harold owns an apple orchard in the state of Washington. Milo has permission to come onto the property and take apples to sell. This right is known as a(n) _____. A) easement B) lease C) possessory interest D) profit E) license
41)
What type of interest does a licensee hold? A) A life estate for as long as the license is in effect B) A profit for as long as the license is in effect C) An irrevocable interest D) A permanent interest E) A temporary and revocable right
42) Which of the following is the legal process by which a transfer of property is made by a governmental entity against the protest of the property owner pursuant to the Takings Clause of the Fifth Amendment to the United States Constitution? A) Allocation B) Appropriation C) Condemnation D) Substitution E) Adverse possession
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43)
Patents and trademarks are considered what type of property? A) Real B) Personal C) Intellectual D) Tangible E) Non-commercial
44)
How is tangible property identified? A) By its purchase price (or by its fair market value if received as a gift) B) By state statute C) By the senses D) By federal statute E) By administrative agency decree
45) Daphne’s grandmother gave her a beautiful sapphire ring one year before her grandmother died. This type of a gift is known as a(n) _____. A) intestate succession B) early distribution C) inter vivos gift D) gift causa mortis E) will transfer
46) Daphne’s grandmother called her to her home one day. Having been diagnosed with advanced lung cancer and with only days to live, she gave Daphne a beautiful sapphire ring. This type of gift is known as a(n) _____. A) transfer for present consideration B) will codicil C) inter vivos gift D) gift causa mortis E) pre-will transfer
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47) What is a distinctive mark, word, design, picture, or arrangement that is used by a producer in conjunction with a product and tends to cause consumers to identify the product with the producer? A) Copyright B) Patent C) Trade secret D) Trademark E) Patent pending
48)
The McDonald’s golden arches and the Nike swoosh are examples of a(n) _____. A) patent B) copyright C) trademark D) easement E) license
49)
If a trademark is used intrastate, the trademark is protected by _____. A) federal common law B) state probate law C) state common law D) fee simple absolute E) eminent domain
50) To be protected in _____ use, a trademark must be registered with the United States Patent Office under the Lanham Act of 1947. A) interstate B) intrastate C) interstate and intrastate D) intrastate and international E) interstate, intrastate, and international
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51) What was the holding of the United States Supreme Court in the Qualltex Co. v. Jacobson Products Co. case? A) A sound cannot constitute a trademark. B) A sound can constitute a trademark. C) A shape can constitute a trademark. D) A color cannot constitute a trademark. E) A color can constitute a trademark.
52) To properly register a trademark with the United States Patent and Trademark Office, one must _____. A) submit a drawing of the mark, indicate when it was first used in intrastate commerce, and indicate how it is used B) submit a drawing of the mark, indicate when it was first used in interstate commerce, and indicate how it is used C) submit a drawing of the mark, indicate when it was first used in international commerce, and indicate how it is used D) submit a drawing of the mark and indicate when it was first used in intrastate commerce, but one need not indicate how it is used E) submit a drawing of the mark and indicate when it was first used in interstate commerce, but one need not indicate how it is used
53) HealthCare Forum, Inc. has its logo trademarked. When must the trademark registration be renewed? A) Before the end of the first year B) Between the second and third years C) Between the fifth and sixth years D) After the tenth year E) Trademarks never need to be renewed once they are properly registered.
54) Assuming it was initially registered with the United States Patent and Trademark Office after 1990, how often must a trademark be renewed after its initial renewal?
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A) Every seven years B) Every ten years C) Every eleven years D) Every twelve years E) Every twenty years
55) Which of the following was not a factor the court considered in the Toys "R" Us, Inc. v. Canarsie Kidde Shop, Inc. case in determining whether "Kids 'r' Us" infringed on the "Toys 'R' Us" mark? A) The strength of the senior user's mark B) The degree of similarity between the two marks C) Evidence of actual confusion D) The revenue of the defendant corporation E) The junior user's good faith
56)
Most websites have _____ domain(s). A) unprotected B) one C) two D) three E) real property
57) If a new federal governmental agency establishes a website, what will the domain name end with? A) .net B) .org C) .com D) .gov E) .edu
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58) Which of the following companies is responsible for registering domain names for Internet use? A) Internet Solutions, Inc. B) Domain Names Corporation C) Internet Domains, Inc. D) Network Solutions, Inc. E) Internet Networks Corporation
59) Becky registers her new domain name but then leaves the country. If she does not use the name for more than _____, she may lose the registration. A) 60 days B) 90 days C) 6 months D) 1 year E) 3 years
60) Which of the following provides that a portion of a copyrighted work may be reproduced for purposes of criticism, comment, news reporting, teaching, scholarships, and research? A) The limited-use doctrine B) The copyright-use doctrine C) The fair-use doctrine D) The trade-use doctrine E) The trade-dress doctrine
61)
A patent protects a product, process, invention, machine, or a(n) _____. A) trademark B) copyright C) plant produced by asexual reproduction D) book that has not yet been submitted for copyright protection E) idea
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62) Which of the following must be satisfied in order for a patent, other than a design patent, to be granted? A) The object of the patent must be antiquated. B) The object of the patent must be non-utilitarian. C) The object of the patent must be obvious. D) The object of the patent must be non-obvious. E) The object of the patent must be novel, useful, and nonobvious.
63) When a patent is issued for an object, it gives its holder the exclusive right to produce, sell, and use the object of the patent for _____ years from the date of application. A) ten B) twenty C) thirty D) forty E) fifty
64) Under _____, a trade secret is protected from unlawful appropriation by competitors as long as it is kept secret and consists of elements not generally known in the trade. A) common law B) state statutory law C) federal statutory law D) international law E) the Sherman Antitrust Act
65)
Which of the following is incorrect regarding trade-secret protection?
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A) Competitors may not legally discover a trade secret by doing reverse engineering. B) Competitors may legally discover a trade secret by going on public tours of plants and observing the use of the trade secret. C) Lawful discovery of a trade secret means there is no longer a trade secret to be protected. D) An invention may be considered a trade secret. E) A design may be considered a trade secret.
66) To stop a competitor from using a trade secret, the plaintiff must prove that a trade secret actually existed, the defendant acquired the trade secret unlawfully, and the _____. A) trade secret is the plaintiff's sole intellectual property right B) inventor successfully patented the trade secret C) defendant published the trade secret D) defendant used the trade secret without the plaintiff's permission E) plaintiff had the trade secret for less than 20 years
67) The shape and design of a product such as Apple’s iPhone is an example of which of the following? A) A trademark B) Trade dress C) A patent D) A copyright E) A trade secret
68)
Which of the following is correct regarding trade dress? A) Trade dress is entitled to the same protection as a trademark. B) Trade dress is entitled to less protection than a trademark. C) Trade dress is entitled to more protection than a trademark. D) Trade dress is entitled to the same protection as a patent. E) Trade dress is entitled to less protection than a patent.
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69) Bank accounts, stocks, and insurance policies are examples of which of the following types of property? A) Tangible B) Intangible C) Substantive D) Real E) Illusory
70) In terms of the transfer of personal property, which of the following is a way in which a gift differs from a purchase? A) After delivery a gift is revocable, while property acquired by purchase is not. B) No consideration is needed for a gift. C) No written contract is needed for a gift, although it is needed for a purchase. D) No certificate of title is needed for a gift, although it is needed for a purchase. E) A mere possessory right accompanies a gift, while an ownership right accompanies acquisition of property by purchase.
71)
A valid gift requires _____. A) delivery B) donative intent C) acceptance D) delivery, donative intent, and acceptance E) delivery and donative intent, but not acceptance
72)
Property that the original owner has discarded is _____ property. A) mislaid B) lost C) eminent domain D) abandoned E) adversely possessed
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73) Which of the following describes property that the true owner has unknowingly or accidentally dropped or left somewhere? A) Lost B) Eminent domain C) Discarded D) Abandoned E) Adversely possessed
74) Which of the following describes property that the true owner has intentionally placed somewhere but has forgotten its location? A) Lost B) Mislaid C) Discarded D) Abandoned E) Adversely possessed
75)
Which of the following is a correct statement regarding lost property?
A) In most states, the finder of lost property has title to the lost good against all, including the person who lost the property. B) In most states, the finder of lost property has title to the lost good against all except the true owner. C) In most states, the finder of lost property has no title to the lost good since the good must be turned over to the local police department for later sale if the true owner cannot be located. D) In all states, the finder of lost property has an obligation to put a notice in the local newspaper looking for the true owner before the finder of the property can claim ownership. E) In most states, the finder of lost property has title to the lost good against all except the person who lost the property, but that right only arises after the finder of the property proves that he or she spent at least one-third of the fair market value of the property in an attempt to locate the true owner.
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76) Disputed Ring. While working in the yard, Tina found a beat-up ring. Becca, an eighteenyear old neighbor, came over to visit and liked the ring. Tina said, "You can have this old thing if you would like." Becca replied, "I really like it - Maybe it's a real diamond!" Tina laughingly told her that there was a one in a billion chance of that and that Tina was more likely to win the lottery. A few months later Becca ran over to Tina's house and told Tina that the ring was actually a diamond worth thousands of dollars! Becca gave Tina the ring to examine. Tina put it in her pocket and told Becca that she would never have given it to her if she had realized its value and that possession was back where it had always belonged. Tina also told Becca that Becca failed to legally accept the gift because she did not know its true value and because Tina did not sign any document turning over title. Becca sues. Which of the following describes the type of gift at issue? A) A gift causa mortis B) An inter vivos gift C) A gift inter mortis D) A gift causa vivos E) A non-donative gift
77) Disputed Ring. While working in the yard, Tina found a beat-up ring. Becca, an eighteenyear old neighbor, came over to visit and liked the ring. Tina said, "You can have this old thing if you would like." Becca replied, "I really like it - Maybe it's a real diamond!" Tina laughingly told her that there was a one in a billion chance of that and that Tina was more likely to win the lottery. A few months later Becca ran over to Tina's house and told Tina that the ring was actually a diamond worth thousands of dollars! Becca gave Tina the ring to examine. Tina put it in her pocket and told Becca that she would never have given it to her if she had realized its value and that possession was back where it had always belonged. Tina also told Becca that Becca failed to legally accept the gift because she did not know its true value and also because Tina did not sign any document turning over title. Becca sues. Which of the following is true regarding Tina's statement that she was entitled to the ring because she would not have given it to Becca if she had known the true value?
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A) Tina is entitled to ownership of the ring, but only if she can prove that she did not realize its true value. B) Tina is entitled to ownership of the ring, but only if she can prove that she did not realize its true value and that there was a difference of at least $1,000 between what she believed the value to be and its true value. C) Tina is entitled to ownership of the ring, but only if she can prove that she did not realize its true value and that there was a difference of at least $10,000 between what she believed the value to be and its true value. D) Tina is entitled to ownership of the ring, but only because neither she nor Becca realized its true value. E) Being ignorant of the value of the ring does not entitle Tina to ownership of it.
78) Disputed Ring. While working in the yard, Tina found a beat-up ring. Becca, an eighteenyear old neighbor, came over to visit and liked the ring. Tina said, "You can have this old thing if you would like." Becca replied, "I really like it - Maybe it's a real diamond!" Tina laughingly told her that there was a one in a billion chance of that and that Tina was more likely to win the lottery. A few months later Becca ran over to Tina's house and told Tina that the ring was actually a diamond worth thousands of dollars! Becca gave Tina the ring to examine. Tina put it in her pocket and told Becca that she would never have given it to her if she had realized its value and that possession was back where it had always belonged. Tina also told Becca that Becca failed to legally accept the gift because she did not know its true value and also because Tina did not sign any document turning over title. Becca sues. Which of the following is true regarding Tina's statement that Becca could not have validly accepted the ring? A) If the ring is valued at $500 or more, then Tina is correct that Becca did not validly accept the ring because a writing would have been needed to validate acceptance. B) If the ring is valued at $1,000 or more, then Tina is correct that Becca did not validly accept the ring because a writing would have been needed to validate acceptance. C) If the ring is valued at $10,000 or more, then Tina is correct that Becca did not validly accept the ring because a writing would have been needed to validate acceptance. D) Tina is correct that Becca could not have validly accepted the ring when she did not understand its true value. E) Tina is incorrect; Becca validly accepted the ring as a gift.
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79) Easement Dispute. Sally buys a house from Bob that borders on a lake. Her deed gives her the most complete estate a person may have. She is in her bathing suit sunning one day when her neighbor, Fred, cuts through her yard. Sally tells him not to do that anymore. Fred informs her that he had previously purchased and properly recorded a right to cut across her yard to get lake access. Sally asks you what she should do to try to get rid of Fred because she doesn't like his cutting through her yard when she is sunning. What type of estate did Sally purchase from Bob? A) A life absolute estate B) A conditional estate C) A fee simple absolute estate D) A limited estate E) A subject estate
80) Easement Dispute. Sally buys a house from Bob that borders on a lake. Her deed gives her the most complete estate a person may have. She is in her bathing suit sunning one day when her neighbor, Fred, cuts through her yard. Sally tells him not to do that anymore. Fred informs her that he had previously purchased and properly recorded a right to cut across her yard to get lake access. Sally asks you what she should do to try to get rid of Fred because she doesn't like his cutting through her yard when she is sunning. What is the type of right that Fred is exercising by cutting through the yard called? A) A profit B) A license C) Adverse possession D) An easement E) Eminent domain
81) Easement Dispute. Sally buys a house from Bob that borders on a lake. Her deed gives her the most complete estate a person may have. She is in her bathing suit sunning one day when her neighbor, Fred, cuts through her yard. Sally tells him not to do that anymore. Fred informs her that he had previously purchased and properly recorded a right to cut across her yard to get lake access. Sally asks you what she should do to try to get rid of Fred because she doesn't like his cutting through her yard when she is sunning. What is the best advice you can give Sally regarding getting rid of Fred?
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A) To call the police when he shows up, because any rights he had terminated when Sally bought the property B) To sell her property and move to another house, because she has absolutely no hope in this case C) To tolerate Fred for one year, because his interest could only last that long after her purchase D) To tolerate Fred for three years, because his interest could only last that long after her purchase E) To reach some sort of agreement with him, possibly by paying him to give up the easement
82) Wedding Photos. Bobby took a number of wedding photos at Jill's wedding. He was paid as the photographer. On all of the photographs, he appropriately noted in the bottom right corner the necessary information showing that he was claiming copyright protection. Jill came to see Bobby three years after the initial photographs were taken and requested that he grant her permission to make as many copies as she wanted at the local photo shop from the pictures that she initially purchased. The photo shop had refused to reproduce the photographs without his permission. When he refused to give her permission to do so, Jill started a heated argument. She told Bobby that photographs are not entitled to copyright protection. She also told him that even if he was correct that there was some copyright protection, she was engaged in fair use, and in any event, damages for copyright infringement are unavailable. Which of the following is correct regarding Jill's claim that photographs are not subject to copyright protection? A) She is correct. Photographs are not subject to copyright protection, even if taken by a professional photographer. B) She is correct, but only because family pictures are involved. Family pictures may not be the subject of copyright protection, but landscape photographs may be the subject of copyright protection. C) She is partially correct. Bobby was entitled to copyright protection on the first picture. After Jill purchased the first picture, however, she could make as many copies as she wanted. D) She is correct, but only because Bobby had not registered the photographs for copyright protection. E) She is incorrect.
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83) Wedding Photos. Bobby took a number of wedding photos at Jill's wedding. He was paid as the photographer. On all of the photographs, he appropriately noted in the bottom right corner the necessary information showing that he was claiming copyright protection. Jill came to see Bobby three years after the initial photographs were taken and requested that he grant her permission to make as many copies as she wanted at the local photo shop from the pictures that she initially purchased. The photo shop had refused to reproduce the photographs without his permission. When he refused to give her permission to do so, Jill started a heated argument. She told Bobby that photographs are not entitled to copyright protection. She also told him that even if he was correct that there was some copyright protection, she was engaged in fair use, and in any event, damages for copyright infringement are unavailable. Which of the following is true regarding Jill's claim that she was engaged in fair use? A) It is likely that she would win on the claim, because she does not seek to use the photographs for commercial purposes. B) It is likely that she would win on the claim, because she only seeks to copy what she has already purchased. C) This issue is not relevant, because Bobby is not entitled to copyright protection on the photographs. D) She would lose, because the fair-use doctrine is only available to educators. E) She would likely lose under the “weighing test” mandated by the Copyright Act.
84) Wedding Photos. Bobby took a number of wedding photos at Jill's wedding. He was paid as the photographer. On all of the photographs, he appropriately noted in the bottom right corner the necessary information showing that he was claiming copyright protection. Jill came to see Bobby three years after the initial photographs were taken and requested that he grant her permission to make as many copies as she wanted at the local photo shop from the pictures that she initially purchased. The photo shop had refused to reproduce the photographs without his permission. When he refused to give her permission to do so, Jill started a heated argument. She told Bobby that photographs are not entitled to copyright protection. She also told him that even if he was correct that there was some copyright protection, she was engaged in fair use, and in any event, damages for copyright infringement are unavailable. Which of the following is correct regarding Jill's claim that damages for copyright infringement are unavailable?
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A) Damages are available, but a copyrighted work must be registered in order for the creator to recover damages from infringement. B) It is not necessary that a copyrighted work be registered in order for the creator to obtain damages from infringement. C) Damages for copyright infringement are only available if two businesses are involved (i.e., a “B to B” transaction), not in disputes involving an individual such as Jill. D) Some material that is subject to copyright must be registered before its creator may recover damages for infringement, but that is not true for photographs. E) She is correct that damages are unavailable in copyright infringement actions, since only injunctive relief is available.
85) Wedding Photos. Bobby took a number of wedding photos at Jill's wedding. He was paid as the photographer. On all of the photographs, he appropriately noted in the bottom right corner the necessary information showing that he was claiming copyright protection. Jill came to see Bobby three years after the initial photographs were taken and requested that he grant her permission to make as many copies as she wanted at the local photo shop from the pictures that she initially purchased. The photo shop had refused to reproduce the photographs without his permission. When he refused to give her permission to do so, Jill started a heated argument. She told Bobby that photographs are not entitled to copyright protection. She also told him that even if he was correct that there was some copyright protection, she was engaged in fair use, and in any event, damages for copyright infringement are unavailable. If Bobby decides to register the photographs under copyright law, how would he go about doing so? A) He would register by filing a form with the Register of Copyrights and providing two copies of the copyrighted materials to the Library of Congress. B) He would register simply by filing a form with the Register of Copyrights. C) He would register simply by providing two copies of the copyrighted materials to the Library of Congress. D) He would register merely by affixing the appropriate symbol at the bottom of the photograph followed by the first date of publication and his name. E) There is nothing he can do since the photographs are not subject to copyright protection.
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86) Scuba Diving. Marcy invented a new type of mask for scuba divers that was not subject to fogging. She agrees to allow Jenny to manufacture and sell the mask. She receives a sum of money for every mask that Jenny sells. Similarly, Marcy entered into an agreement with Frank to allow him to sell the masks, but only if he also purchased non-patented diving suits from Marcy. All parties proceeded to do very well with their sales.Marcy's agreement with Jenny allowing Jenny to sell the mask is referred to as which of the following? A) A license B) A patent agreement C) A trade agreement D) An illegal agreement E) A franchise agreement
87) Scuba Diving. Marcy invented a new type of mask for scuba divers that was not subject to fogging. She agrees to allow Jenny to manufacture and sell the mask. She receives a sum of money for every mask that Jenny sells.Similarly, Marcy entered into an agreement with Frank to allow him to sell the masks, but only if he also purchased non-patented diving suits from Marcy. All parties proceeded to do very well with their sales.In the context of intellectual property law, payments that Marcy receives from Jenny for the sale of the mask are referred to as which of the following? A) Profits B) Receipts C) Royalties D) Payoffs E) Graft
88) Scuba Diving. Marcy invented a new type of mask for scuba divers that was not subject to fogging. She agrees to allow Jenny to manufacture and sell the mask. She receives a sum of money for every mask that Jenny sells.Similarly, Marcy entered into an agreement with Frank to allow him to sell the masks, but only if he also purchased non-patented diving suits from Marcy. All parties proceeded to do very well with their sales.Which of the following describes the agreement between Marcy and Frank?
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A) It is a legal tying arrangement. B) It is a legal cross-licensing agreement. C) It is an illegal tying arrangement. D) It is an illegal cross-licensing agreement. E) It is both a legal tying and a legal cross-licensing agreement.
89) Lottery Winnings. Frank, a hypochondriac who was also very compulsive, was having minor surgery to repair a bone spur on his foot. He had just purchased a lottery ticket for a chance at the grand prize of $30,000,000. Frank's girlfriend, Bubbles, went with him to the hospital. While in the waiting room, Frank said to her, "Bubbles, I may not make it out of this bone spur surgery. Take my lottery ticket. If I don't make it, I hope you win and live it up, but please don't get another boyfriend." Bubbles replied, "I could never be happy without you." A nurse saw and heard the whole exchange. Frank came out of the surgery just fine but with a sore foot. While he was recuperating that evening, Bubbles watched the lottery drawing and discovered that Frank's ticket was indeed the winning ticket. She immediately moved out and collected the winnings. Frank saw her on television with her new boyfriend, George. She appeared to be very happy. He checked the numbers and discovered that she won with his ticket. Frank says that the lottery money is his. Which of the following describes the type of gift at issue? A) A gift causa mortis B) An inter vivos gift C) A gift inter mortis D) A causa vivos gift E) A non-donative gift
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90) Lottery Winnings. Frank, a hypochondriac who was also very compulsive, was having minor surgery to repair a bone spur on his foot. He had just purchased a lottery ticket for a chance at the grand prize of $30,000,000. Frank's girlfriend, Bubbles, went with him to the hospital. While in the waiting room, Frank said to her, "Bubbles, I may not make it out of this bone spur surgery. Take my lottery ticket. If I don't make it, I hope you win and live it up, but please don't get another boyfriend." Bubbles replied, "I could never be happy without you." A nurse saw and heard the whole exchange. Frank came out of the surgery just fine but with a sore foot. While he was recuperating that evening, Bubbles watched the lottery drawing and discovered that Frank's ticket was indeed the winning ticket. She immediately moved out and collected the winnings. Frank saw her on television with her new boyfriend, George. She appeared to be very happy. He checked the numbers and discovered that she won with his ticket. Frank says that the lottery money is his. Which of the following is true regarding Frank's statement at the hospital regarding Bubbles’s taking the ticket? A) At that point, he made a valid gift that could not be revoked. B) He did not make a gift because he placed a condition on it. C) He made an irrevocable gift at that time only if Bubbles never had another boyfriend; otherwise, she had to give the ticket and any resulting cash to Frank. D) He made an irrevocable gift at that time if Bubbles refrained from having another boyfriend until she cashed the ticket; after the ticket was converted, the condition no longer applied. E) None of these
91) Lottery Winnings. Frank, a hypochondriac who was also very compulsive, was having minor surgery to repair a bone spur on his foot. He had just purchased a lottery ticket for a chance at the grand prize of $30,000,000. Frank's girlfriend, Bubbles, went with him to the hospital. While in the waiting room, Frank said to her, "Bubbles, I may not make it out of this bone spur surgery. Take my lottery ticket. If I don't make it, I hope you win and live it up, but please don't get another boyfriend." Bubbles replied, "I could never be happy without you." A nurse saw and heard the whole exchange. Frank came out of the surgery just fine but with a sore foot. While he was recuperating that evening, Bubbles watched the lottery drawing and discovered that Frank's ticket was indeed the winning ticket. She immediately moved out and collected the winnings. Frank saw her on television with her new boyfriend, George. She appeared to be very happy. He checked the numbers and discovered that she won with his ticket. Frank says that the lottery money is his. Which of the following is true regarding rightful ownership of the lottery money?
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A) Frank's gift was automatically revoked when he recovered, and the lottery ticket and any proceeds are validly his. B) Although the gift was not automatically revoked on his recovery, Frank has the right to revoke the gift and recover the lottery proceeds. C) The gift was not automatically revoked on his recovery, and since Frank did not revoke the gift prior to Bubbles' cashing the ticket, he has no rights to any funds. D) Frank has the right to all funds, but only because Bubbles has a new boyfriend. E) Frank has no rights because once he gave the ticket to Bubbles, he gave up all his rights to the ticket and its proceeds.
92)
When might the government not be able to require involuntary transfer of real property? A) For private governmental purposes B) For the benefit of the public C) To protect the health of the public D) To protect the safety of the public E) To protect the general welfare of the public
93) When discussing real property interests, which of the following is not a property right enjoyed by land owners? A) Water rights B) Air rights C) Subsurface rights D) Mineral rights E) Ozone rights
94) To effectuate a transfer of real property, the owner must follow certain legal procedures. Which of the following is not one of these requirements?
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A) Execution B) Delivery C) Acceptance D) Recording E) Security deposit
95)
Which of the following is a type of intangible property? A) A car B) Real property C) A book D) A bank account E) A computer
96)
Private ownership of personal property is referred to as having _____. A) eminent domain B) subrogation rights C) title D) proprietary license E) possession
97) Which of the following is not a factor to consider in determining whether a consumer is likely to be confused by two marks? A) Who filed first B) The similarity of the marks C) The similarity of the products or services D) The sophistication of the consumers E) The intent of a person to palm off its products as that of another
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ESSAY. Write your answer in the space provided or on a separate sheet of paper. 98) Discuss the property rights of the owner of a fee simple absolute in land, including what interests, if any, the owner has beyond the right to use the surface of the property.
99) Describe the procedure for trademark registration, including what the applicant should do when requesting registration and what the government should do in response to the registration request. Additionally, identify the circumstances under which a trademark will not be accepted for registration.
100) Ellen, who runs a successful nail salon, ran across a very interesting pamphlet on customer relations. The pamphlet was fifty pages long and cost $70. Ellen thought the price was outrageous. Accordingly, she bought one copy and photocopied the pages that she thought were pertinent and gave them to her employees. She copied forty of the pages out of the pamphlet for each of her twenty employees. A disgruntled employee informed the publisher of the pamphlet of what Ellen had done and she was charged with copyright infringement. Ellen defended on the basis of the fair-use doctrine. List the four factors a court would consider in determining whether a violation occurred. Also, give your reasoned opinion as to whether Ellen is entitled to fair-use protection.
101)
What three criteria must be satisfied in order to obtain a patent that is not a design patent?
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102) Cindy sold her old used automobile to Bruce for $1,000. Cindy told Bruce to come and take the car and that the transfer would be complete. Is Cindy correct, and why or why not?
103) Bernice enjoys snooping, particularly through her neighbor Fernando’s trash. She sneaks out and grabs Fernando’s trash while he is at work and his garbage can is at the curb, awaiting the trash collector’s pickup. Bernice goes through it to find out confidential information regarding Fernando, but never tells anyone else or uses the information for any purpose other than to satisfy her own curiosity. Discuss whether you believe it is legal and/or ethical for Bernice to go through Fernando’s trash.
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Answer Key Test name: Chap 08_5_The Essentials_Kubasek 1) TRUE Real property is commonly referred to as realty. It includes land and everything permanently attached to it. 2) TRUE Intellectual property consists of the fruits of one’s mind. The laws of intellectual property protect intangible property that is primarily the result of mental creativity rather than physical effort. 3) TRUE When a person owns land, she or he owns more than just the surface. The airspace above the land, extending to the atmosphere, is part of the legal concept of real property. Ownership of real property also extends to mineral rights; these rights involve the land below the surface. The landowner has the legal ability to dig or mine minerals from the earth, and he may sell or give these rights to another person. 4) FALSE Most transfers of property are voluntary. However, for the benefit of the public, and to protect public health, safety, and welfare, the government may require involuntary transfers of property. 5) FALSE An easement is an irrevocable right to use some part of another's land for a specific purpose without taking anything from it. 6) FALSE Subleasing of the property by the tenant to another party is permissible unless specifically prohibited by the lease. However, the initial tenant is liable throughout the entire term of the lease for payment of the rent to the landlord. Version 1
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7) FALSE A license is a right to use another's property that is both temporary and revocable. For example, when a person purchases a theater ticket, he or she has the right to a specific use of the property for a limited time, subject to good behavior. No property interest goes to the license holder. 8) FALSE Condemnation is a legal process by which a transfer of property is made against the protest of the property owner. Pursuant to the Takings Clause of the Fifth Amendment to the United States Constitution, the government has a constitutional right to take private property for the use of the public provided that it pays the owner fair compensation. This right may be exercised at any government level, and sometimes it is exercised on behalf of a private company operating to benefit the public. 9) FALSE All property that is not land or permanently affixed to land is personal property. 10) TRUE Tangible property is property that can be identified by the senses. It is property that you can see or touch. Tangible property includes items such as furniture, cars, and other goods. 11) TRUE Intangible property includes such items as bank accounts, stocks, and insurance policies. 12) FALSE A donor makes a gift causa mortis in contemplation of his or her immediate death. 13) FALSE To register a domain name on the Internet, an application must be filed with Network Solutions, Inc. 14) FALSE Version 1
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A party may lose registration of a domain name by not using it for more than 90 days. 15) TRUE Trade dress refers to the overall appearance and image of a product, and it is entitled to the same protection as a trademark. An example of trade dress is the shape and design of Apple’s iPhone. 16) FALSE Copyrights protect the expression of creative ideas. Copyrights do not protect the ideas themselves; instead, they protect only the fixed form that expresses the ideas. 17) TRUE There are three criteria for a work to be copyrightable. First, it must be fixed, which means set out in a tangible medium of expression. Second, it must be original. Third, it must be creative. 18) FALSE A copyrighted work that is reproduced with the appropriate notice affixed is protected for the life of its creator plus 70 years. 19) FALSE In determining whether the fair-use doctrine provides a valid defense to a claim of copyright infringement, Section 107 of the Copyright Act requires that the court weigh the following 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. 20) TRUE Cross-licensing occurs when two patent holders license each other to use their patents only on the condition that neither licenses anyone else to use his or her patent without the other’s consent. Cross-licensing is illegal because it tends to reduce competition. Version 1
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21) FALSE When a patent is issued for an object, it gives the holder the exclusive right to produce, sell, and use the object of the patent for 20 years from the date of the patent application. 22) TRUE A trade secret is a process, product, method of operation, or compilation of information that gives a businessperson an advantage over his or her competition. A company’s client list may be considered a trade secret. 23) FALSE Competitors may discover a trade secret by any lawful means, such as by doing reverse engineering. Lawful discovery of a trade secret means there is no longer a trade secret to be protected. 24) FALSE Similar to eminent domain law in the United States, the German federal government may expropriate land for the public good, but only if it provides the landowner compensation. 25) FALSE In Kelo v. City of New London, the United States Supreme Court ruled that a government's taking of private property to sell for private development may qualify as a "public use" within the Takings Clause of the U.S. Constitution. 26) FALSE Lost property is property that the true owner has unknowingly or accidentally dropped or left somewhere. Mislaid property differs from lost property in that the owner has intentionally placed the property somewhere but has forgotten its location. 27) B The three basic types of property are real, personal, and intellectual. 28) C
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Real property, commonly referred to as realty, is land and everything permanently attached to it. 29) A A landowner has the legal ability to dig or mine the materials from the earth, and he or she may sell or give these rights to another person. Ownership of these subsurface rights includes the right to enter onto the property to remove the underground materials. 30) C There are a number of types of interests in land, ranging from temporary to permanent to future. The duration of one's ownership interest and the power one has over using the land depend on the type of estate one is said to hold. 31) D Real property ownership extends to mineral rights; these rights involve the land below the surface. The landowner has the legal ability to dig or mine the materials from the earth, and he or she may sell or give these rights to another person. Ownership of these subsurface rights includes the right to enter onto the property to remove the underground materials. 32) D With regard to estates in land, a fee simple absolute is the most complete estate a person may have. Exclusive rights to ownership and possession of the land belong to the person who has a fee simple absolute. It is this type of estate to which most people refer when they speak of buying a house or piece of land. 33) D The owner of a conditional estate possesses the same interest as the owner of a fee simple absolute, except that this interest is subject to a condition: If a certain required event fails to occur or a specific prohibited event occurs, the interest will be terminated. 34) C Version 1
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A life estate is granted for the lifetime of an individual; the right to possess the property terminates at the individual’s death. On the death of the holder of the life estate, the property will go to another party as designated by the original grantor. 35) D With a life estate, the future owner has an interest in seeing that the life tenant does not waste the property; in other words, the life holder is not allowed to neglect or abuse the property in a way that diminishes the property value. If the life tenant fails to make necessary repairs or uses the property in ways damaging to its future value, the future holder could bring legal action against the holder of the life estate to recover damages for waste. 36) C A future interest is a person’s present right to property ownership and possession in the future. Such an interest usually exists in conjunction with a life estate or a conditional estate. 37) E In Vietnam, a state official determines the price at which the property will be transferred. The Vietnamese government has specified certain prices depending on how the land is used. 38) D Although most people think of interests in land as being possessory in nature, some estates do not include the right to possess the property. Such interests include easements, profits, and licenses. 39) A An easement is an irrevocable right to use some part of another's land for a specific purpose without taking anything from it. 40) D A profit is the right to go onto someone's land and take part of the land or a product of it away from the land. Version 1
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41) E A license is a right to use another’s property that is both temporary and revocable. For example, when a person purchases a theater ticket, he or she has the right to a specific use of the property for a limited time, subject to good behavior. No property interest goes to the license holder. 42) C Condemnation is the legal process by which a transfer of property is made against the protest of the property owner pursuant to the Takings Clause of the Fifth Amendment to the United States Constitution. 43) C Intellectual property consists of the fruits of one's mind. The laws of intellectual property protect property that is primarily the result of mental creativity rather than physical effort. 44) C Tangible property is property that can be identified by the senses. It is property that you can see or touch. Tangible property includes items such as furniture, cars, and other goods. 45) C An inter vivos gift is a gift that is made by a person during his or her lifetime. 46) D A gift causa mortis is a gift that is made in contemplation of one's immediate death. 47) D A trademark is a distinctive mark, word, design, picture, or arrangement that is used by a producer in conjunction with a product and tends to cause consumers to identify the product with the producer. 48) C The shape of a product or package may be a trademark if it is nonfunctional. Version 1
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49) C A trademark used intrastate is protected under state common law. 50) A To be protected in interstate use, the trademark must be registered with the United States Patent Office under the Lanham Act of 1947. 51) E In writing for the majority in the United States Supreme Court case Qualltex Co. v. Jacobson, Justice Stephen Breyer opined that a color can constitute a trademark, stating that both the language of the Lanham Act and the basic underlying principles of trademark law would seem to include color within the universe of things that could qualify as a trademark. 52) B To properly register a trademark with the United States Patent and Trademark Office, one must submit a drawing of the mark, indicate when it was first used in interstate commerce, and indicate how it is used. 53) C Once the mark is registered, the registration must be renewed between the fifth and sixth years. 54) B Assuming a trademark was initially registered with the United States Patent and Trademark Office after 1990, the holder must renew a trademark’s registration every ten years after its initial renewal. 55) D
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In the Toys “R” Us, Inc. v. Canarsie Kidde Shop, Inc. case, the District Court of the Eastern District of New York considered a number of factors in determining whether Kids ‘r’ Us infringed on the Toys “R” Us trademark, including: a) the strength of the senior user’s mark; b) the degree of similarity between the two marks; c) evidence of actual mark confusion; and d) the junior user’s good faith (or lack thereof). 56) C Most websites have two domains. The first-level domain, the one the address ends with, generally identifies the type of site. The second-level domain is usually the name of whoever maintains the site. 57) D If it is a government site, the domain name will end in .gov. 58) D Network Solutions, Inc. (NSI), which is funded by the National Science Foundation, is responsible for registering domain names. This entity acts on behalf of the Internet Network Information Center, which handles the daily administration of the domain name system in the United States. 59) B A party may lose registration of a name by not using it for more than 90 days. 60) C The fair-use doctrine provides that a portion of a copyrighted work may be reproduced for purposes of "criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarships, and research." 61) C A patent protects a product, process, invention, machine, or a plant produced by asexual reproduction. 62) E
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For a patent to be granted, the following three criteria must be satisfied: the object of the patent must be novel, or new; the object must be useful, unless it is a design; and the object must be nonobvious. 63) B When a patent is issued for an object, it gives its holder the exclusive right to produce, sell, and use the object of the patent for twenty years from the date of application. 64) A Under common law, a trade secret is protected from unlawful appropriation by competitors as long as it is kept secret and consists of elements not generally known in the trade. 65) A Competitors may discover a trade secret by any lawful means, such as by doing reverse engineering or by going on public tours of plants and observing the use of trade secrets. 66) D To stop a competitor from using a trade secret, the plaintiff must prove that a trade secret actually existed, the defendant acquired the trade secret unlawfully, and the defendant used the trade secret without the plaintiff's permission. 67) B The term trade dress refers to the overall appearance and image of a product. For example, the shape and design of Apple’s iPhone is an example of trade dress. 68) A The terms trade dress refers to the overall appearance and image of a product. Trade dress is entitled to the same protection as a trademark. 69) B Intangible property includes such items as bank accounts, stocks, and insurance policies. Version 1
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70) B When transfer of the property is by purchase, the acquiring party gives some consideration to the seller in exchange for title to the property; that is not the case, however, when gifts are involved. 71) D Three elements are necessary for a valid gift. First, there must be delivery of the gift. Second, the delivery must be made with donative intent to make an immediate gift. Third, there must be acceptance, a willingness of the donee to take the gift from the donor. 72) D Property that the original owner has discarded is abandoned property. 73) A Lost property is property that the true owner has unknowingly or accidentally dropped or left somewhere. 74) B Mislaid property differs from lost property in that the owner has intentionally placed the property somewhere but has forgotten its location. 75) B In most states, the finder of lost property has title to the lost good against all except the true owner. 76) B Inter vivos gifts are gifts made by a person during his or her lifetime. Three elements are necessary for a valid inter vivos gift. First, there must be delivery of the gift. Second, the delivery must be made with donative intent to make an immediate gift. Third, there must be acceptance, a willingness of the donee to take the gift from the donor. 77) E
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Inter vivos gifts are gifts made by a person during his or her lifetime. Three elements are necessary for a valid inter vivos gift. First, there must be delivery of the gift. Second, the delivery must be made with donative intent to make an immediate gift. Third, there must be acceptance, a willingness of the donee to take the gift from the donor. 78) E A transfer of ownership of the ring required no formalities and acceptance is satisfied by the willingness of the donee to take the gift from the donor. 79) C With regard to estates in land, a fee simple absolute is the most complete estate a person may have. Exclusive rights to ownership and possession of the land belong to the person who has a fee simple absolute. It is this type of estate to which most people refer when they speak of buying a house or piece of land. 80) D An easement is an irrevocable right to use some part of another's land for a specific purpose without taking anything from it. 81) E Easements can be terminated in many ways, including by express agreement. 82) E There are three criteria for a work to be copyrightable. First, it must be fixed, which means set out in a tangible medium of expression. Second, it must be original. Third, it must be creative. 83) E
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In determining whether the fair-use doctrine provides a valid defense to a claim of copyright infringement, Section 107 of the Copyright Act requires that the court weigh the following four factors: a) the purpose and character of the use; b) the nature of the copyrighted work; c) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and d) the effect of the use on the potential market for or value of the copyrighted work. 84) A For the creator to be able not only to seek an injunction but also recover damages arising from the infringement, the copyrighted work must be registered. 85) A One may register a work by filing a form with the Register of Copyrights and providing two copies of the copyrighted material to the Library of Congress. 86) A The holder of a patent may license, or allow others to manufacture and sell, the patented object. 87) C In most cases, patents are licensed in exchange for the payment of royalties, a sum of money paid for each use of the patented process. 88) C
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A patent holder may not use the patent for an illegal purpose. The two most common illegal purposes are tying arrangements and crosslicensing. A tying arrangement occurs when the holder issues a license to use the patented object only if the licensee agrees to buy some nonpatented product from the holder. Cross-licensing occurs when two patent holders license each other to use their patents only on the condition that neither licenses anyone else to use his or her patent without the other’s consent. Both of these activities are unlawful because they tend to reduce competition. 89) A A gift causa mortisis a gift that is made in contemplation of one's immediate death. A gift causa mortis is automatically revoked if the donor recovers. 90) E A gift causa mortis can be revoked any time before the death of the donor andis automatically revoked if the donor recovers. 91) A A gift causa mortis can be revoked any time before the death of the donor, and it is automatically revoked if the donorrecovers. 92) A Government can require involuntary transfer under the following circumstances: for the benefit of the public, and to protect public health, safety, and welfare, the government may require involuntary transfers of property. 93) E With regard to estates in land, a fee simple absolute is the most complete estate a person may have. Exclusive rights to ownership and possession of the land belong to the person who has a fee simple absolute, including airspace, water, and mineral rights. 94) E Version 1
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To effectuate such a transfer, the owner must follow certain legal procedures. These procedures are execution, delivery, acceptance, and recording (see Exhibit 8-4), 95) D Intangible property includes such items as bank accounts, stocks, and insurance policies. 96) C Ownership of property is referred to as title, and title to property passes when the parties so intend. 97) A The primary issue is whether consumers are likely to be confused by the two marks. This decision is based on factors such as the similarity of the marks; the similarity of the products or services in issue; the sophistication of consumers; and even the intent of the defendant to palm off its product as that of another. 98) With regard to estates in land, a fee simple absolute is the most complete estate a person may have. Exclusive rights to ownership and possession of the land belong to the person who has a fee simple absolute, including airspace, water, and mineral rights. 99) Trademarks are registered with the United States Patent Office. To register a trademark with the Patent Office, one must submit a drawing of the mark and indicate when it was first used in interstate commerce and how it was used. The Patent Office then conducts an investigation to verify those facts and will register the trademark so long as it is not generic, descriptive, immoral, deceptive, or substantially similar to another's trademark.
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100) In determining whether the fair-use doctrine provides a valid defense to a claim of copyright infringement, Section 107 of the Copyright Act requires the court to weigh the following four factors: 1.a) The purpose and character of the use; 2.b) The nature of the copyrighted work; 3.c) The amount and substantiality of the portion used in relation to the copyrighted work as a whole; and 4.d) The effect of the use on the potential market for or value of the copyrighted work. Although Ellen did not copy the entire pamphlet, she copied a substantial amount and did so because she did not want to pay the full price for the copyrighted material for all employees. Her actions had a negative effect on the market for the work, and she was not copying the work for a nonprofit educational purpose. In all likelihood, Ellen is not entitled to fair-use protection. 101) A patent protects a product, process, invention, machine, or a plant produced by asexual reproduction. For this protection to be granted, three criteria must be satisfied. First, the object of the patent must be novel, or new. No one else must have previously made or published the plans for the object. Second, the object must be useful (unless it is a design); it must provide some utility to society. Third, the object must be nonobvious. The invention must not be one that a person of ordinary skill in the trade could have easily discovered. 102) Cindy is incorrect. In order to transfer a vehicle, a certificate of title must be signed by the seller, taken to the appropriate government agency, and then reissued in the name of the new owner.
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103) Property that the original owner has discarded is abandoned property. Anyone finding such property becomes its owner by possessing it. If Fernando’s garbage can is at the curb awaiting the trash collector’s pickup, the trash inside the can is most likely abandoned property. Student answers may vary on the ethical issue. Most students will likely believe that it is unethical to go through a neighbor’s trash, even if the information is not used for any improper purpose.
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CHAPTER 9 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) A contract is a set of legally unenforceable statements of intent. ⊚ true ⊚ false
2)
An agreement consists of an assignment by one party and a delegation by the other party. ⊚ true ⊚ false
3) The promisor is the party who makes an offer and the promisee is the party who receives the offer. ⊚ true ⊚ false
4)
Lack of genuine assent is a defense to the enforcement of a contract. ⊚ true ⊚ false
5)
In the United States, the primary source of contract law is federal statutory law. ⊚ true ⊚ false
6) The Restatement of the Law Second, Contracts is not actually the law itself, so judges rarely cite it in cases since it is not an authoritative statement of what the law is. ⊚ true ⊚ false
7) In 1952, the United States Congress enacted as federal law the Uniform Commercial Code (UCC). ⊚ true ⊚ false
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8) Since it takes at least two parties to enter into an enforceable agreement, a contract cannot be classified as unilateral. ⊚ true ⊚ false
9)
A bilateral contract is commonly defined as a promise in exchange for an act. ⊚ true ⊚ false
10)
Express contracts can be either written or oral. ⊚ true ⊚ false
11) If you have a dental emergency and a dentist pulls your severely infected tooth without any discussion regarding payment, there is nevertheless an express contract between you and the dentist requiring payment for his services. ⊚ true ⊚ false
12)
Quasi-contracts are legally recognized as contracts. ⊚ true ⊚ false
13)
Quasi-contracts are sometimes referred to as implied-in-law contracts. ⊚ true ⊚ false
14) A quasi-contract is an agreement reached by contracting parties to avoid unjust enrichment. ⊚ true ⊚ false
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15)
Sometimes a contract may be valid yet unenforceable. ⊚ true ⊚ false
16) While negotiable instruments and recognizances are examples of informal contracts, letters of credit and contracts under seal are examples of formal contracts. ⊚ true ⊚ false
17)
Some states still allow a contract without consideration to be enforced if it is under seal. ⊚ true ⊚ false
18) Under common law, an agreement begins when one party, the offeree, makes an promise to another party, the offeror. ⊚ true ⊚ false
19) Under common law, the elements of an offer are intent, definite and certain terms, and communication of the offer to a neutral third party. ⊚ true ⊚ false
20)
Courts interpret contracts using a subjective standard. ⊚ true ⊚ false
21) If Bill overhears Sam offer to sell his car to Helen for $5,000, Bill can walk over to Sam and form a contract by accepting the offer. ⊚ true ⊚ false
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22)
In the absence of a time condition in the offer, the offer will expire after thirty (30) days. ⊚ true ⊚ false
23)
According to the Restatement of Contracts, silence can never constitute acceptance. ⊚ true ⊚ false
24) The mirror-image rule says that the terms of the acceptance must mirror the industryspecific terms applicable to the contract. ⊚ true ⊚ false
25)
If an acceptance is received after a rejection is received, the acceptance is not valid. ⊚ true ⊚ false
26)
The mailbox rule provides that an acceptance is valid when it is received by the offeror. ⊚ true ⊚ false
27) An offeror can revoke the offer at any time unless the offeror says he or she will hold the offer open for a stated period of time. ⊚ true ⊚ false
28) If the subject matter of the offer is destroyed or becomes illegal, the offer is rescindable at the election of the offeror or the offeree. ⊚ true ⊚ false
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MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 29) Which of the following describes a contract as “a promise or set of promises for the breach of which the law gives a remedy or the performance of which the law in some way recognizes a duty”? A) The Restatement (Second) of Contracts B) The Uniform Contracts Code C) The United States Constitution D) The International Commercial Code E) The Restatement of Torts
30)
Which of the following is not a required element for contract formation? A) Fair bargain B) Agreement C) Consideration D) Contractual capacity E) Legal object
31) Laticia offers to sell her law books to Darren for $500. Darren agrees. This is known as a(n) _____. A) offer B) promise C) concurrence D) alliance E) agreement
32)
Thomas offers to sell his water skis to Lynord. Thomas is the _____.
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A) delegator B) promisee C) offeror D) offeree E) assignee
33)
Margaret offers to sell Keyanna her laptop computer. Keyanna would be the _____. A) recipient B) delegatee C) assignor D) offeror E) offeree
34)
Bargained-for exchange is the definition of _____. A) an assignment B) a negotiation C) consideration D) a delegation E) legal compensation
35)
The legal ability to enter into a binding agreement is known as _____. A) a proffer B) concurrence C) acceptance D) contractual capacity E) informed consent
36) Which of the following are examples of people who do not have the capacity to enter into legally binding contracts?
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A) Those over the age of majority and those suffering from a mental illness B) People suffering from physical illness and intoxicated persons C) Intoxicated persons and those over the age of majority D) Those under the age of 21 and those over the age of 70 E) People under the age of majority, people suffering from mental illness, and intoxicated persons
37)
Which of the following means that a contract cannot be illegal or against public policy? A) Agreement B) Consideration C) Contractual capacity D) Legal object E) Mutual assent
38)
Which of the following represents a lack of genuine assent?
A) Acceptance secured through fraud B) Acceptance secured through undue influence C) Acceptance secured through misrepresentation D) Acceptance secured through fraud or undue influence, but not through misrepresentation E) Acceptance secured through fraud, undue influence, or misrepresentation
39)
Which of the following are the two primary sources of contract law?
A) Case law and the Restatement (Second) of Contracts B) Case law and the Uniform Commercial Code (UCC) C) The Uniform Commercial Code (UCC) and the Convention on Contracts for the International Sales of Goods (CISG) D) Case law and the Convention on Contracts for the International Sales of Goods (CISG) E) The Convention on Contracts for the International Sales of Goods (CISG) and the Restatement (Second) of Contracts
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40) There are two primary sources of contract law: case law and the Uniform Commercial Code. Which of the following is a third type of law that has increased with globalization? A) The United Nations Restatement of Contracts B) The Convention on Contracts for the International Sale of Goods C) The League of Nations Restatement (Second) of Contracts D) The Global Convention on Contracts E) The Convention for the Global Standardization of Commercial Trade and Contract Law
41)
What is the primary source of contract law? A) Federal statutory law B) Uniform Commerce Commission regulations C) Common law D) State administrative law E) The United States Constitution
42) Prominent legal scholars recruited by the American Law Institute have organized the principles of the common law of contracts into the Restatement of the Law, Contracts. This compilation has been revised and published as the_____. A) Restatement of the Law Second, Contracts B) Convention on Contracts for the International Sales of Goods C) Uniform Commercial Code D) Uniform Contracts Code E) Restatement of Torts, Second
43) Different states had different laws governing contracts that did not allow interstate commerce to flow smoothly. This resulted in the drafting of the _____.
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A) Restatement of the Law, Contracts B) Restatement of the Law Second, Contracts C) Uniform Contracts Code D) Uniform Commercial Code E) Convention on Contracts for the International Sales of Goods
44) If a firm enters into a contract governed by the Uniform Commercial Code in Ohio, it would be operating under _____. A) federal common law B) federal statutory law C) the Ohio (state) Uniform Commercial Code D) both the federal Uniform Commercial Code and the Ohio (state) Uniform Commercial Code E) either the federal Uniform Commercial Code or the Ohio (state) Uniform Commercial Code, at the election of the seller and assuming the seller specifies choice of law in the contract
45)
Article 2 of the Uniform Commercial Code (UCC) governs contracts _____.
A) for the sale of goods B) for the exchange of services C) for the exchange of currency D) involving the federal government as a contracting party E) between the United States (federal) government and foreign entities (including foreign governments and individual persons)
46)
All contracts can be categorized as either _____ or _____ contracts. A) unilateral; equilateral B) equilateral; trilateral C) bilateral; trilateral D) unilateral; bilateral E) bilateral; equilateral
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47) Barb promises to pay Tina for her new car on Friday. Tina agrees to sell her car to Barb. This is a(n) _____. A) unilateral contract B) voidable contract (at the election of either party) C) executed contract D) bilateral contract E) unilateral promise
48) Jacquelyn accepts Monique’s offer to sell her a used car for $2,000. At what point is there a binding contract between the two parties? A) When Jacquelyn and Monique make the agreement B) When Jacquelyn pays Monique the $2,000 C) When Monique delivers the car to Jacquelyn D) Three business days after Jacquelyn accepts delivery of the car E) Three calendar days after Jacquelyn accepts delivery of the car
49) Darla posts notices in her neighborhood promising to pay $1,000 for the return of her missing Snowshoe Siamese cat. Two days later, Noelle finds the missing cat and returns it to Darla. What type of contract is this? A) A bilateral contract B) A subrogation contract C) An executory contract D) A unilateral contract E) This is not a valid contract.
50) Etienne and Darrin have agreed to purchase and sell a certain parcel of land. They have entered into a written agreement specifying all the essential terms of the contract, including a description of the property, the purchase price, and the date of the transfer of title. This is a(n) _____ contract.
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A) implied B) executed C) express D) unilateral E) delegation
51)
What type of contracts arise not from words, but instead from the conduct of the parties? A) Implied B) Express C) Quasi-contracts D) Bilateral E) Unilateral
52)
Which of the following is true regarding quasi-contracts?
A) They are sometimes called implied-in-law contracts, but they are not actually contracts. B) They are sometimes called implied-in-law contracts, and they are actual contracts. C) They are sometimes called implied-in-fact contracts, but they are not actually contracts. D) They are sometimes called implied-in-fact contracts, and they are actual contracts. E) They are sometimes called express contracts, but they are actually implied contracts.
53) Which of the following is recognized by a court to prevent one party from being unjustly enriched at the expense of another party? A) An express contract B) A quasi-contract C) An implied contract D) An implied-in-fact contract E) A bilateral contract
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54)
A(n) _____ contract is one that contains all the legal elements of a contract. A) quasiB) voidable C) void D) valid E) illusory
55) Expiration of the statute of limitations period for a breach of contract action may make a contract _____. A) executed B) executory C) unenforceable D) illusory E) implied-in-fact
56)
A(n) _____ contract is, in effect, not a contract at all. A) voidable B) executory C) implied D) executed E) void
57) Which type of contract allows one or both of the parties the ability to either withdraw from the contract or to enforce the contract? A) Executed B) Executory C) Implied-in-law D) Voidable E) Void
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58)
Which of the following contracts are usually voidable? A) Contracts entered into as a result of fraud B) Contracts entered into as a result of duress C) Contracts entered into as a result of undue influence D) Contracts entered into as a result of fraud or duress, but not undue influence E) Contracts entered into as a result of fraud, duress, or undue influence
59) Ike and Jeff agree that Ike will tutor Jeff in math for $25.00 an hour. Ike tutors Jeff for an hour and Jeff pays Ike $25.00. This is a(n) _____ contract. A) voidable B) executed C) executory D) illusory E) unenforceable
60) As long as some of the duties under a contract have not yet been performed, the contract is considered _____. A) executory B) executed C) implied-in-law D) implied-in-fact E) illusory
61) Of the following, which is not a formal contract according to the Restatement (Second) of Contracts? A) Contracts under seal B) Letters of credit C) Negotiable instruments D) Recognizances E) Implied-in-law contracts
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62) The term _____ comes from the days when a contract was literally sealed by a piece of soft wax into which an impression was made. A) implied-in-fact B) implied-in-law C) under wax D) under seal E) in the King’s hand
63) As of the publication of the textbook, how many states still allow a contract without consideration to be enforced if it is under seal? A) Five B) Eight C) Ten D) Twenty-three E) Thirty-seven
64)
An example of a(n) _____ is a bond used as bail in a criminal case. A) contract under seal B) implied-in-law contract C) recognizance D) quasi-contract E) voidable contract
65) A _____ is an agreement by the person who issues the letter to pay a sum of money on receipt of an invoice and other documents. A) commercial bond B) letter of credit C) letter of acknowledgement D) negotiated credit instrument E) recognizance
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66) Which of the following is a written document signed by a party that makes an unconditional promise to pay a specific sum of money on demand or at a certain time to the holder of the instrument? A) A negotiable instrument B) An implied-in-law contract C) A recognizance D) An implied-in-fact contract E) A commercial bond
67)
Which of the following is the first element of a contract? A) An agreement B) Forbearance C) An invitation to negotiate D) Equitable consideration E) A unilateral promise
68)
Under common law, when does formation of an agreement begin? A) When the offeree makes an offer to the offeror B) When consideration is provided C) When funds are transferred D) When a writing is executed E) When the offeror makes an offer to the offeree
69) If Maria says to Peter "I bet you a million dollars that it is going to rain tomorrow" and Peter knows that Maria is joking, Maria's statement would not be a valid offer due to the lack of _____.
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A) definite and certain terms B) adequate communication to the offeree C) contractual intent D) contractual capacity E) legal representation
70) What was the result in theLucy v. Zehmer case (referenced in the textbook) involving whether allegations of joking regarding the sale of land prevented the formation of a contract? A) The court ruled that the contract would not be enforced because one of the parties was subjectively joking. B) The court ruled that the contract would not be enforced because one of the parties was joking and a reasonable person should have known that. C) The court ruled that the contract would not be enforced because the parties had been consuming alcohol. D) The court ruled that the agreement would be enforced because of the outward manifestations of agreement. E) The court ruled that the contract would be enforced because of what the parties said, regardless of whether an objective person would have thought joking was involved.
71) Constance asks Kathy if Kathy will sell her used business law book for $50. What is the status of the negotiations? A) No offer has been made. B) An offer has been made, but it may be revoked. C) An offer has been made that may not be revoked. D) A contract has been formed. E) A contract has been formed, but it may be set aside at the option of either party.
72) What was the result in the Lefkowitz v. Great Minneapolis Surplus Store Inc. case (referenced in the textbook) involving an advertisement for the sale of fur coats?
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A) The court ruled that the advertisement was not an offer because it involved a luxury good. B) The court ruled that the advertisement was an offer but that the customer who was suing had not properly accepted it. C) The court ruled that the advertisement was not an offer because it was a ridiculously low offer that the plaintiff should have known was not to be taken seriously. D) The court ruled that the advertisement was not an offer because advertisements are never offers; instead, they are merely invitations for customers to make an offer. E) The court ruled that the advertisement was an offer and that the plaintiff properly accepted it.
73) Georgia decides to sell her engagement ring after Anthony breaks off the engagement and puts the ring up for auction. If she states nothing to the contrary in the terms of the auction, the auction is presumed to be _____. A) illusory B) public C) with reserve D) without reserve E) effectual
74)
In an auction _____, the seller is treated as making an offer to accept the highest bid. A) for the sale of real estate B) for the sale of personal property C) without reserve D) with reserve E) per se
75) The _____ terms of an offer and a resulting contract are those terms that would allow a court to determine what the damages would be in the event that one of the parties breaches the contract.
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A) implied B) implied-in-law C) material D) equitable E) illusory
76)
Which of the following is not a way that an offer can be terminated? A) Revocation of the offer by the offeror B) Rejection of the offer by the offeree C) Destruction of the subject matter of the offer D) A grace period by a bank that has expired E) The death or incapacity of the offeror
77) Which of the following refers to the right of an offeror to revoke his offer, even if the offeror says he will hold the offer open for a stated period of time? A) The offeror as the originator of his offer B) The offeror as the master of his offer C) The offeror as the proponent of his offer D) The offeror as the adjudicator of his offer E) The offeror as the arbiter of his offer
78) Helen finds a piece of land that she is interested in purchasing. She asks Robert, the landowner, to hold the land for her while she makes a decision. Robert says that for $1,000, he will hold the land for her while she decides, and Helen agrees. This is an example of a(n) _____. A) quasi-contract B) illusory contract C) option contract D) open-ended offer E) implied-in-fact offer
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79)
As a general rule, when is revocation of an offer effective?
A) When it is mailed by the offeror B) When it is received by the offeree C) Three (3) business days after the offeror makes the offer, assuming the offeree has not already accepted the offer D) Seven (7) calendar days after the offeror makes the offer, assuming the offeree has already accepted the offer E) Thirty (30) calendar days after the offeror makes the offer, assuming the offeree has not already accepted the offer
80)
Which of the following is true regarding when an offeree may reject an offer?
A) Regardless of how long an offeror states that an offer will be held open, once the offeree rejects it the offer is terminated. B) If the offeror states that an offer will be held open for a certain time period, it is open for that time even if the offeree rejects the offer prior to the expiration of the specified period. C) An offer must remain open for at least three (3) business days before an offeree may reject it. D) An offer must remain open for at least seven (7) calendar days before an offeree may reject it. E) An offer must remain open for at least thirty (30) calendar days before an offeree may reject it.
81) If a(n) _____ contract exists, the administrator of an offeror's estate must hold the offer open until it expires in accordance with the contract. A) bilateral B) unilateral C) executed D) option E) implied-in-law
82)
If the subject matter of an offer is destroyed, the offer _____.
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A) immediately terminates B) applies to other similar property owned by the offeror C) becomes the subject of an option contract D) is voidable E) is still subject to acceptance by the offeree unless the offeror revokes the offer before the offeree accepts it
83)
If the subject matter of an offer becomes illegal, what is the result?
A) The offer immediately terminates B) The offer is still valid if the offer was made at least three (3) calendar days before the subject matter of the offer became illegal C) The offer is still valid if the offer was made at least seven (7) calendar days before the subject matter of the offer became illegal D) The offer is still valid if the offer was made at least thirty (30) calendar days before the subject matter of the offer became illegal E) The offer is still valid if the offer is part of an otherwise enforceable option contract
84)
Without a time condition in an offer, the offer will expire after _____. A) twenty-four (24) hours from the time the offeror made the offer B) five (5) business days from the time the offeror made the offer C) thirty (30) calendar days from the time the offeree received the offer D) sixty (60) calendar days from the time the offeree received the offer E) the lapse of a reasonable time period
85) Which of the following is presumed to be a reasonable amount of time when considering whether an offer has expired?
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A) Forty-eight (48) hours B) Three (3) business days C) Seven (7) calendar days D) Thirty (30) calendar days E) There is no set amount of time; instead, what constitutes a reasonable amount of time varies depending upon the subject matter of the offer.
86) Which of the following is the source to consult in order to understand how the various member states of the European Union regulate contracts? A) The Principles of European Contract Law B) The European Union Contract Manual for Member States C) The Treatise of Uniform Contract Law in the European Union D) The Uniform Contracts Code of the European Union E) The Uniform Commercial Code
87)
In which of the following ways may an offeree accept a unilateral contract?
A) By performance only B) By oral acceptance only C) By a signed writing only D) By either an oral acceptance or a signed writing E) By performance, by an oral acceptance, or by a signed writing
88) Gretchen offers $250 to anyone who returns her lost cell phone. Haley returns the cell phone and requests the money. Gretchen says that there is no binding contract. Which of the following is true regarding Gretchen's statement?
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A) Gretchen is incorrect because there is a binding bilateral contract. B) Gretchen is incorrect because there is a binding unilateral contract that Haley accepted by performing. C) Gretchen is correct because there is no binding bilateral contract. D) Gretchen is correct because there is no binding unilateral contract. E) Gretchen is correct because Haley acted improperly in her manner of attempted acceptance.
89) When acceptance is examined under the common law, how do the basic requirements for a valid acceptance compare to those for a valid offer? A) The basic requirements for a valid acceptance are materially different from those for a valid offer. B) The basic requirements for a valid acceptance parallel those for a valid offer. C) The basic requirements for a valid acceptance are different from those for a valid offer only because an offer must be in writing. D) The basic requirements for a valid acceptance are different from those for a valid offer only because an acceptance must be in writing. E) The basic requirements for a valid acceptance are different from those for a valid offer only because an offer must be revoked immediately, while acceptance can be withheld for a reasonable period of time.
90)
Which of the following is incorrect regarding how the Japanese tend to view contracts?
A) The Japanese tend to view contracts as ongoing relationships. B) The Japanese tend to view contracts as relationships in which parties work with each other to smooth out any problems that arise in performance. C) The Japanese tend to be suspicious of long, detailed contracts. D) The Japanese have a preference for flexible contracts. E) The Japanese do not prefer that any terms be left to be decided later.
91) Wishing to sell her used business law book, Inez calls Janice and tells her that if she does not hear from her within twenty-four hours, she will assume that Janice wishes to purchase the book for $50. After the expiration of twenty-four hours, which of the following is correct regarding the status of the proposed book sale? Version 1
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A) There is no contract because silence, as a general rule, cannot be used to form a contract. B) There is no contract because the offer was not made in person. C) There is no contract because the offer was not made in writing. D) Janice can avoid the legal recognition of a contract, but only if she can prove by a preponderance of the evidence that she did not hear about the offer before the stated expiration time. E) Janice can avoid the legal recognition of a contract, but only if she can prove beyond reasonable doubt that she did not hear about the offer before the stated expiration time.
92) Which rule says that the terms of the acceptance must be identical to the terms of the offer? A) The plain meaning rule B) The statute of frauds C) The mirror-image rule D) The parol evidence rule E) The rule against perpetuities
93) Which of the following references a contract problem occurring when a buyer and a seller purport to make an agreement, but their preprinted forms do not match? A) The mutual exclusivity paradox B) The substantial performance conundrum C) The battle of the forms D) The “frolic and detour” deviation E) The “substantial deviation” issue
94)
Which of the following modifies the mirror-image rule?
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A) The Uniform Contracts Code B) The Uniform Commercial Code C) The Restatement of Contracts, Second D) The International Business Code E) The International Commercial Code
95) Which of the following is true if no means of communicating an acceptance is specified in an offer? A) The acceptance must be in writing. B) The acceptance must be made orally either by telephone or in person. C) No valid contract may be entered into because the offer must specify a means by which to accept. D) Acceptance may be made by any reasonable means. E) Acceptance must be made orally or in writing within twenty-four (24) hours.
96) Which of the following provides that an acceptance is valid when it is placed in the mailbox? A) The substantial performance doctrine B) The contract integrity rule C) The mirror-image rule D) The mailbox rule E) The contract legality rule
97) Which of the following provides that a revocation is effective only when received by the offeree? A) The equal dignity rule B) The United States Postal Service (USPS) revocation rule C) The reasonable revocation rule D) The mailbox rule E) The doctrine of reasonable conveyance
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98) Which of the following is true regarding the validity of various means of acceptance (assuming no means of communicating the acceptance is specified)? A) Telephone, mail, and e-mail are all valid means of acceptance, while telegraph and fax are not valid means of acceptance. B) Telegraph and fax are valid means of acceptance, while telephone, mail, and e-mail are not valid means of acceptance. C) Telephone, mail, e-mail, and fax are all valid means of acceptance, while telegraph is not a valid means of acceptance since it is an outdated form of communication. D) Telephone, telegraph, mail, fax, and e-mail are all valid means of accepting an offer. E) Telephone, telegraph, mail, fax, and e-mail are all invalid means of accepting an offer, since an offer must be accepted either in person or by way of a formal letter of acceptance.
99) Refusal to Pay. Business law professor Debby needed some yard work done. She told her class that she would give $50 to the first person who mowed her yard. She also entered into an agreement with Brenda to trim some shrubbery for $40. Max went to mow Debby's yard. Unfortunately, just as he finished mowing, a neighborhood dog bit him and he had to go to the emergency room for a couple of stitches. Debby refused to pay Max on the basis that the agreement was not in writing and that Max ended up being more trouble than he was worth. Max refused to pay the emergency room because he said that they did not have a binding, bilateral contract. Brenda refused to trim the shrubbery because she got a better offer and claimed that she was not bound by the contract until she started to perform. Which of the following is correct regarding Brenda's statement that she was not bound on any contract? A) Brenda is correct. There was no contract because she had not started working. B) Brenda is incorrect because there was a bilateral, express agreement. C) Brenda is incorrect because there was a bilateral, implied agreement. D) Brenda is incorrect because there was a unilateral, express agreement. E) Brenda is incorrect because there was a unilateral, implied agreement.
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100) Refusal to Pay. Business law professor Debby needed some yard work done. She told her class that she would give $50 to the first person who mowed her yard. She also entered into an agreement with Brenda to trim some shrubbery for $40. Max went to mow Debby's yard. Unfortunately, just as he finished mowing, a neighborhood dog bit him and he had to go to the emergency room for a couple of stitches. Debby refused to pay Max on the basis that the agreement was not in writing and that Max ended up being more trouble than he was worth. Max refused to pay the emergency room because he said that they did not have a binding, bilateral contract. Brenda refused to trim the shrubbery because she got a better offer and claimed that she was not bound by the contract until she started to perform. Which of the following is an appropriate characterization of the agreement between Debby and Max? A) They had a bilateral, express contract. B) They had a bilateral, implied contract. C) They had a unilateral, quasi-contract. D) They had a unilateral contract. E) They did not have any type of enforceable agreement.
101) Refusal to Pay. Business law professor Debby needed some yard work done. She told her class that she would give $50 to the first person who mowed her yard. She also entered into an agreement with Brenda to trim some shrubbery for $40. Max went to mow Debby's yard. Unfortunately, just as he finished mowing, a neighborhood dog bit him and he had to go to the emergency room for a couple of stitches. Debby refused to pay Max on the basis that the agreement was not in writing and that Max ended up being more trouble than he was worth. Max refused to pay the emergency room because he said that they did not have a binding, bilateral contract. Brenda refused to trim the shrubbery because she got a better offer and claimed that she was not bound by the contract until she started to perform. Which of the following is true regarding Max's statement that he did not have to pay the emergency room charges (assuming that prior to and during treatment, Max had no discussions with emergency room personnel regarding payment for services rendered)? A) He is correct. B) He is incorrect because there was a bilateral, express contract. C) He is incorrect because there was a unilateral, express contract. D) He is incorrect because there was an express, trilateral contract. E) He is incorrect because there was a binding implied contract.
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102) Wrong Deck. Penny hires Jackson to paint the back deck on her house. She agrees to pay him $200 for the job and he accepts, sight unseen. They enter into the agreement on Tuesday, and he is to paint the deck on Saturday. When Jackson arrives, neither Penny nor her neighbor is at home. He mistakenly paints the neighbor's deck. Penny calls him the next day and asks him why he did not paint her deck. He informs her that he did paint the deck. It is then realized that he mistakenly painted the neighbor's deck. Penny tells him not to worry because the neighbor will be required to pay him. Jackson says that if the neighbor does not pay, he expects all of his funds from Penny. What was the status of the agreement between Jackson and Penny as of Tuesday when they agreed upon the price for the job? A) The contract was executory. B) The contract was executed. C) The contract was notated. D) The contract was formal. E) The contract was a recognizance contract.
103) Wrong Deck. Penny hires Jackson to paint the back deck on her house. She agrees to pay him $200 for the job and he accepts, sight unseen. They enter into the agreement on Tuesday, and he is to paint the deck on Saturday. When Jackson arrives, neither Penny nor her neighbor is at home. He mistakenly paints the neighbor's deck. Penny calls him the next day and asks him why he did not paint her deck. He informs her that he did paint the deck. It is then realized that he mistakenly painted the neighbor's deck. Penny tells him not to worry because the neighbor will be required to pay him. Jackson says that if the neighbor does not pay, he expects all of his funds from Penny. Which of the following is correct regarding Penny's assertion that the neighbor will be required to pay Jackson? A) She is correct. The neighbor will be required to pay Jackson under a theory of quasicontract. B) She is correct. The neighbor will be required to pay Jackson based upon an impliedin-fact contract. C) She is correct. The neighbor will be required to pay Jackson based upon an impliedin-law contract. D) She is correct. The neighbor will be required to pay Jackson based upon an express contract. E) She is incorrect. The neighbor will not be required to pay Jackson.
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104) Wrong Deck. Penny hires Jackson to paint the back deck on her house. She agrees to pay him $200 for the job and he accepts, sight unseen. They enter into the agreement on Tuesday, and he is to paint the deck on Saturday. When Jackson arrives, neither Penny nor her neighbor is at home. He mistakenly paints the neighbor's deck. Penny calls him the next day and asks him why he did not paint her deck. He informs her that he did paint the deck. It is then realized that he mistakenly painted the neighbor's deck. Penny tells him not to worry because the neighbor will be required to pay him. Jackson says that if the neighbor does not pay, he expects all of his funds from Penny. Which of the following is true regarding Jackson's assertion that Penny must pay him? A) He is correct because an express contract existed. B) He is correct because an implied contract existed. C) He is correct because an implied-in-law contract existed. D) He is correct because a valid contract existed. E) He is incorrect unless he can somehow establish that Penny gave him poor directions or was otherwise at fault in informing him which deck to paint.
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105) Used Car Sales. Walter sells used cars. He is seeking a way to increase sales and profits because he would like to take his girlfriend on a nice diving trip to the Grand Cayman Islands. The first thing that Walter does is say that during the first week of December, he will give a $500 rebate on used cars under two years old. To spice things up, he also offers to sell any car on the lot that is under five years old for $1,000 to the first three customers who can hula hoop ten hours straight on December 7th. (Hula hooping was a practice popular some years ago in which a large hoop would be swung around by a person, usually around the waist.) Walter was not very concerned about the hula hooping issue because he thought that no one would be able to hula hoop for ten hours straight. Walter put an advertisement pertaining to the rebate and hula hoop opportunity in the local newspaper. The promotion went over very well. Although he had several on hand, Walter ran out of cars under two years old within one day. During the rest of the week, shoppers were told that no cars of that description were available. A customer named Sam was very unhappy when he discovered the next day that no cars under two years old were available. On December 7th, while Walter was watching the hula hoopers, Sally was shopping for a car. She was in college and did not have much money. She saw one, an older car, that she liked but she really did not know if it would run or not. She was going to talk to her parents. Walter eventually approached her and Sally asked him if he would take $3,000 for the car. Walter said, "Yes, sold." Sally tried to explain that she needed to talk to her parents first, but Walter would not hear of it. While Walter was still fuming from his encounter with Sally, Zack walked up and started to criticize the nature of Walter's inventory. Walter told him that he had great cars. Zack pointed at an old jalopy that was banged up, had 200,000 miles on it, and a cracked windshield. Zack said, "Sure, I'll pay $10,000 for that car." Walter said, "Sold." Zack said, "Wait a minute. I was only kidding." Walter said, "No way." Meanwhile all the hula hoopers dropped out prior to ten hours of hula hooping except for Barbara. One minute before the ten hours were up, Walter yelled out "I revoke!" Barbara completed the hula hooping anyway and asked for her car for $1,000. Walter refused saying that the offer was revoked. Sam was very angry and sued Walter for not having a car available that was under two years old so that he could get a good deal and a $500 rebate. Additionally, Barbara sued Walter, and Walter sued Zack and Sally. Which of the following is the likely result in the lawsuit brought by Sam complaining that Walter ran out of cars available for a rebate? A) Sam will win because Walter was required to have sufficient cars on hand for anyone who requested one. B) Sam will win because a rebate was involved. C) Sam will win because Walter should have run another advertisement revoking the offer. D) Sam will lose because he did not properly accept the offer. E) Sam will lose because a court would interpret Walter’s intent as being to invite readers to make an offer that Walter was free to reject.
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106) Used Car Sales. Walter sells used cars. He is seeking a way to increase sales and profits because he would like to take his girlfriend on a nice diving trip to the Grand Cayman Islands. The first thing that Walter does is say that during the first week of December, he will give a $500 rebate on used cars under two years old. To spice things up, he also offers to sell any car on the lot that is under five years old for $1,000 to the first three customers who can hula hoop ten hours straight on December 7th. (Hula hooping was a practice popular some years ago in which a person, usually around the waist, would swing around a large hoop.) Walter was not very concerned about the hula hooping issue because he thought that no one would be able to hulahoop for ten hours straight. Walter put an advertisement pertaining to the rebate and hula-hoop opportunity in the local newspaper. The promotion went over very well. Although he had several on hand, Walter ran out of cars under two years old within one day. During the rest of the week, shoppers were told that no cars of that description were available. A customer named Sam was very unhappy when he discovered the next day that no cars under two years old were available. On December 7th, while Walter was watching the hula hoopers, Sally was shopping for a car. She was in college and did not have much money. She saw one, an older car, that she liked but she really did not know if it would run or not. She was going to talk to her parents. Walter eventually approached her and Sally asked him if he would take $3,000 for the car. Walter said, "Yes, sold." Sally tried to explain that she needed to talk to her parents first, but Walter would not hear of it. While Walter was still fuming from his encounter with Sally, Zack walked up and started to criticize the nature of Walter's inventory. Walter told him that he had great cars. Zack pointed at an old jalopy that was banged up, had 200,000 miles on it, and a cracked windshield. Zack said, "Sure, I'll pay $10,000 for that car." Walter said, "Sold." Zack said, "Wait a minute. I was only kidding." Walter said, "No way." Meanwhile all the hula hoopers dropped out prior to ten hours of hula hooping except for Barbara. One minute before the ten hours were up, Walter yelled out "I revoke!" Barbara completed the hula hooping anyway and asked for her car for $1,000. Walter refused saying that the offer was revoked. Sam was very angry and sued Walter for not having a car available that was under two years old so that he could get a good deal and a $500 rebate. Additionally, Barbara sued Walter, and Walter sued Zack and Sally. What is the likely result in Walter's lawsuit against Sally in which he claims that she must pay $3,000 for the car at issue? A) Walter will win because Sally made an offer that he properly accepted, regardless of whether the offer was a reasonable one. B) Walter will win, but only because Sally agreed to pay a reasonable amount for the vehicle and he properly accepted the offer. C) Walter will lose because he did not properly accept Sally's offer. D) Sally will win because she merely expressed interest and did not make an offer. E) Sally will win because minors have the power of avoidance.
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107) Used Car Sales. Walter sells used cars. He is seeking a way to increase sales and profits because he would like to take his girlfriend on a nice diving trip to the Grand Cayman Islands. The first thing that Walter does is say that during the first week of December, he will give a $500 rebate on used cars under two years old. To spice things up, he also offers to sell any car on the lot that is under five years old for $1,000 to the first three customers who can hula hoop ten hours straight on December 7th. (Hula hooping was a practice popular some years ago in which a person, usually around the waist, would swing around a large hoop.) Walter was not very concerned about the hula hooping issue because he thought that no one would be able to hulahoop for ten hours straight. Walter put an advertisement pertaining to the rebate and hula-hoop opportunity in the local newspaper. The promotion went over very well. Although he had several on hand, Walter ran out of cars under two years old within one day. During the rest of the week, shoppers were told that no cars of that description were available. A customer named Sam was very unhappy when he discovered the next day that no cars under two years old were available. On December 7th, while Walter was watching the hula hoopers, Sally was shopping for a car. She was in college and did not have much money. She saw one, an older car, that she liked but she really did not know if it would run or not. She was going to talk to her parents. Walter eventually approached her and Sally asked him if he would take $3,000 for the car. Walter said, "Yes, sold." Sally tried to explain that she needed to talk to her parents first, but Walter would not hear of it. While Walter was still fuming from his encounter with Sally, Zack walked up and started to criticize the nature of Walter's inventory. Walter told him that he had great cars. Zack pointed at an old jalopy that was banged up, had 200,000 miles on it, and a cracked windshield. Zack said, "Sure, I'll pay $10,000 for that car." Walter said, "Sold." Zack said, "Wait a minute. I was only kidding." Walter said, "No way." Meanwhile all the hula hoopers dropped out prior to ten hours of hula hooping except for Barbara. One minute before the ten hours were up, Walter yelled out "I revoke!" Barbara completed the hula hooping anyway and asked for her car for $1,000. Walter refused saying that the offer was revoked. Sam was very angry and sued Walter for not having a car available that was under two years old so that he could get a good deal and a $500 rebate. Additionally, Barbara sued Walter, and Walter sued Zack and Sally. What is the likely result in the lawsuit brought by Walter against Zack? A) Walter will win because Zack properly made an offer that Walter accepted. B) Zack will win because he was merely expressing possible interest. C) Zack will win because Walter did not properly accept. D) Zack will win because under a subjective standard, he was joking. E) Zack will win because under an objective standard, it appears he was joking.
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108) Used Car Sales. Walter sells used cars. He is seeking a way to increase sales and profits because he would like to take his girlfriend on a nice diving trip to the Grand Cayman Islands. The first thing that Walter does is say that during the first week of December, he will give a $500 rebate on used cars under two years old. To spice things up, he also offers to sell any car on the lot that is under five years old for $1,000 to the first three customers who can hula hoop ten hours straight on December 7th. (Hula hooping was a practice popular some years ago in which a person, usually around the waist, would swing around a large hoop.) Walter was not very concerned about the hula hooping issue because he thought that no one would be able to hulahoop for ten hours straight. Walter put an advertisement pertaining to the rebate and hula-hoop opportunity in the local newspaper. The promotion went over very well. Although he had several on hand, Walter ran out of cars under two years old within one day. During the rest of the week, shoppers were told that no cars of that description were available. A customer named Sam was very unhappy when he discovered the next day that no cars under two years old were available. On December 7th, while Walter was watching the hula hoopers, Sally was shopping for a car. She was in college and did not have much money. She saw one, an older car, that she liked but she really did not know if it would run or not. She was going to talk to her parents. Walter eventually approached her and Sally asked him if he would take $3,000 for the car. Walter said, "Yes, sold." Sally tried to explain that she needed to talk to her parents first, but Walter would not hear of it. While Walter was still fuming from his encounter with Sally, Zack walked up and started to criticize the nature of Walter's inventory. Walter told him that he had great cars. Zack pointed at an old jalopy that was banged up, had 200,000 miles on it, and a cracked windshield. Zack said, "Sure, I'll pay $10,000 for that car." Walter said, "Sold." Zack said, "Wait a minute. I was only kidding." Walter said, "No way." Meanwhile all the hula hoopers dropped out prior to ten hours of hula hooping except for Barbara. One minute before the ten hours were up, Walter yelled out "I revoke!" Barbara completed the hula hooping anyway and asked for her car for $1,000. Walter refused saying that the offer was revoked. Sam was very angry and sued Walter for not having a car available that was under two years old so that he could get a good deal and a $500 rebate. Additionally, Barbara sued Walter, and Walter sued Zack and Sally. What is the most likely result in the lawsuit brought by Barbara against Walter? A) Walter will win because he was only engaged in preliminary negotiations. B) Walter will win because the advertisement was simply inviting customers, such as Barbara, to make an offer. C) Walter will win because he properly revoked the offer. D) Barbara will win because the advertisement would be treated as an offer that she properly accepted. E) Barbara will win because she properly made an offer that was accepted by Walter when he allowed her to continue hula hooping.
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109) Saturday Auction. Barry, an auctioneer, was holding an auction on a Saturday morning. At the beginning of the auction, Barry announced that the auction was being held without reserve. Helen, Mary, and Chris were all in attendance. Helen saw an old cash register with a stuck drawer that she thought would look great in her den. The auctioneer put the cash register up for sale, noting that the drawer was stuck and that no one really knew what was inside. Helen bought it for $20. At the same auction, Mary saw a great deal on a used table. She bid $20 on it. No one else bid anything. Barry announced that $20 was clearly insufficient for the table, that it was worth much more than that, and that he was taking it out of the auction. Chris started bidding on a diamond ring for his girlfriend. He bid $2,000. Just as Barry was getting ready to say "Sold," Chris looked over at his girlfriend, decided that he was not sure about marriage, and leaped up yelling, "I revoke." Barry, however, immediately yelled "Sold." When she got it home and broke into it, Helen discovered that the cash register actually contained $5,000. Unfortunately, Helen had a teenage son named Tad who started bragging to his friends about the family's good fortune. Barry heard about what had happened and sued Helen for return of the $5,000. Mary sues Barry attempting to obtain possession of the table. Barry sues Chris attempting to enforce a contract for the sale of the engagement ring. In the lawsuit in which Barry sues Helen for return of the $5,000, which of the following is the most likely result? A) Barry will win because when an auction is held without reserve, the auctioneer is entitled to repossess any item at will. B) Barry will lose, but only because he was not the actual seller. He was only selling at auction for someone else. The seller, however, would win in an action against Helen. C) Barry would win because Helen made an insufficient offer. D) Helen will win, but only if she can show that Barry had knowledge that cash was in the drawer before he sold it. E) Helen will win because the auction was without reserve and she properly bid on and bought the cash register with everyone knowing that the cash drawer was stuck.
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110) Saturday Auction. Barry, an auctioneer, was holding an auction on a Saturday morning. At the beginning of the auction, Barry announced that the auction was being held without reserve. Helen, Mary, and Chris were all in attendance. Helen saw an old cash register with a stuck drawer that she thought would look great in her den. The auctioneer put the cash register up for sale, noting that the drawer was stuck and that no one really knew what was inside. Helen bought it for $20. At the same auction, Mary saw a great deal on a used table. She bid $20 on it. No one else bid anything. Barry announced that $20 was clearly insufficient for the table, that it was worth much more than that, and that he was taking it out of the auction. Chris started bidding on a diamond ring for his girlfriend. He bid $2,000. Just as Barry was getting ready to say "Sold," Chris looked over at his girlfriend, decided that he was not sure about marriage, and leaped up yelling, "I revoke." Barry, however, immediately yelled "Sold." When she got it home and broke into it, Helen discovered that the cash register actually contained $5,000. Unfortunately, Helen had a teenage son named Tad who started bragging to his friends about the family's good fortune. Barry heard about what had happened and sued Helen for return of the $5,000. Mary sues Barry attempting to obtain possession of the table. Barry sues Chris attempting to enforce a contract for the sale of the engagement ring. What is the likely result in the lawsuit brought by Mary against Barry for the table? A) Barry will win because Mary was simply making an offer that he was free to decline. B) Barry will win because the price was clearly insufficient for the table. C) Barry will win because no acceptance occurred. D) Mary will win because the auction was without reserve and Barry had agreed to accept the highest bid. E) Barry will win because he did not inform attendees in writing that the auction was without reserve.
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111) Saturday Auction. Barry, an auctioneer, was holding an auction on a Saturday morning. At the beginning of the auction, Barry announced that the auction was being held without reserve. Helen, Mary, and Chris were all in attendance. Helen saw an old cash register with a stuck drawer that she thought would look great in her den. The auctioneer put the cash register up for sale, noting that the drawer was stuck and that no one really knew what was inside. Helen bought it for $20. At the same auction, Mary saw a great deal on a used table. She bid $20 on it. No one else bid anything. Barry announced that $20 was clearly insufficient for the table, that it was worth much more than that, and that he was taking it out of the auction. Chris started bidding on a diamond ring for his girlfriend. He bid $2,000. Just as Barry was getting ready to say "Sold," Chris looked over at his girlfriend, decided that he was not sure about marriage, and leaped up yelling, "I revoke." Barry, however, immediately yelled "Sold." When she got it home and broke into it, Helen discovered that the cash register actually contained $5,000. Unfortunately, Helen had a teenage son named Tad who started bragging to his friends about the family's good fortune. Barry heard about what had happened and sued Helen for return of the $5,000. Mary sues Barry attempting to obtain possession of the table. Barry sues Chris attempting to enforce a contract for the sale of the engagement ring. What is the likely result in the lawsuit Barry brought against Chris? A) Chris will win because he properly revoked his bid before it was accepted. B) Chris will win because bids made at an auction may be revoked at any time within ten days after the auction. C) Chris will win because bids made at an auction may be revoked at any time within five days after the auction. D) Chris will win because bids made at an auction may be revoked at any time within one day after the auction. E) Barry will win because Chris had no right to revoke the bid.
112)
There are generally two defenses to the enforcement of a contract. What are they? A) The lack of genuine assent and the lack of proper form B) The making of a unilateral contract and the lack of genuine assent C) The making of a bilateral contract and the lack of proper form D) The making of a bad bargain and the lack of genuine assent E) The lack of equal consideration and the lack of proper form
113)
Today’s law of contracts actually originated in judicial decisions from _____.
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A) France B) Germany C) Sweden D) England E) Norway
114) Oliver and Nellie have agreed that Oliver will buy Nellie’s house and horse barn for $250,000. This contract is _____ and _____. A) executory; implied B) executed; implied C) express; executed D) express; bilateral E) illusory; implied
115) Which of the following types of contracts has a special form or must be created in a specific manner? A) Implied B) QuasiC) Implied-in-law D) Formal E) Executory
116)
The first element of an offer is _____. A) an agreement B) consideration C) contractual intent D) equity E) an invitation to negotiate
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117) Pamela offers Veronica the right to buy her entire collection of compact discs. Veronica tells Pamela no. Veronica’s response is considered _____. A) a revocation B) a rejection C) bad faith (or at a minimum, the absence of good faith) D) a counteroffer E) an invitation to negotiate
ESSAY. Write your answer in the space provided or on a separate sheet of paper. 118) Identify and describe the four elements that are necessary for contract formation.
119)
Define a bilateral contract and a unilateral contract, and give an example of each.
120)
Define and give an example of an express contract and an implied contract.
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121) Millie mows her own yard to save money. Her neighbor Paul, however, hires a lawn service to mow his yard. One day Millie is looking out the window and sees Paul's lawn service drive up. Surprisingly, they begin to mow her yard, not Paul's yard. Millie thinks that is great and keeps her mouth shut while they mow the yard. Later, she gets a bill. She calls the owner of the lawn service and says that she does not have to pay because there was no contract in which she agreed to have her yard mowed. Discuss whether the lawn service is entitled to any recovery and why or why not.
122) Discuss the meaning of a void contract and a voidable contract, and the effect of a determination that a contract is voidable after one party has fully or partially performed.
123) Explain the effect of auctions held with reserve and without reserve, and discuss what happens if nothing is said regarding whether an auction is being held with reserve or without reserve.
124)
Indicate the ways in which an offer can terminate.
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125) Wally wants to sell his used computer to Susan for $400. Susan says that she will think about it. Wally tells Susan on Monday that if she wants the computer, she must call him on his cell phone by 6 p.m., the next day. That next morning Susan decides she does want the computer, but she has misplaced Wally's cell phone number. She finds his address in an old campus directory. Therefore, she drops a note to him through the United States Postal Service telling him that she wants the computer. Meanwhile, on Wednesday, before he gets Susan's acceptance, Wally sells the computer to Alice. When Wally calls Susan to tell her the bad news, Susan tells Wally that she accepted the contract and that under the Mailbox Rule, he is liable to her for damages computed by the difference between $400 and the amount it costs her to obtain a similar computer. Who will win in the dispute between Wally and Susan and why?
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Answer Key Test name: Chap 09_5_The Essentials_Kubasek 1) FALSE A contract is a set of legally enforceable promises. 2) FALSE An agreement consists of an offer by one party and an acceptance of the terms by the other party. 3) FALSE The offeror makes the offer while the offeree receives the offer. 4) TRUE Lack of genuine assent is a defense to the enforcement of a contract. A contract is supposed to be entered into freely by both parties, but sometimes the offeror secures the acceptance of the agreement through improper means such as fraud, duress, undue influence, or misrepresentation. In these situations, there really is no genuine assent to the contract, and the offeree may be able to raise the lack of genuine assent as a defense to enforcement of the agreement. 5) FALSE There are two primary sources of contract law: case law and the Uniform Commercial Code (UCC). 6) FALSE Although judges frequently cite it in cases because it is an authoritative statement of what the law is, the Restatement of the Law Second, Contracts is not actually the law itself. 7) FALSE
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To remedy some of the difficulties created by a patchwork of different laws governing commercial transactions, the National Conference of Commissioners on Uniform State Laws and the American Law Institute drafted a set of commercial laws that could be applicable to all states. This effort was called the Uniform Commercial Code (UCC). The UCC became law in each state that adopted it completely or partially as part of its state code. Thus, for example, if a firm enters into a contract governed by the Uniform Commercial Code in Ohio, it would be operating under the Ohio Uniform Commercial Code. 8) FALSE All contracts can be classified as either bilateral or unilateral. Whether a contract is bilateral or unilateral depends on what response the offeror (the party proposing the contract) expects from the offeree (the person agreeing to or accepting the contract). 9) FALSE If the offeror wants a promise from the offeree to form a binding contract, the contract is a bilateral contract. A bilateral contract is commonly defined as a promise in exchange for a promise. 10) TRUE The terms of express contracts are clearly set forth in either written or spoken words. 11) FALSE Contracts are classified as express or implied, depending on how they are created. The terms in express contracts are clearly set forth in either written or spoken words, while implied contracts arise not from words but from the conduct of the parties. If you have a dental emergency and your dentist pulls your severely infected tooth without prior negotiation about payment, or even any mention of payment, you have an implied contract for payment for his services. 12) FALSE Version 1
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Quasi-contracts are not actually contracts. 13) TRUE Implied contracts, which arise not from words but from the conduct of the parties, are sometimes called implied-in-fact contracts. Quasicontracts are sometimes referred to as implied-in-law contracts. 14) FALSE Quasi-contracts are not actually contracts. Rather, to prevent one party from being unjustly enriched at the expense of another, the courts impose contractual obligations on one of the parties as if that party had entered into a contract. 15) TRUE As a general rule, a valid contract is one that will be enforced. However, sometimes a contract may be valid yet unenforceable. A valid contract may be unenforceable when some law prohibits the courts from enforcing it. For example, the statute of frauds requires certain contracts to be evidenced by a writing before they can be enforced. Similarly, the statute of limitations mandates that an action for breach of contract must be brought within a set period of time, thereby limiting the enforceability of the contract. 16) FALSE Formal contracts are those that have a special form or must be created in a specific manner. The Restatement (Second) of Contracts identifies the following four types of formal contracts: a) contracts under seal; b) recognizances; c) letters of credit; and d) negotiable instruments. 17) TRUE States today do not require contracts to be under seal. However, several states still allow a contract without consideration to be enforced if it is under seal. 18) FALSE
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The first element of a contract is the agreement. Under the common law, the agreement begins when one party, the offeror, makes an offer to another party, the offeree. 19) FALSE An offer has three elements. Under the common law, these elements are intent, definite and certain terms, and communication of the offer to the offeree. 20) FALSE Contracts are interpreted using an objective standard, meaning that the courts are concerned with only the party's outward manifestations of his or her intent, not what is going on in that party's mind. The courts interpret the words and actions of the parties the way a reasonable person would interpret them. 21) FALSE The offer must be communicated to the offeree or to the offeree’s agent. Only the offeree to whom the offer was directed can accept the offer. If Bill overhears Sam offer to sell his car to Helen for $5,000, he cannot walk over to Sam and form a contract by accepting the offer. If Bill says to Sam, “I’ll give you $5,000 for your car,” he is not accepting the offer; instead, he is making a new offer. 22) FALSE If the offer states that it will be held open for only a certain time, the offer will terminate when that time expires. In the absence of a time condition in the offer, the offer will expire after the lapse of a reasonable amount of time. What constitutes a reasonable amount of time varies, depending on the subject matter of the offer. For example, an offer by a retailer to purchase seasonal goods from a wholesaler would lapse before an offer to purchase goods that could be easily sold all year long. 23) FALSE
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The Restatement of Contracts offers three circumstances under which silence can constitute acceptance: a) the offeree receives the benefits of the offered services with reasonable opportunity to reject them and knowledge that some form of compensation is expected, yet the offeree remains silent; b) the offeror tells the offeree that silence or inaction will constitute an acceptance, and the offeree, by remaining silent, intends to accept; and c) the parties, by their previous course of dealing with each other, have established a pattern of behavior whereby it would be reasonable to assume that silence was intended to communicate acceptance. 24) FALSE When a bilateral contract is being formed under the common law, the mirror-image rule applies to the acceptance. The mirror-image rule says that the terms of the acceptance must mirror the terms of the offer. If the terms of the acceptance do not mirror the terms of the offer, no contract is formed. Instead, the attempted acceptance is a counteroffer. 25) TRUE If an acceptance is received after a rejection is received, the acceptance is not valid because the rejection terminated the offer. 26) FALSE The mailbox rule provides that an acceptance is valid when it is placed in the mailbox. 27) FALSE The offeror is said to be the master of his offer and, as such, can revoke it at any time, even if he says he will hold the offer open for a stated period of time. 28) FALSE
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If the subject matter of the offer is destroyed or becomes illegal, the offer immediately terminates. For example, if Jamie offers Bill a job managing the riverboat casino Jamie plans to open on January 1, but before Bill accepts the offer the state decides no longer to allow riverboat casinos to operate in the state, the offer of employment terminates. 29) A A contract, according to the Restatement (Second) of Contracts, is "a promise or set of promises for the breach of which the law gives a remedy or the performance of which the law in some way recognizes a duty." 30) A A contract has four elements: the agreement, the consideration, contractual capacity, and a legal object. 31) E The agreement consists of an offer by one party, called the offeror, to enter into a contract, and an acceptance of the terms of the offer by the other party, called the offeree. 32) C The party who makes an offer is called the offeror. 33) E The party who agrees to the terms of an offer is called the offeree. 34) C Consideration is defined as the bargained-for exchange. Another way to think of consideration is that it is what each party gets in exchange for his or her promise under the contract. 35) D Contractual capacity is the legal ability to enter into a binding agreement. 36) E Version 1
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Persons who do not have the capacity to enter into legally binding contracts include those who are under the age of majority, intoxicated, or suffering from mental illness. 37) D Legal object is one element of a binding, legal contract. It means that the contract cannot be either illegal or against public policy. 38) E Sometimes the offeror secures the acceptance of the agreement through improper means, such as fraud, duress, undue influence, or misrepresentation. In these situations, there really is no genuine assent to the contract, and the offeree may be able to raise the lack of genuine assent as a defense to enforcement of the agreement. 39) B There are two primary sources of contract law: case law and the Uniform Commercial Code (UCC). 40) B There are two primary sources of contract law: case law and the Uniform Commercial Code (UCC). A third source of law, which has become more important with increasing globalization, is the Convention on Contracts for the International Sale of Goods (CISG). 41) C The law of contracts is primarily common law. 42) A Prominent legal scholars, recruited by the American Law Institute, organized the principles of the common law of contracts into the original Restatement of the Law, Contracts. The compilation has subsequently been revised and published as Restatement of the Law Second, Contracts. 43) D
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Having different laws governing contracts in different states did not make interstate commerce flow smoothly. To remedy some of the difficulties created by a patchwork of different laws governing commercial transactions, the National Conference of Commissioners on Uniform State Laws and the American Law Institute drafted a set of commercial laws that could be applicable to all states. This effort was called the Uniform Commercial Code (UCC). 44) C The Uniform Commercial Code (UCC) is law in each state that has adopted it completely or partially as part of its state code. Thus, for example, if a firm enters into a contract governed by the Uniform Commercial Code in Ohio, it would be operating under the Ohio (state) Uniform Commercial Code. 45) A The part of the Uniform Commercial Code that is relevant to contracts is Article 2, which governs contracts for the sale (exchange for a price) of goods (tangible, movable objects). 46) D All contracts can be classified as either bilateral or unilateral. 47) D A bilateral contract is commonly defined as a promise in exchange for a promise. 48) A A bilateral contract is commonly defined as a promise in exchange for a promise. As soon as the promises are exchanged, a contract is formed and the parties' legal obligations arise. 49) D In a unilateral contract, the offeror wants a performance to form the contract. The offeror wants the offeree to do something, not promise to do something. Version 1
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50) C Express contracts have all their terms clearly set forth in either written or spoken words. 51) A Implied contracts arise not from words but from the conduct of the parties. 52) A Quasi-contracts are sometimes called implied-in-law contracts, but they are not actually contracts. Rather, to prevent one party from being unjustly enriched at the expense of another, the courts impose contractual obligations on one of the parties as if that party had entered into a contract. 53) B Quasi-contracts are sometimes called implied-in-law contracts, but they are not actually contracts. Rather, to prevent one party from being unjustly enriched at the expense of another, the courts impose contractual obligations on one of the parties as if that party had entered into a contract. 54) D A valid contract is one that contains all the legal elements of a contract: the agreement, the consideration, contractual capacity, and a legal object. 55) C A valid contract may be unenforceable when there is some law that prohibits the courts from enforcing it. For example, the statute of limitations mandates that an action for breach of contract must be brought within a set period of time, thereby limiting the enforceability of the contract. 56) E
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A void contract is, in effect, not a contract at all. Either its object is illegal or it has some defect that is so serious that it is not a contract. 57) D A contract is voidable if one or both of the parties have the ability to either withdraw from the contract or enforce it. 58) E Contracts resulting from fraud, duress, or undue influence are voidable by the innocent party. 59) B Once all the terms of the contract have been fully performed, the contract is said to have been executed. 60) A As long as some of the duties under the contract have not yet been performed, the contract is considered executory. 61) E The Restatement (Second) of Contracts identifies the following four types of formal contracts: a) contracts under seal; b) recognizances; c) letters of credit; and d) negotiable instruments. Quasi-contracts, sometimes called implied-in-law contracts, are not actually contracts. Rather, to prevent one party from being unjustly enriched at the expense of another, the courts impose contractual obligations on one of the parties as if that party had entered into a contract. 62) D The term “under seal” comes from the days when a contract was literally sealed by a piece of soft wax into which an impression was made. 63) C As of the publication of the textbook, ten states still allow a contract without consideration to be enforced if it is under seal. 64) C
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A recognizance arises when a party acknowledges in court that he or she will perform some specified act and/or pay a price on failure to do so. An example of a recognizance is a bond used as bail in a criminal case. The person agrees to return to court for trial or forfeit the bond. 65) B A letter of credit is an agreement by the person or institution that issues the letter to pay a sum of money on receipt of an invoice and other documents (typically documents indicating that the goods were insured against damage in transit). 66) A A negotiable instrument is a written document signed by a person who makes an unconditional promise to pay a specific sum of money on demand or at a certain time to the holder of the instrument. The most common forms of negotiable instruments are checks, notes, drafts, and certificates of deposit. 67) A The first element of a contract is the agreement. 68) E Under common law, the agreement begins when one party, the offeror, makes an offer to another party, the offeree. 69) C The first element of the offer is intent. The offeror must manifest an intent to be bound by the offeree’s acceptance. If an individual is clearly joking, a reasonable person would not think that the individual seriously intended to make an offer, and the courts would consequently not treat the words as an offer. If Maria says to Peter "I bet you a million dollars that it is going to rain tomorrow" and Peter knows that Maria is joking, it would not be a valid offer based upon lack contractual intent. 70) D
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The court held that the parties had entered into a binding agreement, and the court enforced the agreement. This case demonstrates that the courts look at the circumstances surrounding the alleged making of a contract and focus on the outward manifestations of a person’s intent, as gauged by an objective, reasonable person standard. It clearly sends the message that people need to be careful when joking about entering into a contract because a person who jokes too well might find herself or himself bound to an agreement that she or he did not really intend to make. 71) A An invitation to negotiate or an expression of possible interest in an exchange is not an offer. 72) E This case created an exception to the rule that advertisements do not create any power of acceptance in potential offerees. The court ruled that because the plaintiff had fulfilled all the terms of the advertisement and the advertisement was specific and left nothing open for negotiation, a contract had been formed. According to the court, if an advertisement is “clear, definite, and explicit, and leaves nothing open for negotiation . . . it constitutes an offer, acceptance of which will complete the contract.” 73) C If nothing is stated to the contrary in the terms of the auction, an auction is presumed to be with reserve. 74) C In an auction without reserve, the seller is treated as making an offer to accept the highest bid. Thus, the seller must accept the highest bid. Not surprisingly, very few auctions are without reserve. 75) C
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Under the common law, the terms of the offer must be definite and certain. In other words, all the material terms must be included. The material terms of an offer and a resulting contract are those terms that allow a court to determine what the damages are in the event that one of the parties breaches the contract. 76) D There are five ways to terminate an offer: revocation by the offeror, rejection by the offeree, death or incapacity of the offeror, destruction or subsequent illegality of the subject matter of the offer, and lapse of time or failure of other conditions stated in the offer. 77) B The offeror is said to be the "master of his offer" and, as such, can revoke it at any time, even if he says he will hold the offer open for a stated period of time. 78) C If a person wishes to ensure that an offer will in fact be held open for a set period of time, the person may do so by entering into an option contract with the offeror. An option contract is an agreement whereby the offeree gives the offeror a piece of consideration in exchange for the offeror's agreement to hold the offer open for the specified period of time. 79) B As a general rule, the revocation of an offer is effective when it is received by the offeree. Because of this rule, if it is really important to the offeror to know that his offer has been revoked, he or she should personally deliver the revocation to the offeree. 80) A One of the means by which an offer can be terminated is rejection by the offeree. Regardless of how long the offer was stated to be open, once the offeree rejects it, it is terminated. Version 1
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81) D An option contract is an agreement whereby the offeree gives the offeror a piece of consideration in exchange for the offeror’s agreement to hold the offer open for the specified period of time. There are a number of situations when you might want to enter into an option contract. For example, if the person who made the offer is ill, and you are afraid he or she might die, you might want to enter into an option contract because you would then still have the time of the option to enter into the contract with the estate of the offeror; otherwise, the offer dies with the offeror. 82) A If the subject matter of the offer is destroyed, the offer immediately terminates. 83) A If the subject matter of the offer becomes illegal, the offer immediately terminates. 84) E In the absence of a time condition in the offer, the offer will expire after the lapse of a reasonable amount of time. 85) E What constitutes a reasonable amount of time varies depending on the subject matter of the offer. For example, an offer by a retailer to purchase seasonal goods from a wholesaler would lapse before an offer to purchase goods that could easily be sold during the entire year. 86) A If you are doing business with a member state of the European Union, there is one source to turn to in order to understand how the various member states regulate contracts, and that is The Principles of European Contract Law.The principles were drafted by an independent body of experts from each member state of the European Union under a project supported by the European Commission. Version 1
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87) A If the offer is for a unilateral contract, the offeree can accept only by providing the requested performance. 88) B If the offer is for a unilateral contract, the offeree can accept only by providing the requested performance. 89) B In examining the acceptance under the common law, the basic requirements for a valid acceptance parallel those for a valid offer. For an acceptance to be valid, there must be manifestation of intent to be bound by the acceptance to the contract, agreement to the definite and certain terms of the offer, and communication of acceptance to the offeror. 90) E The Japanese tend to view contracts as ongoing relationships in which the parties work with each other to smooth out any problems that arise in performance of the contract. The Japanese tend to be suspicious of long, detailed contracts. They have a distinct preference for short, flexible contracts that leave a number of terms to be decided later. 91) A Silence, as a general rule, cannot be used to form a contract. Silence does not constitute acceptance, and acceptance is required for contract formation. 92) C When a bilateral contract is being formed under the common law, the mirror-image rule applies to the acceptance. The mirror-image rule says that the terms of the acceptance must mirror the terms of the offer. If the terms of the acceptance do not mirror the terms of the offer, no contract is formed. Instead, the attempted acceptance is a counteroffer. 93) C Version 1
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The contract problem involving the preprinted forms of the buyer and the seller not matching is called the "battle of the forms." 94) B Uniform Commercial Code (UCC) Section 2-207 significantly modified the mirror-image rule by providing that, as a general rule, an offeree may include in the acceptance terms that are additional to or different from the terms of the offer as long as: a) the offeror did not explicitly state in the offer that all terms of the offer must be accepted exactly as proposed; b) the offeror does not promptly reject the new terms on receipt of acceptance; and c) the new terms do not materially change the terms of the original offer. 95) D If no means of communicating the acceptance is specified, any reasonable means is generally acceptable. 96) D The mailbox rule provides that an acceptance is valid when it is placed in the mailbox. 97) D The mailbox rule provides that an acceptance is valid when it is placed in the mailbox, whereas a revocation is effective only when received by the offeree. 98) D If no means of communicating acceptance is specified, any reasonable means is generally acceptable. Telephone, telegraph, mail, fax, and email are all valid means of accepting an offer. 99) B If the offeror wants a promise from the offeree to form a binding contract, the contract is a bilateral contract. Express contracts have all their terms clearly set forth in either written or spoken words. 100) D Version 1
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In a unilateral contract, the offeror wants a performance to form the contract. 101) E Implied contracts arise not from words but from the conduct of the parties. 102) A As long as some of the duties under the contract have not yet been performed, the contract is considered executory. 103) E There are limits to the quasi-contract doctrine, however. Specifically, the enrichment must be unjust. Sometimes a benefit may simply be conferred on a person because of a mistake by the other party, and the courts will not make people pay for others’ mistakes. 104) E As long as some of the duties under the contract have not yet been performed, the contract is considered executory. 105) E An illustration of the offer to make an offer is the advertisement. 106) D An invitation to negotiate or an expression of possible interest in an exchange is not an offer. 107) E If an individual is clearly joking or speaking out in anger, the reasonable person would not think that the individual seriously intended to make an offer and the courts would consequently not treat the words as an offer. 108) D In a situation involving a unilateral contract, to prevent injustice, once an offeree begins performance, the offeror must hold the offer open for a reasonable time to allow the offeree to complete the performance. 109) E Version 1
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In an auction without reserve, the seller is treated as making an offer to accept the highest bid. Thus, the seller must accept the highest bid. 110) D In an auction without reserve, the seller is treated as making an offer to accept the highest bid. Thus, the seller must accept the highest bid. 111) A The offeror is said to be the "master of his offer" and, as such, can revoke it at any time, even if he says he will hold the offer open for a stated period of time. 112) A There are generally two defenses to the enforcement of a contract; lack of genuine assent and proper form. See Exhibit 9-1. 113) D Today’s law of contracts actually originated in judicial decisions in England, which were followed by the early courts in the United States. 114) D As long as some of the duties under the contract have not yet been performed, the contract is considered executory. Additionally, express terms are those that are either written or spoken. 115) D Contracts may also be classified as formal or informal. Formal contracts are those that have a special form or must be created in a specific manner. 116) C The first element of the offer is intent. The offeror must manifest an intent to be bound by the offeree’s acceptance. 117) B The second means by which an offer can be terminated is rejection by the offeree. Regardless of how long the offer was stated to be open, once the offeree rejects it, it is terminated. Version 1
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118) The four elements necessary for a contract are agreement, consideration, contractual capacity, and a legal object. The agreement consists of an offer by one party and an acceptance by another. Consideration is defined as a bargain-for exchange. Capacity is the legal ability to enter into a binding contract. Regarding the requirement of a legal object, the contract cannot be either illegal or against public policy. 119) A bilateral contract is commonly defined as a promise in exchange for a promise. In a unilateral contract, the offeror wants a performance to form the contract. Student responses will vary on examples. One example students may use for a unilateral contract is the reward example referenced in the textbook. An example of a bilateral contract would be a promise to pay a certain amount of money for an automobile or other personal property. 120) Express contracts have all their terms clearly set forth in either written or spoken words. Implied contracts arise not from words, but from the conduct of the parties. An example of an express contract is when terms are clearly laid out and parties enter into an agreement. An example of an implied contract is going to the dentist's office in an emergency. Although prior to treatment there might not be negotiation about payment or even any mention of payment, the patient is bound by an implied contract to pay for the emergency services the dentist performs. 121) Quasi-contracts are sometimes called implied-in-law contracts, but they are not actually contracts. Rather, to prevent one party from being unjustly enriched at the expense of another, the courts impose contractual obligations on one of the parties as if that party had entered into a contract. The lawn service will be entitled to recover under a theory of quasi-contract based upon Millie being unjustly enriched at the expense of the lawn service.
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122) A void contract is, in effect, not a contract at all. Either its object is illegal or it has some defect that is so serious that it is not a contract. A contract is voidable if one or both of the parties have the ability to either withdraw from the contract or enforce it. If the parties discover that the contract is voidable after one or both have partially performed, and one party chooses to have the contract terminated, both parties must return anything they have already exchanged under the agreement so that they will be returned to the condition they were in at the time that they entered into the agreement. 123) In an auction held with reserve, the seller is merely expressing an intent to receive offers. The auctioneer may withdraw the item from auction at any time before the auctioneer's hammer falls signaling the acceptance of the bid. In an auction held without reserve, the seller is treated as making an offer to accept the highest bid. Thus, the seller must accept the highest bid. If nothing is stated to the contrary in terms of the auction, an auction is presumed to be with reserve. 124) An offer can terminate in any of the following ways: a) revocation of the offer by the offeror; b) rejection of the offer by the offeree; c) death or incapacity of the offeror; d) destruction or subsequent illegality of the subject matter of the offer; or e) lapse of time or failure of another condition stated in the offer. 125) An offeror has the power to control the means by which the acceptance is communicated and, if the offeror specifies that only a certain means of communication will be accepted, then only that method of communication forms a valid offer. Wally will win because Susan did not properly accept the offer by calling him on his cell phone nor did Wally hear of the acceptance within the time allotted.
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CHAPTER 10 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) Consideration is the thoughtfulness, as measured by an objective standard of reasonableness, a person exhibits as he or she carries out contractual obligations. ⊚ true ⊚ false
2) A court will enforce one party’s promise only if the other party promised something in exchange. ⊚ true ⊚ false
3) The consideration in a bilateral contract is one party’s promise in exchange for the other party’s forbearance. ⊚ true ⊚ false
4) In a unilateral contract, one party's consideration is a promise and the other party's consideration is an act. ⊚ true ⊚ false
5)
Forbearance is the promise not to engage in a particular activity. ⊚ true ⊚ false
6)
Forbearance is not sufficient consideration for a valid and enforceable contract. ⊚ true ⊚ false
7) Promissory estoppel is the legal enforcement of an otherwise unenforceable contract due to a party's detrimental reliance on the contract.
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⊚ ⊚
8)
true false
The essential element of promissory estoppel is fraud. ⊚ true ⊚ false
9) Because mutual consideration is an essential element of contract formation and enforcement, courts always consider whether both parties to a contract gave adequate consideration. ⊚ true ⊚ false
10) Depending of the facts and circumstances of a particular case, an illusory promise can constitute valid consideration. ⊚ true ⊚ false
11)
Past consideration is not sufficient consideration for a present contract. ⊚ true ⊚ false
12)
For a court to enforce a promise, both parties must give consideration. ⊚ true ⊚ false
13) The promise to perform a preexisting duty is sufficient consideration for a present contract. ⊚ true ⊚ false
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14) If, due to unforeseen circumstances, additional work is necessary to satisfy an existing contractual obligation, promising to perform the additional work can never be valid consideration for the modification of an existing agreement or the creation of a new agreement. ⊚ true ⊚ false
15) With unliquidated debt, there is no dispute about the fact that money is owed or the amount of money owed. ⊚ true ⊚ false
16) An accord and satisfaction is an arrangement between contracting parties where one of the parties substitutes a different performance for his or her original duty under the contract. ⊚ true ⊚ false
17) Debt must be liquidated for the parties to enter into an enforceable accord and satisfaction. ⊚ true ⊚ false
18) According to Uniform Commercial Code (UCC) Section 3-311, if a business inadvertently cashes a paid-in-full check, the business has six (6) months from the date it cashed the check to offer repayment in the same amount to the debtor and thereby avoid an enforceable accord and satisfaction. ⊚ true ⊚ false
19) With liquidated debt, there is a genuine dispute regarding whether money is owed or the amount of money owed. ⊚ true ⊚ false
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20) In an accord and satisfaction, the promise to perform the new duty is the accord, and the actual performance of that new duty is the satisfaction. ⊚ true ⊚ false
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 21) What does a person receive in return for performing a contract obligation? A) Liquidation B) An accord and satisfaction C) Consideration D) A novation E) A voluntary dismissal
22) Suppose that Eduardo agrees to purchase Caleah’s car for $10,000. Eduardo’s payment of $10,000 is the _____ Caleah will receive for her car. A) consideration B) offer C) conditional offer D) invitation to negotiate E) forbearance
23)
Which of the following does not constitute valid consideration? A) A benefit to the promisor B) A detriment to the promisee C) A promise to do something D) An invitation to negotiate E) A promise to refrain from doing something
24) In the Hamer v. Sidway case cited in the textbook, the New York Court of Appeals concluded that _____.
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A) consideration is not required to enforce an otherwise valid, bargained-for exchange B) a benefit to the promisor constitutes valid consideration, but a detriment to the promisee does not constitute valid consideration C) forbearance is sufficient consideration for a valid and enforceable contract D) a detriment to the promisee constitutes valid consideration, but a benefit to the promisor does not constitute valid consideration E) forbearance does not satisfy the consideration requirement for a valid and enforceable contract
25) Which of the following is a promise to refrain from doing something you are legally entitled to do? A) Substantial performance B) A preexisting duty C) Abeyance D) Forbearance E) A bargained-for exchange
26) Tiffany promised to sell Lillian her diamond necklace and Lillian promised to pay $2,000. What type of contract is this? A) A unilateral contract B) A liquidated contract C) An executed contract D) A bilateral contract E) A quasi-contract
27) A general rule in contract law is that for a promise to be enforce by a court, there must be _____.
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A) an offer B) consideration C) an acceptance D) an illusory promise E) a written agreement
28) If Greg promises Carlos that he will stop smoking for two (2) years if Carlos promises to pay him $5,000, Greg’s promise is considered _____. A) forbearance B) past consideration C) an illusory promise D) a preexisting duty E) promissory estoppel
29) Suppose that Dakiyah promises to pay Fernando $450 for his television. Fernando promises to sell Dakiyah his television for $450. The parties have not documented the transaction in writing. Which of the following is true regarding this arrangement? A) There is no contract between the parties because the promises are not in writing. B) This is a unilateral contract. C) This is merely an invitation to negotiate. D) There is an oral contract. E) Dakiyah’s promise constitutes an offer, while Fernando’s promise is a counteroffer.
30) In a(n) _____ contract, one party’s consideration is a promise and the other party’s consideration is an act. A) unilateral B) bilateral C) quasiD) illusory E) preexisting duty
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31) Most contracts require that both parties give consideration in a contract. Which of the following is an exception to that rule? A) Promissory estoppel B) Forbearance C) A unilateral contract D) A bilateral contract E) A real estate contract
32) Promissory estoppel is the legal enforcement of an otherwise unenforceable contract _____ A) if one party engages in forbearance B) due to a party's detrimental reliance on the contract C) if one party made a unilateral mistake D) if the parties made a bilateral mistake E) due to fraud
33) Courts seldom consider _____, meaning that courts usually do no determine whether a contracting party made a good bargain. A) mutual consideration B) promissory estoppel C) adequacy of consideration D) contract modifications E) forbearance
34) Caterer and Bride agree that Caterer will cater Bride’s wedding for $20 per plate. On the day of the wedding, Caterer determines that she needs more money and informs Bride that the price is now $25 per plate. Desperate, Bride agrees. Is the $25-per-plate contract modification enforceable?
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A) Yes, since Bride agreed to the new $25-per-plate price B) Yes, since Bride could have counteroffered but declined to do so C) No, since the modification is based on an illusory promise D) No, since promissory estoppel automatically prohibits the modification E) No, since Caterer had a preexisting duty to Cater the wedding for $20 per plate
35) In order to avoid paying his creditors, Isaac sold his 100-acre farm to his best friend Zach for substantially less than its fair market value. Upon the creditors’ request, will a court set aside this transaction? A) No, since Zach paid some consideration for Isaac’s farm B) No, because when it comes to contract recognition and enforcement, courts never consider the adequacy of consideration C) Yes, because the price paid was unfair to Isaac D) Yes, based on the creditors’ forbearance E) Yes, since Isaac sold his farm to avoid paying his creditors
36) In the Smith v. Riley case referenced in the textbook, how did the Tennessee Court of Appeals rule regarding whether a purchase for "the sum of One Dollar ($1.00) and other good and valuable consideration" was sufficient consideration to support an agreement? A) The Court ruled that the purchase amount was sufficient consideration. B) The Court ruled that the purchase amount was insufficient consideration, but only because the sale of an interest in a lease was involved. C) The Court ruled that the purchase amount was insufficient consideration, but only because a sale of goods was involved. D) The Court ruled that the purchase amount was insufficient consideration, but only because a domestic partnership was involved. E) The Court ruled that the purchase amount was insufficient consideration because over $50,000 was at issue.
37) Tom’s Stop-N-Shop Grocery, Inc. tells Kelly that if she would supply five shipments of oranges by Friday, the company will consider making Kelly its sole orange supplier. This is an example of _____.
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A) a preexisting duty B) promissory estoppel C) an illusory promise D) past consideration E) commercial impracticability
38) Mike promises Leighann that if she will come to the high school prom with him, he will consider paying for her dress and shoes. This is an example of _____. A) an illusory promise B) valid consideration C) a quasi-contract D) a unilateral contract E) past consideration
39)
For a court to enforce a promise, _____.
A) only the offeror must pledge consideration B) only the offeree must pledge consideration C) only the assignor must pledge consideration D) both the offeror and the offeree must pledge consideration E) neither party must pledge consideration, since promissory estoppel is a universallyrecognized remedy in contract law
40) Joy is a customer service representative. Joy’s supervisor Tom tells Joy that because she was so good at “diffusing” a customer relations issue last month, he will pay her a $500 bonus. Is Tom’s promise enforceable? A) Yes, because Tom is Joy’s supervisor B) Yes, since this constitutes promissory estoppel C) Yes, since this represents a preexisting duty D) No, since this involves past consideration E) No, because this is an illusory promise
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41)
A promise to do something that you are already obligated to do is _____.
A) valid consideration because it is illusory consideration B) valid consideration, but only in the employment context C) valid consideration because it is past consideration D) valid consideration, but only if a sale of goods transaction invoking the applicability of the Uniform Commercial Code (UCC) is involved E) not valid consideration
42) Courtney, who does not keep up with the price of current technology, agrees to buy a used computer from Jake for $2,500. Later, Courtney’s friend Brice tells Courtney that she made a terrible deal and that she could get a better, new computer for no more than $1,000. Courtney tells Jake that she is not giving him any money because he has not been fair to her in terms of the computer price. Which of the following is the most likely result if Jake sues Courtney alleging breach of contract? A) Jake will win, but only if he can establish that the $2,500 price was actually reasonable. B) Jake will win because the court will not weigh whether a good bargain was made. C) Courtney will win if she can establish that she paid at least 75% more than the computer was actually worth. D) Courtney will win if she can establish that she paid at least 50% more than the computer was actually worth. E) Courtney will win if she can establish that she made a bad deal and that she was not actually aware of the current prices of both new and old computers.
43) Yolanda agrees to bathe and groom Wendy's dog Fluffy for $20. Yolanda agreed to the price before seeing Fluffy, a very plump, grouchy Pembroke Welsh Corgi dog with lots of hair. Yolanda tells Wendy that if she is going to groom Fluffy, the price will be $30. Wendy agrees but exclaims in exasperation that the dog is, after all, named "Fluffy!" Yolanda bathes and grooms Fluffy, but Wendy will only pay $20. Which of the following is correct regarding Yolanda's entitlement to the extra $10?
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A) Yolanda is entitled to the extra $10 because a valid bilateral contract existed. B) Yolanda is entitled to the extra $10 because a valid unilateral contract existed. C) Assuming the unforeseen circumstances rule is inapplicable, Yolanda is not entitled to the extra $10 because she had a preexisting duty to bathe and groom Fluffy for $20. D) Assuming the unforeseen circumstances rule is inapplicable, Yolanda is not entitled to the extra $10 because Wendy's promise to pay $30 was illusory. E) Assuming the unforeseen circumstances rule is inapplicable, Yolanda is not entitled to the extra $10 because past consideration was involved.
44) Felipe contracts with Minnetonka Dozers, LLC (Minnetonka) to raze his old building for $12,000. Once Minnetonka begins the work, its employees discover asbestos in the building. Asbestos is hazardous and difficult to remove for environmental and safety reasons, and this will result in an additional $15,000 labor expense. Minnetonka refuses to complete the job until Felipe agrees to pay the additional $15,000. Felipe agrees. Is the contract modification enforceable? A) Yes, since courts consider this a foreseeable per se circumstance B) Yes, since courts consider this an unforeseen circumstance C) Yes, since both parties agreed to the contract modification D) No, since Minnetonka had a preexisting duty to destroy the building E) No, since Minnetonka gave past consideration and was under a moral obligation to perform all work associated with razing the building
45) Sally goes to have her hair trimmed and agrees to pay $40 to the stylist. While there, Sally decides that she would also like highlights. The stylist informs her that highlights will cost an additional $30. Sally agrees to the price, gets the highlights, but refuses to pay the extra amount. What is the likely result in a dispute between Sally and the stylist, and why?
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A) The stylist will win because she did additional work in exchange for the extra payment; therefore, Sally's promise was supported by valid consideration. B) The stylist will win because she did additional work in exchange for the extra payment; therefore, a valid unilateral contract existed. C) The stylist will win unless Sally can show that she had previously received both a trim and highlights for $40. If she can prove that she previously received both for $40, the “past expectations” rule applies. D) Sally will win because the stylist had a preexisting duty to have her hair looking its finest. E) Sally will win because there was no valid consideration given in exchange for the highlighting.
46) A dispute over a(n) _____ debt may be settled for less than the full amount if the parties enter into a(n) _____. A) liquidated; novation B) unliquidated; novation C) liquidated; accord and satisfaction D) unliquidated; accord and satisfaction E) liquidated; promissory estoppel
47) Carl contracts with Lemon Cars to buy a car and pay monthly installment payments of $375. This is an example of _____. A) a liquidated debt B) forbearance C) an unliquidated debt D) promissory estoppel E) a preexisting duty
48) Barbara and Julie’s Catering are in a dispute about a catering bill. Barbara believes the amount should only be $750 but Julie’s Catering charged her $900. This is an example of _____.
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A) an illusory promise B) promissory estoppel C) a liquidated debt D) an unliquidated debt E) a unilateral contract
49) How can parties who are in a dispute over an unliquidated debt settle for less than the full amount? A) Enter into an accord and satisfaction B) Propose a counteroffer C) Factor (sell) the debt to a third party D) Acknowledge promissory estoppel E) Acknowledge past consideration
50)
A new agreement to pay less than the creditor claims is owed is called a(n) _____. A) satisfaction B) accord C) voluntary dismissal without prejudice D) written compromise E) written acknowledgement
51) When an accord and satisfaction is at issue, the _____ is the debtor’s payment of the reduced amount. A) satisfaction B) accord C) accord and satisfaction D) factor E) bond
52)
Which of the following is true regarding a valid accord and satisfaction?
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A) When the amount agreed upon is paid, the debt is fully discharged. B) When the amount agreed upon is paid, the debt is fully discharged except for any late charges due under the original agreement. C) When the amount agreed upon is paid, the debt is fully discharged except for any interest due under the original agreement. D) When the amount agreed upon is paid, the debt is fully discharged except for any late charges and any interest due under the original agreement. E) When the amount agreed upon is paid, the debt is fully discharged except for any late charges or interest due under the original agreement, or for any reasonable attorney’s fees the creditor has accumulated in his or her attempt to collect the debt.
53) Which of the following is a valid Uniform Commercial Code (UCC) rule regarding checks marked "paid-in-full"? A) If a business inadvertently cashes a check marked “paid-in-full,” the business has 30 days from the date it cashed the check to offer repayment in the same amount to the debtor and avoid an accord and satisfaction. B) If a business inadvertently cashes a check marked “paid-in-full,” the business has 60 days from the date it cashed the check to offer repayment in the same amount to the debtor and avoid an accord and satisfaction. C) If a business inadvertently cashes a check marked “paid-in-full,” the business has 90 days from the date it cashed the check to offer repayment in the same amount to the debtor and avoid an accord and satisfaction. D) If a business inadvertently cashes a check marked “paid-in-full,” the business has 120 days from the date it cashed the check to offer repayment in the same amount to the debtor and avoid an accord and satisfaction. E) If a business inadvertently cashes a check marked “paid-in-full,” the business has no recourse, and the debt is legally satisfied and discharged.
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54) Garage sale. Richard, who is cleaning out his garage, offers to sell Dawn a used computer for $200. Dawn replies that "I'll think about it and buy it if I decide to do so." Richard also calls Denise and offers to give Denise a used business law book. She is excited to receive the book and tells him that she will pick it up the next day. Richard also agrees to sell a communications book for $50 to Jill who promises to pick it up the next day. Meanwhile, Sam comes to visit, offers Richard $20 for the business law book and Richard sells it to him. Sam also offers Richard $50 for the used computer. Richard sells it to Sam because he does not expect to hear from Dawn. Sam sees the communications book and offers Richard $60 for it. Richard decides to forget about Jill and proceeds to sell the book to Sam for $60. Denise is very angry because Richard did not save the book for her and claims that he breached a contract because she had accepted his offer. Jill is also angry because Richard sold the communications book and informs him that he breached the contract he had with her. Exactly 31 days later, Dawn tells Richard that she would like the computer. She tells him that her response constituted consideration in that it bound him to an option contract and that he should have awaited her final decision. Richard tells Sam that he needs to return everything for a full refund. Sam refuses. Which of the following best describes Dawn's statement that she would think about it and buy the computer if she decided to do so? A) It is an illusory promise. B) It is a valid promise. C) It is a promise sufficient to require Richard to consult with her prior to selling the computer to someone else. D) It is a promise sufficient to require Richard to consult with her prior to selling the computer to someone else, but only for 30 days. E) It is a real promise.
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55) Garage sale. Richard, who is cleaning out his garage, offers to sell Dawn a used computer for $200. Dawn replies that "I'll think about it and buy it if I decide to do so." Richard also calls Denise and offers to give Denise a used business law book. She is excited to receive the book and tells him that she will pick it up the next day. Richard also agrees to sell a communications book for $50 to Jill who promises to pick it up the next day. Meanwhile, Sam comes to visit, offers Richard $20 for the business law book and Richard sells it to him. Sam also offers Richard $50 for the used computer. Richard sells it to Sam because he does not expect to hear from Dawn. Sam sees the communications book and offers Richard $60 for it. Richard decides to forget about Jill and proceeds to sell the book to Sam for $60. Denise is very angry because Richard did not save the book for her and claims that he breached a contract because she had accepted his offer. Jill is also angry because Richard sold the communications book and informs him that he breached the contract he had with her. Exactly 31 days later, Dawn tells Richard that she would like the computer. She tells him that her response constituted consideration in that it bound him to an option contract and that he should have awaited her final decision. Richard tells Sam that he needs to return everything for a full refund. Sam refuses. Which of the following is true regarding Dawn's statement that her response was sufficient consideration to bind Richard to an option contract and that he should have awaited her final decision? A) Dawn is correct. Her statement bound him to an option contract, and he should have awaited her final decision. B) Dawn is incorrect that her response bound Richard to an option contract, but she is correct that he should have awaited her final decision. C) Dawn is correct that her response bound Richard to an option correct, but she is incorrect that he should have awaited her final decision. D) Dawn is correct that her statement bound him to an option contract, but he should have awaited her final decision only if she can prove that they have had significant business dealings in the past. E) Dawn is incorrect on both counts. Her statement did not create an option contract nor was Richard bound to await her final decision.
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56) Garage sale. Richard, who is cleaning out his garage, offers to sell Dawn a used computer for $200. Dawn replies that "I'll think about it and buy it if I decide to do so." Richard also calls Denise and offers to give Denise a used business law book. She is excited to receive the book and tells him that she will pick it up the next day. Richard also agrees to sell a communications book for $50 to Jill who promises to pick it up the next day. Meanwhile, Sam comes to visit, offers Richard $20 for the business law book and Richard sells it to him. Sam also offers Richard $50 for the used computer. Richard sells it to Sam because he does not expect to hear from Dawn. Sam sees the communications book and offers Richard $60 for it. Richard decides to forget about Jill and proceeds to sell the book to Sam for $60. Denise is very angry because Richard did not save the book for her and claims that he breached a contract because she had accepted his offer. Jill is also angry because Richard sold the communications book and informs him that he breached the contract he had with her. Exactly 31 days later, Dawn tells Richard that she would like the computer. She tells him that her response constituted consideration in that it bound him to an option contract and that he should have awaited her final decision. Richard tells Sam that he needs to return everything for a full refund. Sam refuses. Which of the following is true regarding Denise's claim that Richard breached a contract with her because Richard did not save the book for her after she had accepted his offer? A) Denise is correct. B) Denise is correct, but only if she can show that she had given past consideration in other dealings with Richard. C) Denise is correct, but only if she can show that Richard did not really need the money. D) Denise is incorrect because her acceptance was illusory. E) Denise is incorrect because she did not provide any consideration.
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57) Garage sale. Richard, who is cleaning out his garage, offers to sell Dawn a used computer for $200. Dawn replies that "I'll think about it and buy it if I decide to do so." Richard also calls Denise and offers to give Denise a used business law book. She is excited to receive the book and tells him that she will pick it up the next day. Richard also agrees to sell a communications book for $50 to Jill who promises to pick it up the next day. Meanwhile, Sam comes to visit, offers Richard $20 for the business law book and Richard sells it to him. Sam also offers Richard $50 for the used computer. Richard sells it to Sam because he does not expect to hear from Dawn. Sam sees the communications book and offers Richard $60 for it. Richard decides to forget about Jill and proceeds to sell the book to Sam for $60. Denise is very angry because Richard did not save the book for her and claims that he breached a contract because she had accepted his offer. Jill is also angry because Richard sold the communications book and informs him that he breached the contract he had with her. Exactly 31 days later, Dawn tells Richard that she would like the computer. She tells him that her response constituted consideration in that it bound him to an option contract and that he should have awaited her final decision. Richard tells Sam that he needs to return everything for a full refund. Sam refuses. Which of the following is true regarding Jill's claim that by selling the communications book for a higher price, Richard breached the contract he had with her? A) Jill is correct. B) Jill is correct, but only if she can establish that she had prior dealings with Richard. C) Jill is correct, but only if she can establish that she had provided past consideration in addition to the amount she agreed to pay for the book. D) Jill is incorrect because her acceptance was illusory. E) Jill is incorrect because the amount she agreed to pay was significantly less than the fair market value of the book; as a result, it did not constitute valid consideration.
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58) Garage sale. Richard, who is cleaning out his garage, offers to sell Dawn a used computer for $200. Dawn replies that "I'll think about it and buy it if I decide to do so." Richard also calls Denise and offers to give Denise a used business law book. She is excited to receive the book and tells him that she will pick it up the next day. Richard also agrees to sell a communications book for $50 to Jill who promises to pick it up the next day. Meanwhile, Sam comes to visit, offers Richard $20 for the business law book and Richard sells it to him. Sam also offers Richard $50 for the used computer. Richard sells it to Sam because he does not expect to hear from Dawn. Sam sees the communications book and offers Richard $60 for it. Richard decides to forget about Jill and proceeds to sell the book to Sam for $60. Denise is very angry because Richard did not save the book for her and claims that he breached a contract because she had accepted his offer. Jill is also angry because Richard sold the communications book and informs him that he breached the contract he had with her. Exactly 31 days later, Dawn tells Richard that she would like the computer. She tells him that her response constituted consideration in that it bound him to an option contract and that he should have awaited her final decision. Richard tells Sam that he needs to return everything for a full refund. Sam refuses. Which of the following is true regarding the dispute between Richard and Sam regarding whether Sam must return anything? A) Sam must return the computer only. B) Sam must return the business law book only. C) Sam must return the communications book only. D) Sam must return the computer, the business law book, and the communications book. E) Sam does not legally have to return anything.
59) Bank Robbery. Victor robbed Safe Bank of a significant sum of cash. Safe Bank offered a reward of $10,000 for anyone who captured or provided information leading to the capture of Victor. Ted, a police officer in town, promised Safe Bank officials that he would apprehend Victor. While on duty, Ted arrested Victor at a hamburger joint in town. He found Victor based upon a hunch he had after Ursula, who dated Victor, told him about various places Victor enjoyed eating. The bank refuses to pay either Ursula or Ted any of the reward money. Which of the following is true regarding the offer of the reward?
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A) It was made in the context of a bilateral contract that could only be accepted by the offeree’s promise as consideration. B) It was made in the context of a bilateral contract that could only be accepted by the offeree’s performance as consideration. C) It was made in the context of a bilateral contract that could be accepted by the offeree’s promise or performance as consideration. D) It was made in the context of a unilateral contract that could only be accepted by the offeree’s promise as consideration. E) It was made in the context of a unilateral contract that could only be accepted by the offeree’s performance as consideration.
60) Bank Robbery. Victor robbed Safe Bank of a significant sum of cash. Safe Bank offered a reward of $10,000 for anyone who captured or provided information leading to the capture of Victor. Ted, a police officer in town, promised Safe Bank officials that he would apprehend Victor. While on duty, Ted arrested Victor at a hamburger joint in town. He found Victor based upon a hunch he had after Ursula, who dated Victor, told him about various places Victor enjoyed eating. The bank refuses to pay either Ursula or Ted any of the reward money. In a lawsuit between the bank and Ted regarding the reward funds, who is likely to prevail and why? A) The bank is likely to prevail because Ted only provided past consideration. B) The bank is likely to prevail because Ted had a preexisting duty to catch Victor. C) The bank is likely to prevail because Ted's promise to catch Victor was an illusory promise. D) Ted is likely to prevail because his promise to catch Victor resulted in a binding bilateral contract. E) Ted is likely to prevail because an enforceable unilateral contract arose from his performance.
61) Bank Robbery. Victor robbed Safe Bank of a significant sum of cash. Safe Bank offered a reward of $10,000 for anyone who captured or provided information leading to the capture of Victor. Ted, a police officer in town, promised Safe Bank officials that he would apprehend Victor. While on duty, Ted arrested Victor at a hamburger joint in town. He found Victor based upon a hunch he had after Ursula, who dated Victor, told him about various places Victor enjoyed eating. The bank refuses to pay either Ursula or Ted any of the reward money. In a lawsuit between the bank and Ursula regarding the reward funds, who is likely to prevail and why? Version 1
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A) The bank is likely to prevail because Ursula only provided past consideration. B) The bank is likely to prevail because Ursula since she had a conflict of interest by having dated Victor. C) The bank is likely to prevail because no valid bilateral contract existed. D) Ursula is likely to prevail because a valid bilateral contract existed. E) Ursula is likely to prevail because a valid unilateral contract existed, and she accepted the bank’s reward offer.
62) Marcy's Mom. Marcy's mother, Sue, did not want her to date until she was older. She also wanted Marcy to attend law school. Just before Marcy started her freshman year in college, Sue told Marcy that if Marcy would refrain from dating until she received her law degree, then Sue would pay off all of Marcy's school loans and throw in an extra $50,000. Marcy agrees and states, "Thanks, Mom, and by the way, when I graduate I'm throwing you a big party for all you've done for me!" Sue smiles and hugs Marcy. Marcy finished law school and asked for payment of her loans, the $50,000 in cash, and for a car. Sue said, "No way - I know you went out on some dates during law school, and I never agreed on the car." Marcy said those were just study nights and that her mother had never objected to Marcy's frequent statements that she wanted a car upon graduation. Sue asks about the party. Marcy tells her that she is nuts because there is no way Marcy can afford a party since Sue has backed out of the deal. After some serious negotiation Marcy and Sue settled their dispute with Sue agreeing to pay for half of Marcy's school loans and for all the expenses of Marcy's upcoming wedding, and to forget about Marcy’s throwing a party for her. Was the agreement between Marcy and Sue that Sue would pay Marcy's school loans and throw in an extra $50,000 if Marcy refrained from dating until she received a law degree sufficiently supported by consideration? A) Yes, sufficient consideration existed to support the agreement. B) No, because the agreement involved an exchange of illusory promises. C) No, because refraining from dating and going to school does not have monetary value and therefore does not constitute valid consideration. D) No, because close relatives are involved. E) No, because the consideration was inadequate.
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63) Marcy's Mom. Marcy's mother, Sue, did not want her to date until she was older. She also wanted Marcy to attend law school. Just before Marcy started her freshman year in college, Sue told Marcy that if Marcy would refrain from dating until she received her law degree, then Sue would pay off all Marcy's school loans and throw in an extra $50,000. Marcy agrees and states, "Thanks, Mom, and by the way, when I graduate I'm throwing you a big party for all you've done for me!" Sue smiles and hugs Marcy. Marcy finished law school and asked for payment of her loans, the $50,000 in cash, and for a car. Sue said, "No way - I know you went out on some dates during law school, and I never agreed on the car." Marcy said those were just study nights and that her mother had never objected to Marcy's frequent statements that she wanted a car upon graduation. Sue asks about the party. Marcy tells her that she is nuts because there is no way Marcy can afford a party since Sue has backed out of the deal. After some serious negotiation Marcy and Sue settled their dispute with Sue agreeing to pay for half of Marcy's school loans and for all the expenses of Marcy's upcoming wedding, and to forget about Marcy’s throwing a party for her. Was there sufficient consideration to support Marcy's agreement to throw a party for Sue? A) Yes, sufficient consideration was present. B) No, there was insufficient consideration because Sue did not promise anything in exchange. C) No, there was insufficient consideration because Marcy's agreement was illusory. D) No, because throwing a party does not have monetary value and therefore does not constitute valid consideration. E) No, because close relatives are involved.
64) Marcy's Mom. Marcy's mother, Sue, did not want her to date until she was older. She also wanted Marcy to attend law school. Just before Marcy started her freshman year in college, Sue told Marcy that if Marcy would refrain from dating until she received her law degree, then Sue would pay off all Marcy's school loans and throw in an extra $50,000. Marcy agrees and states, "Thanks, Mom, and by the way, when I graduate I'm throwing you a big party for all you've done for me!" Sue smiles and hugs Marcy. Marcy finished law school and asked for payment of her loans, the $50,000 in cash, and for a car. Sue said, "No way - I know you went out on some dates during law school, and I never agreed on the car." Marcy said those were just study nights and that her mother had never objected to Marcy's frequent statements that she wanted a car upon graduation. Sue asks about the party. Marcy tells her that she is nuts because there is no way Marcy can afford a party since Sue has backed out of the deal. After some serious negotiation Marcy and Sue settled their dispute with Sue agreeing to pay for half of Marcy's school loans and for all the expenses of Marcy's upcoming wedding, and to forget about Marcy’s throwing a party for her. What type of alleged debt was involved in the dispute between Marcy and Sue involving the school loans, additional funds, car, and party? Version 1
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A) Liquidated B) Unliquidated C) Non-negotiable D) Secured E) Liquidated with regard to the school loans, additional funds, and car; non-negotiable with regard to the party.
65) Marcy's Mom. Marcy's mother, Sue, did not want her to date until she was older. She also wanted Marcy to attend law school. Just before Marcy started her freshman year in college, Sue told Marcy that if Marcy would refrain from dating until she received her law degree, then Sue would pay off all Marcy's school loans and throw in an extra $50,000. Marcy agrees and states, "Thanks, Mom, and by the way, when I graduate I'm throwing you a big party for all you've done for me!" Sue smiles and hugs Marcy. Marcy finished law school and asked for payment of her loans, the $50,000 in cash, and for a car. Sue said, "No way - I know you went out on some dates during law school, and I never agreed on the car." Marcy said those were just study nights and that her mother had never objected to Marcy's frequent statements that she wanted a car upon graduation. Sue asks about the party. Marcy tells her that she is nuts because there is no way Marcy can afford a party since Sue has backed out of the deal. After some serious negotiation Marcy and Sue settled their dispute with Sue agreeing to pay for half of Marcy's school loans and for all the expenses of Marcy's upcoming wedding, and to forget about Marcy's throwing a party for her. In reaching a settlement, Marcy and Sue entered into a(n) _____. A) novation B) promissory estoppel C) accord and novation D) novation and satisfaction E) accord and satisfaction
66)
What are the elements of promissory estoppel?
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A) One party makes a promise knowing the other party will not rely on it; the other party does not rely on the promise; and the only way to avoid injustice is to enforce the promise B) One party makes a promise knowing the other party will rely on it; the other party does rely on the promise; and the only way to enforce the contract is to require specific performance C) Money (or other property of value); a promise; the performance of an act called for by the agreement; and forbearance D) One party makes a promise knowing the other party will rely on it; the other party does rely on the promise; and the only way to avoid injustice is to enforce the promise E) Real and/or personal property given as consideration to enforce the contract; an exchange of mutual promises; and the performance of an act called for by the agreement
67) Fredrick sold his car to Thomas for $4,000. The car’s actual value is approximately $10,000. In retrospect, Fredrick is upset with the deal. Can Fredrick either get his car back from Thomas or recover from him the monetary difference ($6,000) accounting for the car’s actual value? A) Yes, since this is obviously a bad bargain B) Yes, but Fredrick can only recover from Thomas the monetary difference ($6,000) accounting for the car’s actual value; he cannot get his car back C) Yes, but Fredrick can only get his car back from Thomas; he cannot recover the monetary difference ($6,000) representing the car’s actual value D) No, this is simply a bad bargain on Fredrick’s part E) No, because the difference between the contract price for the car and the car’s actual value, $6,000, does not exceed the $10,000 amount required for a remedy pursuant to Article 2 of the Uniform Commercial Code (UCC)
68) Peter indicates to Paul that if he will write a number-one hit song, Peter will think about making Paul his sole writing contributor. This is an example of _____. A) an illusory promise B) a quasi-contract C) a liquidated debt D) a unilateral contract E) past consideration
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69) Elizabeth, David’s grandmother, was in ill health. David promised Elizabeth that she could come to his house and stay in a spare bedroom for as long as she needed, and that he would provide basic care for her. Elizabeth agreed. Later, David changed his mind, maintaining that his grandmother’s presence at his house would interfere with his “active lifestyle.” Assuming that Elizabeth took care of David when he was a child, can she successfully sue David for breach of contract? A) Yes, because there was an agreement between the two parties based on a valid offer, a valid acceptance, and mutual consideration B) Yes, because David had a preexisting duty to care for his grandmother C) Yes, because David had a moral obligation to care for his grandmother D) No, since Elizabeth’s care for David when he was a child was past consideration E) No, since Elizabeth’s care for David when he was a child was a preexisting duty
70)
The exception to the preexisting duty rule is _____. A) a bad bargain by the offeree B) new work requested by the offeree C) a money shortage by the offeror D) unforeseen circumstances E) promissory estoppel
71) Julian has a lease agreement with Starwood Apartments, LLC. According to the terms of the lease, he is obligated to pay $650 in rent by the fifth day of every month. The amount Julian pays is _____. A) a liquidated debt B) an unliquidated debt C) past consideration D) a counteroffer E) an illusory debt
72)
John offers Shaun his new mountain bike for $500. In this situation, _____.
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A) John is the offeree and Shaun is the offeror B) John is the offeror and Shaun is the offeree C) John cannot offer the bike to anyone else because this is an option contract D) Shaun cannot counteroffer because John is the master of the offer E) John must wait sixty (60) days for Shaun to respond to the offer
73)
In a _____ contract, the consideration for each promise is a return promise. A) bilateral B) unilateral C) void D) voidable E) statute of frauds
ESSAY. Write your answer in the space provided or on a separate sheet of paper. 74) Define and discuss promissory estoppel, and give an example of when it would be applied.
75) Do you believe that in order to enforce a contract, the law should require a party to give consideration that is similar to or equal in value to what they will receive from the other party? Discuss why or why not.
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76) Henry's boss, Jacob, tells Henry that because he has been such a valuable employee, he will receive an extra week of vacation. When Henry decides to schedule the vacation, he reminds Jacob of his statement. Jacob says that he has changed his mind and that he really cannot afford to let Henry take the extra vacation time. Henry says that Jacob has breached the contract he had with Jacob for an extra vacation week. Who is right and why?
77) Frank is building a home for Debby that under the original contract is to be completed by December 31. Debby found the plans for the home in a publication focusing on unique houses and is excited because it will be the only home of its type in the area. Because he underestimated the time needed for special and unique framing required for Debby's house, Frank tells Debby that he needs to hire additional workers in order to have the home done by that time and that she needs to pay him an extra $10,000. Debby says that she will pay. Frank finishes the home and asks for his $10,000. Debby refuses to pay. What is the likely result if Frank sues? Discuss whether you believe the result is ethical and equitable.
78) Define the terms liquidated debt and unliquidated debt, and discuss when an accord and satisfaction is enforceable.
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Answer Key Test name: Chap 10_5_The Essentials_Kubasek 1) FALSE Consideration is what a person will receive in return for performing a contract obligation. 2) TRUE For a promise to be enforced by the courts, there must be consideration. A court will enforce one party’s promise only if the other party promised something in exchange. 3) FALSE In a bilateral contract (a promise for a promise), the "consideration" for each promise is a return promise. 4) TRUE In a unilateral contract (a promise for an act), one party's consideration is a promise and the other party's consideration is an act. 5) TRUE Forbearance is the promise not to engage in a particular activity. 6) FALSE Forbearance is sufficient consideration for a valid and enforceable contract. 7) TRUE Promissory estoppel is the legal enforcement of an otherwise unenforceable contract due to a party's detrimental reliance on the contract. Promissory estoppel occurs when three conditions are met: a) one party makes a promise knowing the other party will rely on it; b) the other party does rely on the promise; and c) the only way to avoid injustice is to enforce the promise. 8) FALSE Version 1
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One exception to the rule requiring consideration is promissory estoppel. Promissory estoppel occurs when three conditions are met: a) one party makes a promise knowing the other party will rely on it; b) the other party does rely on the promise; and c) the only way to avoid injustice is to enforce the promise. 9) FALSE The court seldom considers adequacy of consideration. This rule means that the court does not weigh whether you made a good bargain. 10) FALSE An illusory promise is not an actual promise. Moreover, an illusory promise is not consideration. 11) TRUE Consideration that was provided before the promise was made, known as past consideration, does not qualify as consideration. 12) TRUE For a court to enforce a promise, both parties must give consideration. There must be bargaining and an exchange. If one party has given nothing in exchange, a court will not enforce the other party’s promise. 13) FALSE A preexisting duty, a promise to do something that you are already obligated to do, is not valid consideration. 14) FALSE An exception to the preexisting-duty rule is that if additional work is needed for an existing contractual duty due to unforeseen circumstances, the promise for the additional work may be valid consideration for a new agreement. 15) FALSE In a liquidated debt, there is no dispute about the fact that money is owed and the amount of money owed. 16) TRUE Version 1
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An accord and satisfaction is an arrangement between contracting parties whereby one of the parties substitutes a different performance for his or her original duty under the contract.The promise to perform the new duty is the accord, and the actual performance of that new duty is the satisfaction. 17) FALSE For an accord and satisfaction to be enforceable, three requirements must be met: a) the debt is unliquidated [i.e., the amount or existence of the debt is in dispute]; b) the creditor agrees to accept as full payment less than the creditor claims is owed; and c) the debtor pays the amount they have agreed on. 18) FALSE According to UCC Section 3-311, if a business inadvertently cashes a paid-in-full check, the business has 90 days from the date it cashed the check to offer repayment in the same amount to the debtor.Once the offer has been made by the business, no accord and satisfaction exists. 19) FALSE In a liquidated debt, there is no dispute about the fact that money is owed, and the amount of money owed. 20) TRUE An accord and satisfaction is an arrangement between contracting parties whereby one of the parties substitutes a different performance for his or her original duty under the contract.The promise to perform the new duty is the accord, and the actual performance of that new duty is the satisfaction. 21) C Consideration is what a person will receive in return for performing a contract obligation. 22) A
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Consideration is what a person will receive in return for performing a contract obligation. 23) D Consideration may be a benefit to the promisor, a detriment to the promisee, a promise to do something, or a promise to refrain from doing something. 24) C In the Hamer v. Sidway case, the New York Court of Appeals concluded that forbearance (i.e., refraining from particular activities) can constitute valid and lawful consideration for a contract. 25) D Forbearance is a promise to refrain from doing something you are legally entitled to do. 26) D In a bilateral contract (a promise for a promise), the consideration for each promise is a return promise. 27) B As a general rule of contract law, for a promise to be enforced by the courts, there must be consideration. 28) A Forbearance is the promise to not engage in particular activities. It is sufficient consideration for a valid and enforceable contract. 29) D In this example, an oral contract was created. Dakiyah’s promise to pay Fernando $300 for the television is her consideration to Fernando. Fernando’s promise to sell Dakiyah the television for $300 is his consideration to Dakiyah. There has been a mutual exchange of something of value—a promise to pay $300 and a promise to sell the television for $300. 30) A Version 1
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In a unilateral contract (a promise for an act), one party's consideration is the promise and the other party's consideration is the act. 31) A One exception to the rule requiring consideration is promissory estoppel. 32) B The legal enforcement of an otherwise unenforceable contract due to a party's detrimental reliance on the contract is promissory estoppel. 33) C Courts seldom considers adequacy of consideration. This means that as a general rule, courts do not weigh whether a contracting party made a good bargain. There is an exception to this rule. If it appears that a debtor sold assets to avoid payment to creditors, the court may set aside each sale and sell the assets to pay creditors. 34) E Performance of a duty you are obligated to do under the law is not good consideration. 35) E Courts seldom consider the adequacy of consideration. There is, however, an exception to this rule. Courts will consider the adequacy of consideration if it appears that a debtor sold assets to avoid payment to creditors. In such a situation, the court may set aside each sale and sell the assets to pay creditors. 36) A The Smith v. Riley case demonstrates that courts will generally not consider the adequacy of consideration. 37) C An illusory promise involves a situation in which a party appears to commit to do something; in reality, however, he or she has not committed to do anything. 38) A Version 1
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An illusory promise is not consideration. 39) D For a court to enforce a promise, both the offeror and the offeree must pledge consideration. 40) D Past consideration is no consideration at all. For a promise to be enforceable, there must be bargaining and an exchange. In this example, there was no exchange. Work done in the past, by definition, has already been performed. 41) E A promise to do something that you are already obligated to do is not valid consideration. 42) B As a general rule of contract law, courts rarely consider the adequacy of consideration pledged and exchanged in a contract. 43) C A promise to do something that you are already obligated to do is not valid consideration. 44) B Exceptions to the preexisting-duty rule include unforeseen circumstances, If unforeseen circumstances cause a party to make a promise regarding an unfinished project, that promise is valid consideration. 45) A If a party to a contract agrees to do additional work (i.e., more than he or she is obligated to do under the contract), the promise is valid consideration. 46) D A dispute over an unliquidated debt may be settled for less than the full amount if the parties enter into an accord and satisfaction. Version 1
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47) A In a liquidated debt, there is no dispute about the fact that money is owed and the amount of money owed. 48) D In an unliquidated debt, the parties either dispute the fact that any money is owed or agree that some money is owed but dispute the amount. 49) A In an unliquidated debt, the parties either dispute the fact that any money is owed or agree that some money is owed but dispute the amount. A dispute over an unliquidated debt may be settled for less than the full amount if the parties enter into an accord and satisfaction. 50) B An accord and satisfaction is an arrangement between contracting parties whereby one of the parties substitutes a different performance for his or her original duty under the contract. In an accord and satisfaction, the “accord” is the new agreement to pay less than the creditor claims. 51) A An accord and satisfaction is an arrangement between contracting parties whereby one of the parties substitutes a different performance for his or her original duty under the contract. In an accord and satisfaction, the “satisfaction” is the payment, by the debtor, of the reduced amount. 52) A For an accord and satisfaction to be enforceable, three requirements must be met: a) the debt is unliquidated [i.e., the amount or the existence of the debt is in dispute]; b) the creditor agrees to accept as full payment less than the creditor claims is owed; and c) the debtor pays the agreedupon amount. When the reduced amount is paid, the debt is fully discharged. 53) C
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If a business inadvertently cashes a check marked “paid-in-full, the business has 90 days from the date it cashed the check to offer repayment in the same amount to the debtor. Once the offer has been made by the business, no accord and satisfaction exists. 54) A An illusory promise is not a promise at all and does not constitute valid consideration. 55) E An illusory promise is not a promise at all and does not constitute valid consideration. 56) E For a promise to be enforced by a court, both parties must pledge consideration. A court will enforce one party’s promise only if the other party pledges something (an act, money, etc.) in exchange. Although Richard offered to give Denise his business law book, Denise pledged nothing in return. At most, Richard has promised to make a gift to Denise, and legally, a donor’s promise to make a gift to a donee is generally unenforceable because by the very nature of a gift, the donee promises nothing in return (i.e., no consideration) for the gift. 57) A A court will enforce one party's promise if the other party promised something (an act, money, etc.) in exchange. Richard promised to sell his communications book to Jill for $50, and Jill agreed to pay Richard $50 for the book. Richard and Jill created a bilateral contract, and in a bilateral contract (a promise for a promise), the consideration for each promise is a return promise. 58) E A court will enforce one party's promise if the other party promised something (an act, money, etc.) in exchange. 59) E Version 1
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In a unilateral contract (a promise for an act), one party's consideration is the promise and the other party's consideration is the act. Safe Bank's $10,000 reward offer was a promise that could only be accepted by an offeree's performance of either capturing or providing information leading to the capture of Victor. 60) B A promise to do something that you are already obligated to do is not valid consideration. Ted, a police officer, has a preexisting duty to apprehend criminals. 61) E In a unilateral contract (a promise for an act), one party's consideration is the promise and the other party's consideration is the act. Safe Bank’s $10,000 reward offer was a promise that could only be accepted by an offeree’s performance of either capturing or providing information leading to the capture of Victor. Ursula provided information that led to Victor’s arrest. 62) A Consideration may consist of a detriment to the promisee. Furthermore, forbearance (refraining from doing something one has the legal right to do) is sufficient consideration for a valid and enforceable contract. Assuming that Marcy only went on study outings and not dates, her forbearance from dating until she received her law degree was the consideration she gave in return for Sue’s agreeing to satisfy all of Marcy’s school loans and pay her an extra $50,000. 63) B Consideration is what a person will receive in return for performing a contract obligation. 64) B In an unliquidated debt, the parties either dispute the fact that any money is owed or agree that some money is owed but dispute the amount. Version 1
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65) E In an unliquidated debt, the parties either dispute the fact that any money is owed or agree that some money is owed but dispute the amount. A dispute over an unliquidated debt may be settled for less than the full amount if the parties enter into an accord and satisfaction. An accord and satisfaction is an arrangement between contracting parties whereby one of the parties substitutes a different performance for his or her original duty under the contract. In an accord and satisfaction, the “accord” is the new agreement to pay less than the creditor claims, and the “satisfaction” is the payment, by the debtor, of the reduced amount. 66) D Promissory estoppel occurs when one party makes a promise knowing the other party will rely on it, the other party does rely on it, and the only way to avoid injustice is to enforce the promise. Student examples involving application of promissory estoppel will vary. One example included in the textbook involved a job applicant who accepted a job offer, moved across the country, and was then informed there was no job for her. As mentioned in the textbook, although promissory estoppel is not applied regularly it can, in the right case, provide a remedy when no other remedy exists. 67) D As a general rule of contract law, courts rarely consider adequacy of consideration. This rule means that courts do not typically determine whether a contracting party made a good bargain. By and large, bad bargains are still enforceable contracts! 68) A An illusory promise is not consideration. 69) D For a court to enforce a promise, both the offeror and the offeree must pledge consideration. Version 1
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70) D An exception to the preexisting-duty rule is that if additional work is needed for an existing contractual duty due to unforeseen circumstances, the promise for the additional work may be valid consideration for a new agreement. 71) A In a liquidated debt, there is no dispute about the fact that money is owed and the amount of money owed. 72) B The person making the offer is the offeror and the person receiving the offer is the offeree. 73) A In a bilateral contract (a promise for a promise), the consideration for each promise is a return promise. 74) Promissory estoppel occurs when one party makes a promise knowing the other party will rely on it, the other party does rely on it, and the only way to avoid injustice is to enforce the promise. Student examples involving application of promissory estoppel will vary. One example included in the textbook involved a job applicant who accepted a job offer, moved across the country, and was then informed there was no job for her. As mentioned in the textbook, although promissory estoppel is not applied regularly it can, in the right case, provide a remedy when no other remedy exists.
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75) Student responses will vary. As a general rule of contract law, courts rarely consider adequacy of consideration. This rule means that courts do not typically determine whether a contracting party made a good bargain. By and large, bad bargains are still enforceable contracts! To some students, it may seem unfair that courts enforce inequitable contracts. However, there would be much less certainty in contract law if the law required the consideration pledged in a bargained-for exchange to be equal in value. 76) Jacob is not required to allow Henry to take an extra week off. The reason is that Henry's past work is considered past consideration, which is not valid consideration for a binding contract. 77) Debby will likely win. Frank had a preexisting contractual duty to complete the project by December 31. As a general rule of contract law, the performance of an existing contractual duty is not valid consideration. Student responses on the ethics issue will vary. 78) In a liquidated debt, there is no dispute about the fact that money is owed and the amount of money owed. In an unliquidated debt, the parties either dispute the fact that any money is owed or agree that some money is owed but dispute the amount. For an accord and satisfaction to be enforceable, three requirements must be met: a) the debt must be unliquidated; b) the creditor must agree to accept as full payment less than the creditor claims is owed; and c) the debtor pays the amount they have agreed on.
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CHAPTER 11 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) In order to have legal capacity to contract, a person must have at least a high school education. ⊚ true ⊚ false
2) Even today, a few states limit the ability of married women to enter into certain kinds of contracts. ⊚ true ⊚ false
3)
Minors are those who are under the age of 18, except in three states. ⊚ true ⊚ false
4) Emancipation occurs when a minor’s parents or legal guardians give up their right to exercise legal control over the minor. ⊚ true ⊚ false
5) In order for a minor to disaffirm a contract, the minor must send written notice of his or her intent to disaffirm. ⊚ true ⊚ false
6) According to the traditional rule, if Sam, a minor, purchased a television from an electronics shop with a $100 down payment on a one-year credit contract and accidentally damaged it a week after he took it home, he could return the television to the store in its damaged condition and tell the owner he was rescinding the contract. Sam would then be entitled to the return of his $100 down payment and would owe no further obligation to the store. ⊚ true ⊚ false
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7)
Disaffirmance by a minor must occur by his or her twenty-first birthday. ⊚ true ⊚ false
8)
In most states, parents are liable for the torts of their minor children. ⊚ true ⊚ false
9)
As a general rule, parents are liable for contracts entered into by their minor children. ⊚ true ⊚ false
10) Once a person reaches the age of majority, he or she may no longer ratify contracts made as a minor. ⊚ true ⊚ false
11) Once a person reaches the age of majority and ratifies a contract made when he or she was a minor, the contract is still voidable until the person is 25 years old. ⊚ true ⊚ false
12) Making regular payments under a contract after reaching the age of majority most likely constitutes implied ratification of the agreement. With implied ratification, however, the contract is still voidable at the election of the former minor, assuming he or she disaffirms the contract within a reasonable time after ratifying it. ⊚ true ⊚ false
13) Contracts made with someone who has been adjudicated insane are legal as long as the court is aware that the adjudicated person is making the contract.
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⊚ ⊚
true false
14) As a general rule, most states follow the Restatement of Contracts, which provides that contracts of an intoxicated person are void. ⊚ true ⊚ false
15) A contract of an intoxicated person for necessaries will be enforced for the manufacturer’s suggested retail price of the necessaries. ⊚ true ⊚ false
16) If a contract is considered contrary to law, it will still be enforced if the contract is written but not oral. ⊚ true ⊚ false
17) Sabbath laws are also referred to as red laws, relating to the practice of Catholic cardinals wearing red to signify the blood of Christ. ⊚ true ⊚ false
18) A covenant not to competecan be an agreement involving the sale of an ongoing business or noncompetition in employment. ⊚ true ⊚ false
19)
All exculpatory clauses are illegal as a matter of law. ⊚ true ⊚ false
20)
In pari delicto means "comparable taste."
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⊚ ⊚
true false
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 21) A person who has legal _____ to contract is one who has the mental ability to understand his or her rights and obligations under a contract. A) affirmance B) capacity C) ratification D) construction E) assent
22) If a potential contracting party is concerned with another person’s mental ability to contract, she is concerned with the person's _____. A) mens rea B) intelligence quotient C) capacity D) actus reus E) consideration
23) Belinda has been adjudicated insane by a court. If she makes a contract, the contract would be _____. A) void B) voidable C) ratified D) conditional E) unilateral
24) A contract with a person who has some sort of mental defect that prevents that person from being able to legally contract means that he lacks _____.
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A) consideration B) capacity C) mens rea D) promissory estoppel E) actus reus
25) Before modern day common law changed, which people besides minors and insane persons historically were unable to contract? A) Uneducated people B) Married women C) Landowners D) Government officials E) Those under the age of thirty (30)
26)
The age at which most states consider someone a minor is _____ years old. A) eighteen (18) B) nineteen (19) C) twenty (20) D) twenty-one (21) E) twenty-five (25)
27) Tulum is a sixteen-year-old who has sought and received full legal capacity to contract from the court. This means that Tulum is _____. A) emancipated B) capacitated C) ratified D) certified E) bona fide
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28) Which of the following occurs when a minor's parents or legal guardians give up their right to exercise legal control over the minor? A) Ratification B) Disaffirmance C) Emancipation D) Subrogation E) Reaffirmance
29) Georgia and Mitchell are seventeen (17) years old. Their parents gave them the right to marry. In most states, this means that Georgia and Mitchell can contract because they became _____. A) emancipated B) capacitated C) ratified D) certified E) bona fide
30) Oliver is a sixteen-year-old who would like to disaffirm his automobile purchase contract with Henry’s Used Cars, LLC (Henry’s). What must Oliver do to disaffirm? A) He must first make all his car payments to Henry’s. B) He must give Henry’s ninety (90) days written notice. C) He must give Henry’s thirty (30) days written notice. D) He must manifest an intention to rescind the contract either by words or by actions. E) He may not disaffirm the contract, since only Henry’s has the right to disaffirm.
31) Because their contracts are _____, minors have the right, until a reasonable time after reaching the age of majority, to _____, or avoid, their contracts.
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A) void; disaffirm B) void; affirm C) void; rescind D) voidable; disaffirm E) voidable; remand
32) Which of the following is true regarding how Chinese law treats contracts entered into by minors? A) Because parents are considered responsible for their children's actions, parents are held responsible for any contracts entered into by their minor children. B) Minors are held responsible only for contracts involving necessities. C) Minors are not held responsible for any contracts, and contracting with a minor is illegal, subjecting the adult contracting party to a term of imprisonment. D) Children between ten (10) and eighteen (18) are deemed competent for entering into certain contracts, appropriate to each child's mental state. E) Children are held responsible only for contracts involving educational expenses.
33)
If a minor chooses to disaffirm a contract, what is the obligation placed on the minor?
A) Minors do not have a right to disaffirm a contract if the contract has existed for more than ninety (90) days. B) In all states, minors can return the goods or consideration received for a full refund. C) In all states, a minor must return any consideration in his control, make restitution, and pay for any loss in value of the collateral. D) States vary on what minors must do upon disaffirmance of a contract. E) The obligations of a minor on disaffirmance depend on her parent’s socioeconomic status.
34) Since a minor’s disaffirmance of a contract must occur before or within a reasonable time after the minor reaches the age of majority, what constitutes a “reasonable time?”
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A) Federal statutory law requires that the former minor must disaffirm the contract within three (3) months after reaching the age of majority. B) State laws vary, but the minimum time is three (3) months. C) A reasonable time is determined on a case-by-case basis. D) Within one (1) year after reaching the age of majority. E) Whatever the former minor deems equitable under the circumstances of the case.
35) As a general rule, most states will not allow a minor to disaffirm a contract for which of the following? A) Life insurance B) Health insurance C) Psychological counseling D) Life insurance, health insurance, or psychological counseling E) Health insurance or psychological counseling, but a minor does have the right to disaffirm a contract for life insurance, because life insurance premiums have a disparate impact (actuarially) on minors
36)
What is the purpose of the minor’s right to disaffirm contracts?
A) To reduce the judicial caseload for breach of contract actions B) To allow minors a windfall in terms of keeping property without paying for it C) To punish adults who contract with minors D) To give minors superior bargaining power in negotiating contracts E) To protect the minor from competent parties that might otherwise take advantage of the minor
37)
What is the legal significance in most states when a minor misrepresents his age?
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A) If a competent party relies on the misrepresentation in good faith, the minor forfeits the right to disaffirm the agreement. B) The minor must restore the competent party to that party's pre-contractual position before disaffirming. C) The minor may disaffirm the contract, but the competent party has the right to sue the minor in tort and recover damages for fraud. D) The misrepresentation does not affect the minor's right to disaffirm the contract. E) The misrepresentation results in the minor receiving a return of only the monetary consideration (if any) he or she paid to the other contracting party.
38) A contract that supplies the minor with basic needs such as food, clothing, and shelter is called a(n) _____. A) unilateral contract B) implied contract C) contract for a necessary D) fundamentals contract E) contract of adhesion
39) Which of the following is incorrect regarding contracts for necessaries entered into by minors? A) A minor cannot disaffirm a contract for necessaries. B) A minor can disaffirm a contract for necessaries, but the minor is still liable for the reasonable value of the necessary. C) A contract for a necessary is a contract that supplies the minor with the basic necessities of life. D) The purpose of the limitation on the minor's right to disaffirm a contract for necessaries is to ensure that minors can obtain the essential necessities of life when their parents will not provide them. E) Whether something is considered a necessary relates to whether the minor's parents are willing to provide the minor the item in question.
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40) Which of the following occurs when a person reaches the age of majority and states, either orally or in writing, that he or she intends to be bound by the contact entered into as a minor? A) Implied ratification B) Express ratification C) Express novation D) Implied novation E) Disaffirmance
41) Hillary and Dillon enter into a contract whereby Hillary, seventeen (17) years old, purchases a computer and printer from Dillon. Dillon agrees to finance the contract and allows Hillary to pay $100 per month. When Hillary turns eighteen (18) years old, what must she do to ratify the contract? A) She must give Dillon written notice that she intends to keep the computer. B) She must return the computer and allow Dillon to refinance it for a higher monthly payment, since she is now an adult. C) She must call Dillon and expressly agree to keep paying the $100 per month. D) She must give Dillon written notice and pay the entire amount due on the contract. E) She can ratify the contract by continuing to pay $100 per month with no other requirement.
42) Which of the following is true regarding the ability of persons suffering from a mental illness to enter into a binding contract?
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A) Persons suffering from a mental illness never have capacity to enter into a binding contract. B) Persons suffering from a mental illness have full capacity to enter into a binding contract, so long as they do not present a danger to themselves or others. C) Persons suffering from a mental illness have full capacity to enter into a binding contract, so long as they inform the other party that they are either in, or in the process of seeking, professional treatment. D) Persons suffering from a mental illness may have full, limited, or no legal capacity to enter into a binding contract, depending on the nature and extent of their mental deficiency. E) Persons who suffer from a mental illness always have full capacity to enter into a binding contract.
43)
Guardians may be appointed for which of the following individuals?
A) Only those who have been adjudicated insane B) Only those who have been adjudicated habitual drunkards C) Only those whose judgment has been impaired because of a condition such as Alzheimer's D) Those who have been adjudicated insane or those whose judgment has been impaired because of a condition such as Alzheimer's, but not those who have been adjudicated habitual drunkards E) Those who have been adjudicated insane, those whose judgment has been impaired because of a condition such as Alzheimer's, and those who have been adjudicated habitual drunkards
44)
Which of the following is true if a contract is disaffirmed on the basis of intoxication?
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A) Each party to the contract must return the other to the condition he or she was in at the time the contract was formed. B) Only the intoxicated person must be returned to the condition he or she was in at the time the contract was formed. C) Any party other than the intoxicated person must be returned to the condition he or she was in at the time the contract was formed. D) So long as the contract was objectively fair, neither party must be returned to the condition he or she was in prior to the time the contract was formed. E) So long as the contract was subjectively fair in the opinion of the intoxicated party, neither party must be returned to the condition he or she was in prior to the time the contract was formed.
45)
If a contract is deemed unenforceable, what remedy is available to the parties? A) Compensatory damages only B) Compensatory and consequential damages C) None D) Compensatory and punitive damages, but not consequential damages E) Punitive damages only
46)
If a contract is _____, it is unenforceable. A) against public policy B) between two merchants C) between a merchant and a non-merchant D) ratified E) voidable
47)
Which of the following is true regarding an agreement to commit a crime or a tort?
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A) An agreement to commit a crime is enforceable, but an agreement to commit a tort is unenforceable. B) An agreement to commit a tort is enforceable, but an agreement to commit a crime is unenforceable. C) An agreement to commit a crime is unenforceable, and an agreement to commit a tort is unenforceable unless a business tort is involved, in which case the agreement is enforceable as an implied-in-fact contract. D) An agreement to commit a crime is unenforceable except an agreement to commit a white-collar crime, which is enforceable as an implied-in-law contract; and an agreement to commit a tort is unenforceable unless a business tort is involved, in which case the agreement is enforceable as an implied-in-fact contract. E) Both an agreement to commit a crime and an agreement to commit a tort are unenforceable.
48) If a legal contract is formed and the subject of the contract then becomes illegal under a new statute, the contract is _____. A) discharged B) enforceable C) implied-in-law D) executed E) executory
49) In every state, people who work for certain professions must obtain a(n) _____ to practice their craft. A) exculpatory agreement B) indemnification agreement C) judicial order D) license E) disclaimer
50)
Which of the following are the two main purposes of professional licensing statutes?
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A) To give the government an avenue by which to regulate specific industries and to temper the effectiveness of free enterprise B) To protect the public’s health, safety, and welfare and to temper the effectiveness of free enterprise C) To give the government an avenue by which to regulate specific industries and to tax professionals D) To protect the public’s health, safety, and welfare and to tax professionals E) To give the government an avenue by which to regulate specific industries and to protect the public’s health, safety, and welfare
51) Johnathan’s Plumbing, LLC (Johnathan’s) uses only unlicensed plumbers in its business operations. If a contract is entered into with Johnathan’s, the agreement would likely be deemed _____. A) unconscionable B) avoidable at the election of either party C) illegal and unenforceable D) enforceable E) valid, subject to Johnathan’s payment of a statutory fine
52) Badger Bank and Trust (Badger) is a community bank in Oshkosh, Wisconsin. Badger loaned $5,000 to Plessy and charged him an interest rate that was five (5) percent higher than the statutorily-allowed maximum. This loan would be considered _____. A) usurious B) fraudulent C) valid, since Badger can determine what potential profit is necessary to compensate it and its owners for the assumed risk D) voidable at the election of Badger E) void at the election of Plessy
53) Which of the following occurs when a party makes a loan at an interest rate exceeding the legal maximum?
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A) Abeyance B) Penury C) A variance D) Usury E) Nullification
54)
How many states engage in at least some regulation of gambling? A) Fifty (50) B) Forty-seven (47) C) Forty (40) D) Thirty-five (35) E) Ten (10)
55) Selina moved to a state that limits the types of business activities in which parties can legally engage on Sundays. This type of law is known as a _____ law. A) Sabbath B) red C) nullification D) usury E) penury
56) Bob is hired to do computer sales for an electronics store. He agrees that if he leaves his employment, he will not work for another computer store within twenty-five miles for a period of two years. This type of agreement is called a(n) _____. A) covenant not to compete B) implied-in-law contract C) quasi-contract D) termination agreement E) public policy agreement
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57) If a contract is largely one-sided in nature, heavily favoring only one party, the contract is considered to be _____. A) conscionable B) unperfected C) unconscionable D) in abeyance E) usurious
58) A party who claims that he or she could not understand contractual terms because of tiny, hard-to-read print on the back of an agreement and the excessive use of legalese is referring to which of the following? A) Substantive unconscionability B) Adhesion conscionability C) Procedural unconscionability D) Commercial impracticability E) An in pari delicto agreement
59)
Which of the following involves overly harsh or lopsided substance in an agreement? A) Substantive unconscionability B) Adhesion conscionability C) Procedural unconscionability D) An exculpatory clause E) An in pari delicto agreement
60) Tow the Line Towing Company, Inc. creates contracts with its clients that are presented on a “take-it-or-leave-it” basis. Courts typically find these types of agreements to be _____. A) holistically unconscionable B) adhesion contracts C) conscionable D) categorically unconscionable E) equitable
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61) A statement releasing one of the parties to an agreement from all liability, regardless of who is at fault or what the injury suffered is, would be referred to as a(n) _____. A) conscionable contract B) contract of adhesion C) in pari delicto agreement D) exculpatory clause E) declaration against interest
62) What was the result in Riley v. Iron Gate Self Storage, the case in which Larry Riley rented a self-storage unit from Iron Gate with an agreement limiting the value of stored contents to $5,000 and a corresponding liability limit of $5,000? A) That the exculpatory clause would be upheld with damages limited to $5,000 B) That the exculpatory clause was unreasonable and violated public policy C) That the exculpatory clause exceeded the statutorily-allowed maximum D) That the exculpatory clause was unenforceable because it was usurious E) That the $1.5 million damage request was justified since Iron Gate should have known that the storage unit contents exceeded $5,000 in value
63)
A(n) _____ contract contains multiple parts that can each be performed separately. A) in pari delicto B) usurious C) adhesion D) executed E) severable
64) A(n) _____ contract is one requiring complete performance by both parties, even if it appears as if the contract contains multiple parts.
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A) adhesion B) divisible C) in pari delicto D) indivisible E) independent
65) Irresponsible Teen. At age 17, in a state in which the age of majority is 18, Sally purchased a prom dress from Formal Stuff. She wore it to the prom and then attempted to return it to the store claiming that she was a minor and that she was entitled to a refund. The dress had clearly been worn and had a purple stain that Sally claimed was from grape juice. Additionally, a few days before she turned 18, Sally purchased a used car from Dings and Dents used cars. She had a deal whereby she paid $100 per month on the car. She drove the car and made payments for fourteen months after she turned 18. Then, she returned the car to Dings and Dents and told them that she wanted all her money back. Dings and Dents claimed the car was a necessity. Sally and her parents claimed that the parents were ready and willing to provide a car to Sally and that she only purchased the car from Dings and Dents because she liked that particular style and color. When purchases of the dress and car were made, the sellers knew that Sally was under the age of 18. Which of the following is true regarding Sally's attempt to return the damaged dress? A) In all states, Sally has the right to keep the dress and get a refund. B) In all states, Sally must return the dress but she has a right to a full refund. C) Regardless of what she does with the dress, Sally has no right to a refund in any state. D) In some states, Sally would have an obligation of restitution to the store. E) In all states, Sally would have an obligation of restitution to the store.
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66) Irresponsible Teen. At age 17, in a state in which the age of majority is 18, Sally purchased a prom dress from Formal Stuff. She wore it to the prom and then attempted to return it to the store claiming that she was a minor and that she was entitled to a refund. The dress had clearly been worn and had a purple stain that Sally claimed was from grape juice. Additionally, a few days before she turned 18, Sally purchased a used car from Dings and Dents used cars. She had a deal whereby she paid $100 per month on the car. She drove the car and made payments for fourteen months after she turned 18. Then, she returned the car to Dings and Dents and told them that she wanted all her money back. Dings and Dents claimed the car was a necessity. Sally and her parents claimed that the parents were ready and willing to provide a car to Sally and that she only purchased the car from Dings and Dents because she liked that particular style and color. When purchases of the dress and car were made, the sellers knew that Sally was under the age of 18. In the dispute between Sally and the owner of Dings and Dents, which of the following is true regarding the defense of Sally and her parents that the car was a necessary? A) The claim will have no effect because the law does not recognize the concept of necessaries when minors are involved. B) Social status is always irrelevant in addressing a claim that an item was a necessary. C) Whether or not parents would buy the item at issue is irrelevant in addressing a claim that an item was a necessary. D) A minor may not disaffirm a contract for a necessary. E) Even if a minor is allowed to disaffirm a contract for a necessary, the minor will still be held liable for the reasonable value of the necessary.
67) Irresponsible Teen. At age 17, in a state in which the age of majority is 18, Sally purchased a prom dress from Formal Stuff. She wore it to the prom and then attempted to return it to the store claiming that she was a minor and that she was entitled to a refund. The dress had clearly been worn and had a purple stain that Sally claimed was from grape juice. Additionally, a few days before she turned 18, Sally purchased a used car from Dings and Dents used cars. She had a deal whereby she paid $100 per month on the car. She drove the car and made payments for fourteen months after she turned 18. Then, she returned the car to Dings and Dents and told them that she wanted all her money back. Dings and Dents claimed the car was a necessity. Sally and her parents claimed that the parents were ready and willing to provide a car to Sally and that she only purchased the car from Dings and Dents because she liked that particular style and color. When purchases of the dress and car were made, the sellers knew that Sally was under the age of 18. In the dispute between Sally and the owner of Dings and Dents, which of the following is true regarding any claim that Sally affirmed the contract?
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A) So long as, after reaching the age of majority, Sally did not state orally or in writing that she intended to be bound by the contract, then she did not commit the type of express ratification required for her to be bound. B) Sally may have impliedly ratified the contract by making payments for so long after she turned 18. C) An implied ratification occurs when parents agree to accept the debt entered into by a minor. D) If Sally caused any damage whatsoever to the car, she was said to have impliedly ratified the contract. E) Sally was required to expressly ratify the contract before she could be bound to it so long as no damage was done; however, if she did any damage to the car, as a matter of law, she is said to have expressly ratified it.
68) Useless Friend. Charles, who is very gullible, is friends with Bobby. Bobby, who cannot be trusted, decides to try to bind Charles to a contract in Bobby's favor. Bobby has Charles sign a contract promising to wash Bobby's car once a week for a month for $80. The contract incorporated by reference terms on the back. The terms on the back were in very small print and required Charles for one year to cook dinner for Bobby, do his laundry, and clean his apartment. Bobby is also very angry with his former girlfriend, Tessa, and decides to start rumors, that would constitute the tort of defamation, such as that she has a vile disease, cheated on tests, and stole from friends. Bobby wants to enlist the help of Charles but knows that Charles would be hesitant to assist in his endeavors. One evening, however, Charles drank too much beer and was clearly intoxicated - a fact apparent to Bobby. Bobby had him sign a contract agreeing to defame Tessa for $50. When he sobers up, Charles tells Bobby that he was drunk and that he has no intention of defaming Tessa, who also happens to be Charles's new girlfriend. He also finally takes a look at the contract involving work for Bobby and tells Bobby that the contract is outrageous and that he has no intentions of going through with any of it. Which of the following is true under the Restatement of Contracts, Section 16, regarding Charles's claim that he should be able to avoid the contract involving Tessa because he was intoxicated?
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A) Contracts of an intoxicated person are voidable by the intoxicant if the other party had reason to know that because of the intoxicated person's condition, that person was unable to understand the nature and consequences of the transaction or was unable to act in a reasonable manner in relation to the transaction. B) Contracts of an intoxicated person are void if the other party had reason to know that because of the intoxicated person's condition, that person was unable to understand the nature and consequences of the transaction or was unable to act in a reasonable manner in relation to the transaction. C) Contracts of an intoxicated person are enforceable because a person should be bound by his or her actions. D) Contracts of an intoxicated person are void only if it can be proven that the other party was involved in encouraging the abuse of alcohol by the intoxicated person. E) Contracts of an intoxicated person are voidable by the intoxicant only if it can be proven that the other party was involved in encouraging the abuse of alcohol by the intoxicated person.
69) Useless Friend. Charles, who is very gullible, is friends with Bobby. Bobby, who cannot be trusted, decides to try to bind Charles to a contract in Bobby's favor. Bobby has Charles sign a contract promising to wash Bobby's car once a week for a month for $80. The contract incorporated by reference terms on the back. The terms on the back were in very small print and required Charles for one year to cook dinner for Bobby, do his laundry, and clean his apartment. Bobby is also very angry with his former girlfriend, Tessa, and decides to start rumors that would constitute the tort of defamation, such as that she has a vile disease, cheated on tests, and stole from friends. Bobby wants to enlist the help of Charles but knows that Charles would be hesitant to assist in his endeavors. One evening, however, Charles drank too much beer and was clearly intoxicated - a fact apparent to Bobby. Bobby had him sign a contract agreeing to defame Tessa for $50. When he sobers up, Charles tells Bobby that he was drunk and that he has no intention of defaming Tessa, who also happens to be Charles's new girlfriend. He also finally takes a look at the contract involving work for Bobby and tells Bobby that the contract is outrageous and that he has no intentions of going through with any of it. Which of the following is true regarding Charles's claim that he had no obligation to defame Tessa?
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A) Charles is correct in that he could not be legally obligated to commit defamation. B) Charles is correct, but only if it can be proven that the defamation would cause Tessa money damages. C) Charles is correct, but only if it can be proven that the defamation would cause Tessa actual injury. D) Charles is correct, but only if it can be proven that the defamation is undeserved. E) Charles is correct, but only if it can be proven that he had a prior relationship with Tessa.
70) Useless Friend. Charles, who is very gullible, is friends with Bobby. Bobby, who cannot be trusted, decides to try to bind Charles to a contract in Bobby's favor. Bobby has Charles sign a contract promising to wash Bobby's car once a week for a month for $80. The contract incorporated by reference terms on the back. The terms on the back were in very small print and required Charles for one year to cook dinner for Bobby, do his laundry, and clean his apartment. Bobby is also very angry with his former girlfriend, Tessa, and decides to start rumors that would constitute the tort of defamation, such as that she has a vile disease, cheated on tests, and stole from friends. Bobby wants to enlist the help of Charles but knows that Charles would be hesitant to assist in his endeavors. One evening, however, Charles drank too much beer and was clearly intoxicated - a fact apparent to Bobby. Bobby had him sign a contract agreeing to defame Tessa for $50. When he sobers up, Charles tells Bobby that he was drunk and that he has no intention of defaming Tessa, who also happens to be Charles's new girlfriend. He also finally takes a look at the contract involving work for Bobby and tells Bobby that the contract is outrageous and that he has no intentions of going through with any of it. Which of the following would be a possible defense to Bobby's contract involving chores based upon the small print on the back of the contract? A) Substantive unconscionability B) Unclear drafting C) Procedural unconscionability D) Outrageous wording E) Adhesion conscionability
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71) Useless Friend. Charles, who is very gullible, is friends with Bobby. Bobby, who cannot be trusted, decides to try to bind Charles to a contract in Bobby's favor. Bobby has Charles sign a contract promising to wash Bobby's car once a week for a month for $80. The contract incorporated by reference terms on the back. The terms on the back were in very small print and required Charles for one year to cook dinner for Bobby, do his laundry, and clean his apartment. Bobby is also very angry with his former girlfriend, Tessa, and decides to start rumors that would constitute the tort of defamation, such as that she has a vile disease, cheated on tests, and stole from friends. Bobby wants to enlist the help of Charles but knows that Charles would be hesitant to assist in his endeavors. One evening, however, Charles drank too much beer and was clearly intoxicated - a fact apparent to Bobby. Bobby had him sign a contract agreeing to defame Tessa for $50. When he sobers up, Charles tells Bobby that he was drunk and that he has no intention of defaming Tessa, who also happens to be Charles' new girlfriend. He also finally takes a look at the contract involving work for Bobby and tells Bobby that the contract is outrageous and that he has no intentions of going through with any of it. Which of the following would be a possible defense to the contract as far as the harsh and lopsided requirements involving chores is concerned? A) Substantive unconscionability B) Unclear drafting C) Procedural unconscionability D) Outrageous wording E) Adhesion conscionability
72) Beauty Shop Woes. When Janice went to work as a hair stylist in Rick's beauty shop, she entered into an agreement with Rick whereby if she left, she would not work for another beauty shop within 50 miles for 2 years. Rick trained Janice in several new techniques. After nine months, Janice was offered a great job down the street at a new beauty shop, quit Rick, and had a number of customers follow her down the street to her new job. Rick claimed that she had signed a contract and had no right to go to work at the new shop. Janice disagreed and told Rick that no judge in the country would enforce such an agreement. Janice told Rick that she was more worried about a customer, Treena, who was threatening to sue her because her hair turned green after Janice worked on it. Janice agreed that Treena's hair was damaged. Janice pointed out, however, that she told Treena that odd results could result from a dye attempt, and she required that Treena sign a contract releasing Janice from all liability before she did anything with Treena's hair. Treena, however, sued anyway. The agreement Rick and Janice entered into is referred to as which of the following?
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A) A competition agreement B) A prohibited competition agreement C) A covenant not to misappropriate D) A policy agreement E) A covenant not to compete
73) Beauty Shop Woes. When Janice went to work as a hair stylist in Rick's beauty shop, she entered into an agreement with Rick whereby if she left, she would not work for another beauty shop within 50 miles for 2 years. Rick trained Janice in several new techniques. After nine months, Janice was offered a great job down the street at a new beauty shop, quit Rick, and had a number of customers follow her down the street to her new job. Rick claimed that she had signed a contract and had no right to go to work at the new shop. Janice disagreed and told Rick that no judge in the country would enforce such an agreement. Janice told Rick that she was more worried about a customer, Treena, who was threatening to sue her because her hair turned green after Janice worked on it. Janice agreed that Treena's hair was damaged. Janice pointed out, however, that she told Treena that odd results could result from a dye attempt, and she required that Treena sign a contract releasing Janice from all liability before she did anything with Treena's hair. Treena, however, sued anyway. Which of the following is true regarding Janice's claim that no judge in the country would enforce such an agreement? A) She is correct, because such agreements are considered in restraint of trade in every state. B) She is incorrect, because such agreements are criminally illegal in every state. C) She is incorrect, because while no court would approve a geographical restriction, some courts recognize time restrictions as being valid. D) She is incorrect, because all courts approve such agreements so long as it can be shown the employee gained a benefit other than pay from the employment. E) She is incorrect, because courts across the country vary in regard to the enforceability of such agreements.
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74) Beauty Shop Woes. When Janice went to work as a hair stylist in Rick's beauty shop, she entered into an agreement with Rick whereby if she left, she would not work for another beauty shop within 50 miles for 2 years. Rick trained Janice in several new techniques. After nine months, Janice was offered a great job down the street at a new beauty shop, quit Rick, and had a number of customers follow her down the street to her new job. Rick claimed that she had signed a contract and had no right to go to work at the new shop. Janice disagreed and told Rick that no judge in the country would enforce such an agreement. Janice told Rick that she was more worried about a customer, Treena, who was threatening to sue her because her hair turned green after Janice worked on it. Janice agreed that Treena's hair was damaged. Janice pointed out, however, that she told Treena that odd results could result from a dye attempt, and she required that Treena sign a contract releasing Janice from all liability before she did anything with Treena's hair. Treena, however, sued anyway. What type of clause did Janice have Treena sign to the effect that she would not hold Janice liable for any bad results? A) Adhesion B) Exculpatory C) Procedural D) Substantive E) Malfeasance
75) Beauty Shop Woes. When Janice went to work as a hair stylist in Rick's beauty shop, she entered into an agreement with Rick whereby if she left, she would not work for another beauty shop within 50 miles for 2 years. Rick trained Janice in several new techniques. After nine months, Janice was offered a great job down the street at a new beauty shop, quit Rick, and had a number of customers follow her down the street to her new job. Rick claimed that she had signed a contract and had no right to go to work at the new shop. Janice disagreed and told Rick that no judge in the country would enforce such an agreement. Janice told Rick that she was more worried about a customer, Treena, who was threatening to sue her because her hair turned green after Janice worked on it. Janice agreed that Treena's hair was damaged. Janice pointed out, however, that she told Treena that odd results could result from a dye attempt, and she required that Treena sign a contract releasing Janice from all liability before she did anything with Treena's hair. Treena, however, sued anyway. Which of the following is true regarding the enforceability of the clause providing that Treena not hold Janice liable for any bad results?
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A) Such clauses are enforced so long as no duress was applied. B) Such clauses are never enforced. C) Such clauses are always enforced so long as the complaining party had the capacity to contract. D) Such clauses are enforced unless a person sustains a physical injury, and hair damage would not qualify as a physical injury. E) Such clauses might be enforced if the contract involves private businesses providing nonessential services.
76) Cheap Motorcycle. Tony, a hateful, disgruntled business law professor, notices that Peter, a student who is past the age of majority, has bought a new motorcycle. Peter has struggled through school, is in his last semester, and needs to pass business law in order to graduate. Tony tells Peter that he would like to see Peter pass, and in the next sentence, Tony says that he wants to buy the motorcycle for $100, a price far below the value of the motorcycle. Peter asks if Tony is serious about the price, and Tony replies, "I have the power here!" Tony proceeds to draw up a contract for the sale of the motorcycle for $100 with lots of fine print by which he can sue Peter and recover any maintenance costs for the next five years. Seeing that he is at an advantage, Tony also throws into the deal that Peter will mow Tony's one-acre yard for $5 all summer long. After Tony tells Peter to either take the contract or leave it, Tony reluctantly signs. Which of the following is true if Peter seeks to rescind the contractual agreement to sell the motorcycle? A) Peter may rescind the agreement based on fraud. B) Peter may rescind the agreement based on unconscionability. C) Peter may rescind the agreement based on mistake. D) Peter may rescind the agreement based on fraud, unconscionability, and mistake. E) Peter may rescind the agreement based on fraud or unconscionability, but not mistake.
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77) Cheap Motorcycle. Tony, a hateful, disgruntled business law professor, notices that Peter,a student who is past the age of majority, has bought a new motorcycle. Peter has struggled through school, is in his last semester, and needs to pass business law in order to graduate. Tony tells Peter that he would like to see Peter pass, and in the next sentence, Tony says that he wants to buy the motorcycle for $100, a price far below the value of the motorcycle. Peter asks if Tony is serious about the price, and Tony replies, "I have the power here!" Tony proceeds to draw up a contract for the sale of the motorcycle for $100 with lots of fine print by which he can sue Peter and recover any maintenance costs for the next five years. Seeing that he is at an advantage, Tony also throws into the deal that Peter will mow Tony's one-acre yard for $5 all summer long. After Tony tells Peter to either take the contract or leave it, Tony reluctantly signs. Which of the following is an appropriate term for the contract drawn up by Tony? A) Adhesion B) Implied-in-law C) Illusory D) In pari delicto E) Exculpatory
78) Cheap Motorcycle. Tony, a hateful, disgruntled business law professor, notices that Peter, a student who is past the age of majority, has bought a new motorcycle. Peter has struggled through school, is in his last semester, and needs to pass business law in order to graduate. Tony tells Peter that he would like to see Peter pass, and in the next sentence, Tony says that he wants to buy the motorcycle for $100, a price far below the value of the motorcycle. Peter asks if Tony is serious about the price, and Tony replies, "I have the power here!" Tony proceeds to draw up a contract for the sale of the motorcycle for $100 with lots of fine print by which he can sue Peter and recover any maintenance costs for the next five years. Seeing that he is at an advantage, Tony also throws into the deal that Peter will mow Tony's one-acre yard for $5 all summer long. After Tony tells Peter to either take the contract or leave it, Tony reluctantly signs. Which of the following is true regarding the yard mowing agreement? A) It is enforceable. B) It is not enforceable because it is unconscionable. C) It is not enforceable because a professor and student are involved. D) It is not enforceable unless it can be proven that Peter is over the age of twenty-five. E) It is not enforceable unless Tony also signs a binding contract to pass Peter even if he makes terrible grades.
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79)
If a minor wants to be emancipated, what must she do? A) Have her parents declared incompetent B) Petition the court C) Request the judicial appointment of a guardian D) Earn at least a high school degree and secure gainful employment E) Get married
80) Once a minor reaches the age of majority, he or she may _____ contracts made as a minor. A) reinstitute B) rectify C) ratify D) revoke E) reprobate
81) Cantina contracts with Marlo to kill her unfaithful husband. The agreement between the parties is _____. A) voidable at Cantina’s election B) unenforceable C) voidable at Marlo’s election D) usurious E) a contract of adhesion
82) A(n) _____ is a statement releasing one of the parties to an agreement from all liability, regardless of who is at fault or the injury sustained. A) voluntary dismissal B) exculpatory clause C) involuntary dismissal D) indemnification clause E) declaratory judgment
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83) A(n) _____ contract requires complete performance by both parties, even if it appears that the contract contains multiple parts like a severable contract. A) categorical B) substantial performance C) indivisible D) allegorical E) subrogation
84)
In pari delicto means _____. A) common defects B) illegally formed C) equally at fault D) devoid of judgment E) delicate negotiations
ESSAY. Write your answer in the space provided or on a separate sheet of paper. 85) Polly decides to go snow skiing at a ski facility owned by Bill. Bill requires that all the skiers sign an agreement containing a release providing that even if the ski facility is negligent and that negligence results in injury, the skier agrees not to hold the ski facility liable. While on one of the steepest slopes Polly fell, breaking her leg. She complains that she was not adequately warned of conditions on the slope and sues Bill. Polly's position is that the release is not enforceable. What is the release Polly signed called, and what is Bill's best argument?
86) Discuss the views applied in determining the obligations of a minor to the other contracting party on disaffirmance of a contract, which view you support, and why.
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87) Describe the test most states follow regarding the capacity of intoxicated persons to enter into contracts.
88) Define the offense of usury, and discuss the two situations discussed in the textbook where loans may exceed the maximum interest rate despite the existence of usury statutes.
89) Maurice wishes to purchase a small local restaurant named "Tasty Burger" from Todd, who tells Maurice that although he loves the teenagers who have frequented his establishment, he is tired of flipping burgers and wants to spend more time fishing on the lake. Maurice has Todd sign a covenant not to compete, prohibiting Todd from opening a restaurant within 25 miles of Tasty Burger for 5 years. Assuming that the covenant was drafted properly, is it likely to be enforced? Discuss arguments for and against covenants not to compete in the sale of a business.
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90) John and Joan enter a contract whereby John will feed Joan's cat for $100 while Joan is on vacation. Another part of the contract provides that John will mow Joan's whole yard for the summer for $500. Just before Joan leaves for vacation, John discovers that Joan's cat is not a domesticated cat but is instead a lion rescued from the circus. In the area in which John and Joan live, it is illegal to keep or care for a wild animal such as a lion in a domestic setting. John tells Joan to forget it, that she misrepresented the nature of the animal, and that she can forget about the contract, including the lawn mowing deal. Joan, being a somewhat reasonable person, feels bad about not telling John the whole truth about the cat, and she is willing to compromise on that issue. She does, however, want to enforce the yard mowing agreement. What is her best argument?
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Answer Key Test name: Chap 11_5_The Essentials_Kubasek 1) FALSE A person who has legal capacity to contract is one who has the mental ability to understand his or her rights and obligations under a contract and, therefore, will presumably be able to understand how to comply with the terms of the agreement. A person is not required to have a high school education in order to have legal capacity to contract. 2) TRUE Historically, people with limited or no capacity included married women. Today, married women have been removed from the category of those lacking contractual capacity, although in a few states their capacity to enter into certain kinds of contracts is still limited. 3) TRUE Today, in all but three states, a minor is someone under the age of 18. 4) TRUE Emancipation occurs when a minor’s parents or legal guardians give up their right to exercise legal control over the minor, typically when the minor moves out of the parents’ house and begins supporting himself or herself. 5) FALSE No formalities are required to disaffirm a contract; the minor need only manifest an intention to rescind the contract, either by words or by actions. However, the minor must avoid the entire contract; he or she cannot choose to disaffirm only a portion of it. 6) TRUE
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States that still follow the traditional rule regarding the ability of minors to disaffirm contracts simply require the minor to notify the competent party of the intent to disaffirm and return the competent party any consideration received under the contract that is still under the minor’s control, regardless of the condition of the consideration. If the consideration has been destroyed or damaged, the minor returns whatever is left of it, and the other party has no recourse against the minor under most circumstances. The other party is also obligated to return to the minor whatever consideration the minor offered to support the contract. In this example, the electronics shop must return to Sam his $100 down payment. 7) FALSE Disaffirmance must occur before or within a reasonable time of the minor's reaching the age of majority. Today, in all but three states, the age of majority is eighteen. 8) FALSE In most states, parents are not liable for the torts of their minor children; minors are liable for their own personal torts. 9) FALSE As a general rule, parents are not liable for the contracts entered into by their minor children. Because of this rule, merchants are often reluctant to enter into contracts with minors unless some competent person is willing to agree to cosign the contract. 10) FALSE Once a person reaches the age of majority, he or she may ratify, or legally affirm, contracts made as a minor.Once ratified, the contract is no longer voidable. 11) FALSE
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Once a person reaches the age of majority, he or she may ratify, or legally affirm, contracts made as a minor.Once ratified, the contract is no longer voidable. Ratification may be either express or implied. 12) FALSE Once a person reaches the age of majority, he or she may ratify, or legally affirm, contracts made as a minor.Once ratified, the contract is no longer voidable. Ratification may be either express or implied. Making regular payments under a contract after reaching the age of majority most likely constitutes implied ratification of the agreement. 13) FALSE If a person's mental deficiencies have resulted in his being adjudicated insane and a guardian has been appointed for him, he has no capacity to enter into contracts and any contract he attempts to enter into is void. 14) FALSE As a general rule, most states follow the Restatement of Contracts, Section 16, which provides that contracts of an intoxicated person are voidable by the intoxicated person if the other party had reason to know that because of the intoxicated person’s condition, that person was unable to understand the nature and consequences of the transaction or was unable to act in a reasonable manner in relation to the transaction. If the intoxication merely causes someone to exercise poor judgment, the person’s capacity to enter into a legally binding contract is not affected. 15) FALSE As with contracts of other persons who have limited capacity, a contract of an intoxicated person for necessaries will be enforced for the reasonable value of the necessaries. The reasonable value of the necessaries may not be equal to (it may be less than) the manufacturer’s suggested retail price. 16) FALSE
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When a contract is overturned due to being contrary to law, the contract is frequently declared void, as if it never existed. 17) FALSE Sabbath laws are also referred to as blue laws, and theylimit the types of certain activities on Sundays. The term blue law is a reference to the blue paper on which New Haven, Connecticut, printed its Sabbath laws in 1781. New Haven’s law prohibited shops from being open and prohibited all work on the “Lord’s day” (Sunday). 18) TRUE Covenants not to compete, also known as restrictive covenants, tend to come in two varieties. The first involves noncompetition in the sale of an ongoing business, and the second involves noncompetition in employment. 19) FALSE An exculpatory clause is a statement releasing one of the parties to an agreement from all liability, regardless of who is at fault or what the injury suffered is. While businesses closely linked to the public interest cannot enforce exculpatory clauses, not all exculpatory clauses are unlawful. 20) FALSE Generally speaking, when an agreement is deemed illegal, courts will label the contract void. The reason most illegal agreements are void is that in most cases, both parties are equally responsible for the illegal agreement. In the law, when both parties are equally responsible for an illegal agreement, the parties are said to be In pari delicto. 21) B A person who has legal capacity to contract is one who has the mental ability to understand his or her rights and obligations under a contract and, therefore, will presumably be able to understand how to comply with the terms of the agreement. Version 1
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22) C Capacity is one of the elements of a legally binding contract. 23) A Depending on the nature of his or her mental or physical defect, a person may have either no capacity, and therefore any attempted contract is void, or limited capacity, resulting in the ability to form only voidable contracts. 24) B Incapacity, or incompetence, as it is sometimes called, is some sort of mental or physical defect that prevents a natural person from being able to enter into a legally binding contract. Depending on the nature of his or her mental or physical defect, a person may have either no capacity, and therefore any attempted contract is void, or limited capacity, resulting in the ability to form only voidable contracts. 25) B Historically, people with limited or no capacity to contract included married women, minors, and insane persons. 26) A Today, in all but three states, a minor is someone under the age of 18. 27) A In most states, a person is given full legal capacity to enter into contracts when he or she becomes emancipated. 28) C Emancipation occurs when a minor's parents or legal guardians give up their right to exercise legal control over the minor, typically when the minor moves out of the parents' house and begins supporting him or herself. 29) A
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Emancipation occurs when a minor's parents or legal guardians give up their right to exercise legal control over the minor. In most cases, when a minor marries, she or he is considered emancipated. 30) D In terms of a minor’s right to disaffirm a contract, no formalities are required; the minor need only manifest an intention to rescind the contract, either by words or by actions. The minor must disaffirm the entire contract; he or she cannot choose to disaffirm only a portion of it. 31) D One of the oldest limitations on capacity is the ability of minors to enter into only voidable contracts. Because their contracts are voidable, minors have the right, until a reasonable time after reaching the age of majority, to disaffirm, or avoid, their contracts. 32) D Chinese law holds minors accountable for their contracts in more situations than contracts for necessities. In China, children between ten and eighteen are deemed competent for entering into certain contracts, appropriate to each child's mental state. 33) D The obligations of the minor on disaffirmance vary from state to state. Many states simply require the minor to notify the competent party of the intent to disaffirm and return to the competent party any consideration received under the contract that is still under the minor’s control, regardless of the condition of the consideration. If the consideration has been destroyed or damaged, the minor returns what is left of it, and the other party has no recourse against the minor under most circumstances. A number of states, however, have modified the duty of the minor on disaffirmance, holding that the minor has a duty of restitution that requires her or him to place the competent party back in the position that party was in at the time the contract was made. Version 1
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34) C The disaffirmance must occur before or within a reasonable time of the minor's reaching the age of majority. What constitutes a reasonable time is determined on a case-by-case basis. 35) D As a general rule, most states will not allow a minor to disaffirm contracts for life insurance, health insurance, psychological counseling, the performance of duties related to stock and bond transfers and bank accounts, education loan contracts, child support contracts, marriage contracts, and contracts to enlist in the armed services. 36) E The minor’s right to disaffirm a contract is designed to protect a minor from competent parties that might otherwise take advantage of the minor. 37) D The majority rule is that misrepresentation does not affect a minor's right to disaffirm a contract. 38) C A contract for a necessary is a contract that supplies the minor with the basic necessities of life, generally thought of as food, clothing, shelter, and basic medical services. 39) A Technically, a minor can disaffirm contracts for necessaries; however, the minor will be held liable for the reasonable value of the necessary. 40) B An express ratification occurs when, after reaching the age of majority, the person states, either orally or in writing, that he or she intends to be bound by the contract entered into as a minor. 41) E
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An implied ratification occurs when the former minor takes some action after reaching the age of majority that is consistent with an intent to ratify the contract. 42) D Persons suffering from a mental illness or deficiency may have full, limited, or no legal capacity to enter into a binding contract, depending on the nature and extent of their mental deficiency. 43) E Guardians may be appointed not only for those who have been adjudicated insane but also for those who have been adjudicated habitual drunkards and those whose judgment has been impaired because of a condition such as Alzheimer's. 44) A If the contract is disaffirmed on the basis of intoxication, each party to the contract must return the other to the condition she or he was in at the time the contract was entered into. 45) C No remedy is available for an unenforceable agreement. 46) A When contracts are against generally accepted public policy, these agreements are deemed unenforceable and not void. No remedy is available for unenforceable agreements. 47) E Contracts cannot be for an illegal subject or be carried out by illegal means. Therefore, any agreement to commit a crime or tort is illegal and unenforceable. 48) A Should a legal contract be formed and then the subject of the contract becomes illegal under a new statute, the contract is considered to be discharged by law. Version 1
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49) D All 50 states have statutes requiring that people working in certain professions obtain a license before practicing their craft. 50) E The two main purposes of professional licensing statutes are to give the government an avenue by which to regulate specific industries and to protect the public’s health, safety, and welfare 51) C If the licensing statute is intended to protect the public's health, safety, or welfare, the agreement is typically deemed illegal and unenforceable. 52) A Statutes prohibiting usury exist in nearly every state. Usury occurs when a party gives a loan at an interest rate exceeding the legal maximum. 53) D Statutes prohibiting usury exist in nearly every state. Usury occurs when a party gives a loan at an interest rate exceeding the legal maximum. The legal maximum interest rate varies from state to state, but it is easy to determine the rate in any given state. 54) A As with licensing statutes, all states engage in at least some regulation of gambling. 55) A A large number of states still have what are known as Sabbath, Sunday, or blue laws on the books which limit the types of business activities in which parties can legally engage on Sundays. 56) A
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When a restraint on trade is reasonable, as determined by the courts, the restraint is typically allowed. Such restraints are known as covenants not to compete, or restrictive covenants. Covenants not to compete tend to come in two varieties - noncompetition in the sale of an ongoing business and noncompetition in employment. 57) C There are times when agreements are so one-sided, or heavy-handed against one party, that the courts will not make the harmed, innocent person fulfill his or her contractual duties. These heavily one-sided agreements are known as unconscionable agreements. The term unconscionable refers to the fact that the agreement in question is so unfair that it is void of conscience. 58) C Procedural unconscionability relates to conditions that would impair one party's understanding of a contract, as well as to the integration of terms into a contract. Factors contributing to procedural unconscionability range from tiny, hard-to-read print on the back of an agreement to excessive use of legalese (unnecessarily technical legal language) or even the inability of a person to fully read over a contract and ask any questions before he or she is required to sign. 59) A Substantive unconscionability involves overly harsh or lopsided substance in an agreement. If an agreement is terribly one-sided, it is probably invalid on the basis of substantive notions of fairness and fair dealing. 60) B
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An adhesion contract is a contract created by a party to an agreement that is presented to the other party on a take-it-or-leave-it basis. That is, the contract is presented as complete and as the only chance the presented party, known as the adhering party, will have to enter into the agreement. 61) D An exculpatory clause is a statement releasing one of the parties to an agreement from all liability, regardless of who is at fault or what the injury suffered is. Because tort law attempts to return the wronged party to the state he or she was in before the wrong occurred, anything preventing this corrective mechanism is against public policy. The patently unfair nature of an exculpatory clause is closely tied to the idea of unconscionable contracts. 62) A The lower court's finding that the clause did not violate public policy and therefor was not illegal was affirmed in favor of the defendant, and therefore its liability was limited to $5,000. 63) E A severable contract, also known as a divisible contract, contains multiple parts that can each be performed separately. In addition, separate consideration is offered for each individual part. In essence, a severable contract is like numerous contracts in one. 64) D An indivisible contract requires complete performance by both parties, even if it appears as though the contract contains multiple parts, similar to a severable contract. 65) D
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The obligations of the minor on disaffirmance vary from state to state. Most states simply require the minor to notify the competent party of the intent to disaffirm and return to the competent party any consideration received under the contract that was still under the minor’s control, regardless of the condition of the consideration. However, a number of states have modified the duty of the minor on disaffirmance, holding that the minor has a duty of restitution that requires that she or he place the competent party back in the position that party was in at the time the contract was made. 66) E Technically, a minor can disaffirm contracts for necessaries; however, the minor will be held liable for the reasonable value of the necessary. 67) B An implied ratification occurs when the former minor takes some action after reaching the age of majority that is consistent with intent to ratify the contract. Most courts find that continuing to act in accordance with the contract, such as continuing to make regular payments under a contract after reaching the age of majority, constitutes ratification. 68) A The Restatement of Contracts, Section 16, provides that contracts of an intoxicated person are voidable by the intoxicant if the other party had reason to know that because of the intoxicated person's condition, that person was unable to understand the nature and consequences of the transaction or is unable to act in a reasonable manner in relation to the transaction. If the intoxication causes someone to exercise poor judgment, the person’s capacity to enter into a legally binding contract is not affected. 69) A
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Contracts cannot be for an illegal subject or be carried out by illegal means. Therefore, any agreement to commit a crime or tort is illegal and unenforceable. 70) C Procedural unconscionability relates to conditions that would impair one party’s understanding of a contract and to the integration of terms into a contract. Regarding impaired understanding of contractual terms, the factors can be anything from tiny, hard-to-read print on the back of an agreement to excessive use of legalese (unnecessarily technical legal language) or even the inability of a person to read over a contract fully and ask any questions before he or she was required to sign. 71) A Substantive unconscionability involves overly harsh or lopsided substance in an agreement. If an agreement is terribly one-sided, it is probably invalid on the basis of substantive notions of fairness and fair dealing. 72) E When a restraint on trade is reasonable, as determined by the courts, the restraint is typically allowed. One example of a permissible restraint on trade is a covenant not to compete in an employment contract, whereby the employee agrees that if she leaves employment, she will not compete with her employer for a designated period of time within a designated geographic area. 73) E Covenants not to compete in employment contracts are legal in most states. However, to be legal, the covenant needs to protect a legitimate business interest. Furthermore, the covenant needs to be for a reasonable period of time and geographic area, so that it does not unlawfully impinge on the employee’s right to earn a living. 74) B Version 1
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An exculpatory clause is a statement releasing one of the parties to an agreement from all liability, regardless of who is at fault or what the injury suffered is. The patently unfair nature of an exculpatory clause is closely tied to the idea of unconscionable contracts. 75) E To be able to enforce an exculpatory clause, the party seeking enforcement must be a private business or an individual and must not be important to the public interest. Such private businesses or individuals provide nonessential services and thus do not have the same bargaining power as entities such as banks, utilities, and airlines. 76) B There are times when agreements are so one-sided, or heavy-handed against one party, that the courts will not make the harmed, innocent person fulfill his or her contractual duties. These heavily one-sided agreements are known as unconscionable agreements. The term unconscionable refers to the fact that the agreement in question is so unfair that it is void of conscience. 77) A An adhesion contract is a contract created by a party to an agreement that is presented to the other party on a take-it-or-leave-it basis. That is, the contract is presented as complete and as the only chance the presented party (known as the adhering party) will have to enter into the agreement. Although adhesion contracts are themselves legal, the presence of one does raise some potential problem indicators for courts. Given that adhesion contracts usually do not allow for debate regarding the agreement, courts tend to examine adhesion contracts to see whether they can determine how voluntary the agreement really was. 78) B
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There are times when agreements are so one-sided, or heavy-handed against one party, that the courts will not make the harmed, innocent person fulfill his or her contractual duties. These heavily one-sided agreements are known as unconscionable agreements. The term unconscionable refers to the fact that the agreement in question is so unfair that it is void of conscience. 79) B Often the minor will petition the court for a declaration of emancipation. 80) C Once a person reaches the age of majority, he or she may ratify, or legally affirm, contracts made as a minor. Once ratified, the contract is no longer voidable. Ratification may be either express or implied. 81) B Contracts cannot be for an illegal subject or be carried out by illegal means. Therefore, any agreement to commit a crime or tort is illegal and unenforceable. 82) B An exculpatory clause is a statement releasing one of the parties to an agreement from all liability, regardless of who is at fault or what the injury suffered is. The patently unfair nature of an exculpatory clause is closely tied to the idea of unconscionable contracts. 83) C An indivisible contract requires complete performance by both parties, even if it appears as though the contract contains multiple parts, similar to a severable contract. 84) C
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Generally speaking, when an agreement is deemed illegal, courts will label the contract void. The reason most illegal agreements are void is that in most cases, both parties are equally responsible for the illegal agreement. In the law, when both parties are equally responsible for an illegal agreement, the parties are said to be In pari delicto. 85) The release is called an exculpatory clause. An exculpatory clause is a statement releasing one of the parties to an agreement from all liability, regardless of who is at fault or what the injury suffered is. A basic test to determine whether an exculpatory clause is unenforceable is to see whether the enforcing party engages in a business directly related to the public interest. Courts believe it is against the public interest to release businesses engaging in work in the public’s interest from accountability to the public they are serving. Bill's best argument would be that the services provided by the ski facility were not related to the public interest and not something in which people were required to engage. Polly could have declined skiing if she did not want to be bound by the clause. 86) Most states simply require the minor to notify the competent party of the intent to disaffirm and to return to the competent party any consideration received under the contract that is still under the minor's control, regardless of the condition of the consideration. Some states have modified the duty of the minor on disaffirmance, holding that the minor has a duty of restitution that requires that she or he place the competent party back in the position that party was in at the time that the contract was made. When returning damaged goods in those states, the minor would be required to compensate the competent party for the difference between the value of the item when given to the minor and its value when returned. Student responses will vary on the most appropriate test.
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87) Most states follow the Restatement of Contracts, Section 16, which provides that contracts of an intoxicated person are voidable if the other party had reason to know that because of the intoxicated person's condition, that person was unable to understand the nature and consequences of the transaction or was unable to act in a reasonable manner in relation to the transaction. If the intoxication merely causes someone to exercise poor judgment, the person’s capacity to enter into a legally binding contract is not affected. 88) Statutes prohibiting usury exist in nearly every state. Usury occurs when a party gives a loan at an interest rate exceeding the legal maximum. The legal maximum interest rate varies from state to state, but it is easy to determine the rate in any given state. One exception to the applicability of usury statutes relates to corporate loans. Most states with usury statutes allow corporations to lend and borrow at rates exceeding the maximum. Another exception to usury statutes applies to smaller loans. Many states allow parties to make small loans at rates above the maximum to parties that cannot obtain a needed loan at the statutory maximum. 89) The covenant is not likely to be enforced. The agreement may not be for a longer period of time or larger geographic region than is necessary to protect the employer’s legitimate business interest. A concern with covenants not to compete is that they restrain trade and may reduce competition. The public policy argument in favor of supporting restrictions regarding the sale of a business involves the fairness of the sale. Public policy requests fairness in business transactions and this fairness does not occur when people profit from a business transaction and then start a new business that destroys the business they just sold. Students may also have other arguments for and against covenants not to compete.
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90) Joan’s best argument is that her agreement with John is a severable contract. A severable contract, also known as a divisible contract, contains multiple parts that can each be performed individually. In addition, separate consideration is offered for each individual part. In essence, a severable contract is like numerous contracts in one. Therefore, Joan can argue that a court should declare void only the illegal part of the contract involving the cat. With respect to illegality, severable contracts have a huge advantage over indivisible contracts: If a severable contract has both legal and illegal portions, the court has the option of declaring void only those sections of the agreement that are illegal. The court can then enforce the remaining, legal portions of the contract.
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CHAPTER 12 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) When a contract is voidable, it may be rescinded. ⊚ true ⊚ false
2) Major obstacles to genuine assent include mistake, misrepresentation, undue influence and duress. ⊚ true ⊚ false
3) European courts permit contract rescission for a mistake of value when the mistake involves more than fifty (50) percent of the value at the time of the contract. ⊚ true ⊚ false
4) A mistake results from an erroneous belief about the facts of a contract at the time the contract is concluded. ⊚ true ⊚ false
5) Mistakes in contract law do not result from untrue statements made by one party to the contract. ⊚ true ⊚ false
6) When both parties to a contract are mistaken about either a current or a past material fact, either party can choose to rescind the contract. ⊚ true ⊚ false
7) For a mutual mistake to interfere with legal consent, it must involve a basic assumption about the subject matter of the contract.
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⊚ ⊚
8)
true false
A misrepresentation is an untruthful assertion by one of the parties about a material fact. ⊚ true ⊚ false
9) An innocent misrepresentation is a false statement made about a material fact in an agreement that the person who made the statement believed to be true. ⊚ true ⊚ false
10)
There is no scienter involved in a fraudulent misrepresentation. ⊚ true ⊚ false
11) In terms of the elements of fraudulent misrepresentation, there must have been justifiable reliance on the false statement by the innocent party to the agreement. ⊚ true ⊚ false
12) A negligent misrepresentation results when the party making the statement would have known the truth about the fact had he used reasonable care to discover or reveal it. ⊚ true ⊚ false
13) With negligent misrepresentation, even though there was no actual intent to deceive, the party making the false statement is treated in contract law as if the intent were present. ⊚ true ⊚ false
14) Nondisclosure involves the active hiding of the truth about a material fact pertaining to a contract.
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⊚ ⊚
true false
15) Until recently, courts have been hesitant to use nondisclosure as a basis for rescinding a contract. ⊚ true ⊚ false
16) Today, nondisclosure is especially likely to provide the basis for rescission when one party has information about a basic assumption of the deal that is unavailable to the other party. ⊚ true ⊚ false
17) Undue influence is a situation in which one person has taken advantage of his or her dominant position in a relationship to unduly persuade the other person. ⊚ true ⊚ false
18)
Duress is more visible and active interference with free will than is undue influence. ⊚ true ⊚ false
19) In the Philippines, if consent is given through mistake, violence, intimidation, undue influence, or fraud, contracts are valid until they are annulled, and there is no time limitation on the protected party to obtain an annulment. ⊚ true ⊚ false
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 20) Contracts that are _____ may be rescinded or canceled.
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A) voidable B) executed C) in pari delicto D) deferred E) quid pro quo
21)
Which of the following is not one of the major obstacles to genuine assent? A) Mistake B) Misrepresentation C) Undue influence D) Agreement E) Duress
22) A(n) _____ is an erroneous belief about the facts of a contract at the time the contract is concluded. A) assumption B) projection C) abeyance D) mistake E) accord
23)
Which of the following ways can a mistake be classified in contract law? A) Real or personal B) Conditional or unconditional C) Equal or unequal D) Unilateral or mutual E) Primary or secondary
24) Which of the following is necessary in order to establish that a mutual mistake involving a basic assumption about the subject matter of a contract was made? Version 1
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A) The mistake involved the existence, quality, or quantity of the items to be exchanged B) The mistake involved whether a party could profit from the contract C) The mistake involved whether a party could profit from the contract or whether a party misunderstood the time constraints involved in the contract D) The mistake involved the identity of parties to the contract or whether a party misunderstood the time constraints involved in the contract E) The mistake involved a misunderstanding regarding the applicability of the Uniform Commercial Code (UCC) to the contract
25) The Peerless ship case referenced in the textbook is a classic example of a _____ mistake. A) unilateral B) mutual C) conditional D) secondary E) non-material
26) What was the result in Scott v. Mid-Carolina Homes, Inc., the case referenced in the textbook in which the defendant attempted to rescind a contract to sell a mobile home because its salesperson was acting under a mistake of fact when he gave the plaintiff the sales price? A) The seller was allowed to rescind the contract because a unilateral contract was involved. B) The seller was allowed to rescind the contract because a bilateral contract was involved. C) The seller was allowed to rescind the contract because the mistake involved a price differential of over twenty-five (25) percent. D) The seller was allowed to rescind the contract because the mistake involved a price differential of over fifty (50) percent. E) The seller was not allowed to rescind the contract.
27) For a mutual mistake to interfere with legal consent, it must involve a _____ effect on the agreement.
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A) conditional B) material C) tertiary D) criminal E) statutory
28)
Any fraud on the part of a party to a contract provides a basis for _____. A) judicial recognition of an equitable remedy for the defendant B) judicial recognition of an implied-in-law contract C) judicial enforcement of an implied-in-fact contract D) contract rescission E) contract reformation
29) Which of the following was the result on appeal in Evan Rothberg v. Walt Disney Pictures, the case in the textbook in which a representative of the defendant convinced Robert Jahn, a senior executive at Disney who was dying from AIDS, to sign a release that waived his rights to approximately $2 million in employee benefits days before his death? A) The court said that summary judgment in favor of Disney was proper, as Jahn had not been a victim of economic duress. B) The court said that a directed verdict in favor of Disney was proper, as Jahn had not been a victim of physical duress. C) The court rule that the question of whether the release had been procured by undue influence was a question for the judge. D) The court ruled that the question of whether the release had been procured by undue influence was a question for the jury. E) In deference to the ruling of the United States district court, the U.S. court of appeals refused to take the case up on appeal.
30) George contracts with Leeann to buy a condo #229 from her. Leeann writes the entire contract up including the description and #229 but George really meant to buy #230. What type of mistake is this?
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A) A mutual mistake B) A unilateral mistake C) A coordinated mistake D) A promissory mistake E) A conditional mistake
31) Ned and Ira negotiate the sale of a certain set of golf clubs. The two believe that the golf clubs were used by a famous golfer, and Ned sells them to Ira for a substantial price. Ira later learns that the golf clubs were not used by the golfer, significantly reducing their value. What type of mistake is this? A) Mutual B) Unilateral C) Promissory D) Conditional E) Executory
32) The distinction between a _____ and a _____ mistake is significant in determining which contracts are voidable. A) unilateral; secondary B) primary; mutual C) legitimate; nonlegitimate D) unilateral; mutual E) mutual; promissory
33)
In general, a _____ mistake does not generally void a contract. A) conditional B) mutual C) unilateral D) bilateral E) primary
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34) Which of the following is incorrect regarding the rescission of a contract in the Philippines? A) If consent is given through mistake, violence, intimidation, undue influence, or fraud, contracts are valid until they are annulled. B) The period in which to annul a contract for mistake, violence, intimidation, undue influence, or fraud is four (4) years. C) In cases of intimidation, violence, or undue influence, the time period for annulling a contract is measured from the time the defect in the assent ceases. D) In cases of mistake or fraud, the time period for annulling a contract is measured from the time of the discovery of the defect. E) The law of the Philippines regarding contract rescission for mistake, violence, intimidation, undue influence, or fraud is the same as United States law.
35) George offers to sell Penelope a ring that George found in his yard. He and Penelope look at the ring and decide that they are not sure what it is, probably just a shiny stone. Penelope pays George $10 for the ring. The ring turns out to be a diamond worth much more than $10. George wants the ring back, and Penelope refuses. What is the most likely result? A) Penelope must return the ring to George due to mutual mistake. B) Penelope must return the ring to George due to unilateral mistake. C) Penelope must return the ring to George due to the application of equitable principles. D) Penelope may keep the ring unless George can establish that she was negligent in not recognizing the ring's true value. E) Penelope can keep the ring because the parties contracted on the assumption that they did not know the value of the ring.
36) Which of the following must a mutual mistake involve in order for a mutual mistake to interfere with legal consent?
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A) A basic assumption about the subject matter of the contract B) A material effect on the agreement C) A basic assumption about the subject matter of the contract and an adverse effect on a party who did not agree to bear the risk of mistake at the time of the agreement, but not a material effect on the agreement D) A basic assumption about the subject matter of the contract, a material effect on the agreement, and an adverse effect on a party who did not agree to bear the risk of mistake at the time of the agreement E) An admission by one of the parties that a misrepresentation occurred
37) What was the result in the Peerless case referenced in the textbook in which there were two (2) ships named Peerless and the parties disagreed over which ship was the subject of the contract? A) The court rescinded the contract. B) The court ruled that the older ship would be identified to the contract. C) The court ruled that the newer ship would be identified to the contract. D) The court ruled that the defendant would be allowed to choose which ship would be identified to the contract. E) The court ruled that the plaintiff would be allowed to choose which ship would be identified to the contract.
38) Which of the following is a false statement about a material fact that the person who asserted the statement believed to be true? A) Fraud B) Negligence C) A criminal misrepresentation D) A scienter-based misrepresentation E) An innocent misrepresentation
39)
What is the legal term that refers to intent or knowledge of wrongdoing?
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A) Negligence B) Criminal omission C) Scienter D) Actus reus E) Res ipsa loquitor
40)
In Indian Law, duress is referred to as _____. A) coercion B) undue influence C) unforced contractual relations D) subjective bias E) objective bias
41) If a person is misled by the innocent misrepresentation of another party, the misled person can _____. A) recover pain and suffering damages B) recover punitive damages C) recover compensatory and punitive damages D) recover compensatory damages E) only rescind the contract
42) Palmer is negotiating a contract with Wilma and makes a statement he thinks is true. In reality, the statement is not true, and had Palmer investigated the statement before he made it, he would have discovered that. This is an example of _____. A) fraud B) duress C) a criminal omission D) negligent misrepresentation E) an innocent misrepresentation
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43)
Which of the following statements is true regarding negligent misrepresentation?
A) It is treated the same as an innocent misrepresentation. B) It is treated the same as duress and entitles the victim to recover punitive damages. C) It is treated the same as a fraudulent misrepresentation and entitles the victim to recover compensatory damages, as well as punitive damages of up to two (2) times the amount of actual damages. D) It is treated the same as a mutual mistake. E) Even if there is no actual intent to deceive, the person making the false statement is treated as having intent to deceive.
44) As discussed in the textbook, which of the following is true in China when an outsider allegedly commits or actually commits fraud in the course of business dealings with Chinese firms? A) Because of the governmental interest in increasing international business, it is very difficult to prove fraud when international business is involved. B) Because of the governmental interest in increasing international business, few penalties are imposed on international businesses that commit fraud. C) Because of the governmental interest in increasing international business, it is very difficult to prove fraud when an international business is involved, and few penalties are imposed on international businesses that commit fraud. D) Chinese law does not recognize the concept of fraud. E) Fraudulent misrepresentations have resulted in heavy fines and refusals to allow any more agreements with Chinese firms.
45) A _____ is a false representation of a material fact that is consciously false and intended to mislead the other party. A) negligent misrepresentation B) fraudulent misrepresentation C) defalcation D) negligent misrepresentation, fraudulent misrepresentation, or defalcation E) fraudulent misrepresentation or defalcation, but not a negligent misrepresentation,
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46) Which of the following can be treated as the equivalent of an actual assertion in a fraudulent misrepresentation case? A) Duress B) Negligence C) Puffery D) Concealment E) Nondisclosure
47) When Gloria sells her house, she does not inform the buyer that the basement leaks during times of heavy rain. This is considered _____, which is the equivalent of an actual assertion. A) a unilateral mistake B) nondisclosure C) negligence D) a tacit admission E) implied confirmation
48)
Which of the following is not an element of fraudulent misrepresentation? A) A false statement about a fact that is material to the contract B) The intent to deceive C) Justifiable reliance on the false statement by the innocent party D) Injury to the defrauded party as a result of the misrepresentation E) A non-commercial relationship between the parties
49) Under what condition(s) will a court now find nondisclosure as having the same legal effect as an actual false assertion?
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A) When a relationship of trust exists between the parties to the contract B) When there is a failure to correct assertions of fact that are no longer true in light of events that have occurred since the initial consent to the terms of the agreement C) When the transaction at issue is the first contractual relationship between the parties D) When a relationship of trust exists between the parties to the contract, and when there is a failure to correct assertions of fact that are no longer true in light of events that have occurred since the initial consent to the terms of the agreement E) When a relationship of trust exists between the parties to the contract, when there is a failure to correct assertions of fact that are no longer true in light of events that have occurred since the initial consent to the terms of the agreement, and when the transaction at issue is the first contractual relationship between the parties
50) Heather innocently misrepresented the status of a puppy as being a full-blooded Pomeranian when actually it was a mixed breed. Brad had contracted to purchase the dog, but the problem was discovered prior to his paying for the dog and picking it up. Nevertheless, Brad was very angry and felt that Heather should have been more careful. He said that he planned to rescind the contract and also sue her for damages to punish her and deter others from behaving similarly. Which of the following is true regarding the remedies available to Brad? A) Because Heather violated the contract to provide a full-blooded Pomeranian, Brad is entitled to rescind the contract and to the damages he seeks. B) Because Heather violated the contract to provide a full-blooded Pomeranian, Brad is entitled to rescind the contract, but he is not entitled to the damages he seeks. C) Because Heather is not guilty of any wrongdoing, Brad is entitled to no remedy, and Heather has an additional thirty (30) days to honor the contract. D) Because Heather is not guilty of any wrongdoing, Brad is entitled to no remedy, and Heather has an additional sixty (60) days to honor the contract. E) Because Heather is not guilty of any wrongdoing, Brad is entitled to no remedy, and Heather has an additional ninety (90) days to honor the contract.
51) For several months, Franklin has been his grandmother’s sole caregiver. He takes her to the store, her doctor, and any other place she wants or needs to go. When it is time to make her will, Franklin constantly reminds his grandmother that he is the only one who cares for her and that he can stop taking her places if she does not make him the sole beneficiary of the will. This is an example of _____.
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A) economic duress B) undue influence C) physical duress D) fraud E) a negligent misrepresentation
52) Bobby tells Robert that unless he receives $10,000, Bobby will give Robert’s wife all the pictures he took of Robert with a woman not his wife. This is an example of _____. A) duress B) fraud C) gross negligence D) unconscionability E) negligent misrepresentation
53) Which of the following occurs when a person threatens not to perform a contract obligation unless the other party either signs another contract with the person making the threat or pays him or her a higher price than was specified in the original agreement? A) Physical duress B) Due influence C) An arm’s-length bargain D) Economic duress E) Undue influence
54) Which of the following occur(s) when one party threatens physical harm to gain consent to a contract? A) Duress B) Undue influence C) Disparagement D) Criminal negligence E) Duress and disparagement, but not undue influence
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55) Henry is negotiating a contract with Quinn. He becomes angry that Quinn will not agree to the proposed contract terms. Henry threatens Quinn with a criminal lawsuit claiming that he knew Quinn did not pay his taxes last year and is therefore a tax evader. This is an example of _____. A) fraud B) negligent misrepresentation C) duress D) criminal recklessness E) undue influence
56) Which of the following occur(s) when a party threatens to file a frivolous civil lawsuit unless another party gives consent to the terms of a contract? A) Duress B) Undue influence C) Constructive fraud D) Criminal influence E) Duress and constructive fraud
57) Which of the following occurs when a party threatens to file a legitimate (in other words, a non-frivolous) civil lawsuit unless another party gives consent to the terms of a contract? A) Duress B) Undue influence C) Durable fraud D) Criminal influence E) None of these choices are correct.
58) With duress, the _____ necessary for legal _____ has been removed by the specifics of the threat.
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A) free will; consideration B) promise; consideration C) promise; capacity D) free will; consen E) capacity; consideration
59) Jane operates a home decorations shop selling slightly used goods. She bought a painting from Sally for the shop. Bob came into the shop and asked if the painting was by Bill, a local artist of some repute. Jane, without checking with Sally, says, "I'm sure it is" because she really did think it looked like one of Bill's paintings. Bob bought the painting. A week or so later, he took the painting by Bill's studio. Bill just laughed and said that he never painted anything that horrible. Bob took the painting back to Jane and asked for a refund. Jane refused on the basis that she never gave refunds and that Bob took the risk that the painting was not done by Bill. Should Bob sue in small claims court, who will likely win and why? A) Bob, on the basis of a negligent misrepresentation B) Bob, on the basis of an innocent misrepresentation C) Bob, on the basis of a unilateral mistake D) Jane, on the basis that Bob accepted the risk of loss E) Jane, both on the basis that Bob accepted the risk of loss and that he agreed by an oral contract to purchase the painting
60) Bruce runs back the odometer on his car to make it appear as if it had fewer miles. Wally buys the car. When he checks back through past sale reports through his state's title office, Wally discovers that the car had fewer miles when Bruce sold it to him than it had when a previous owner sold it to Bruce. In legal terms, in selling the car knowing that he had tampered with the odometer, Bruce is said to have had _____. A) negligence B) commercial impracticability C) scienter D) oversight E) inattentiveness
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61) Maurice offered to sell his used computer to Mike for $300, and Mike accepted. Both Maurice and Mike believed that the computer was only one (1) year old. When the receipt was found, however, it was discovered that the computer was actually eighteen (18) months old. Mike wants out of the agreement based on mutual mistake. Which of the following is Maurice's best argument to enforce the contract? A) That the mistake did not have a material effect on the agreement B) That the mistake should be allocated equally between the parties C) That a mutual mistake was involved D) That a unilateral mistake was involved E) None of these, because as a matter of law, Mike can legally avoid the contract with this type of mistake
62) Anna’s attorney Sergio is discussing with Anna her willingness to sell property to his partner. Sergio reminds Anna that he has never led her estray in all the years he has helped her. He continues to persuade Anna that it is a great deal to sell her property to his partner. This is a form of _____. A) economic duress B) harassment C) physical duress D) undue influence E) fraud
63) Maurice contracted with Suzanne to feed and walk her Corgi mix dog, Baby, for $100 while Suzanne was on vacation for one week. One day before Suzanne was to leave, Maurice came over and said that Baby would be a significant amount of trouble and that he would have to receive $150 in order to walk and feed Baby. Suzanne reluctantly agreed. When she returned from vacation, she handed Maurice $100 and refused to pay more. Maurice threatens to take her to small claims court. What would be the likely result?
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A) Maurice will lose due to economic duress. B) Maurice will lose due to undue influence. C) Maurice will lose because of fraud. D) Suzanne will lose because she breached the amended contract with Maurice. E) Suzanne will lose because she breached the amended contract with Maurice, unless she can establish that the prevailing rate for walking and feeding a dog for one week is no more than $100.
64) Pet Pig Farm. Marcy wanted to buy Lucy's land and use it to breed small pigs to be kept as pets. Marcy told Lucy that having water on the property was very important. Lucy assured her that a spring ran through one corner of the property. Therefore, Marcy agreed to buy the farm. Although she did not ask Lucy anything about it, Marcy, who loved pigs, assumed that the neighbors would be pleased with the pigs being in the area. In a separate contract, Lucy also agreed to sell Marcy a used truck for $5,000. After the contract for the land sale was entered into, it was discovered that actually the spring did not run through the corner of Lucy's property. The area in which the spring ran actually belonged to a neighbor. Additionally, when Lucy brought Marcy the used truck, Marcy said, "That's not the truck!" It was discovered that Lucy, who had two trucks, thought that Marcy had bought the older truck when Marcy thought she had purchased the newer truck. Marcy was also surprised when she received a petition signed by all surrounding landowners objecting to the presence of the pigs and threatening to sue Marcy for nuisance. Assuming that Lucy innocently made a misrepresentation regarding the spring running through the corner of the farm with no reason to believe that was not correct, considering only the lack of a spring issue, which of the following is true if Marcy does not want to go through with the sale of the farm? A) Marcy may rescind the contract and recover compensatory damages only. B) Marcy may rescind the contract, but she may not recover damages. C) Marcy may sue for damages, but she may not rescind the contract. D) Because Lucy acted with scienter, Marcy may receive reliance damages in addition to compensatory damages, but she may not rescind the contract. E) Because Lucy acted with scienter, Marcy may receive reliance damages in addition to compensatory damages, and she may rescind the contract.
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65) Pet Pig Farm. Marcy wanted to buy Lucy's land and use it to breed small pigs to be kept as pets. Marcy told Lucy that having water on the property was very important. Lucy assured her that a spring ran through one corner of the property. Therefore, Marcy agreed to buy the farm. Although she did not ask Lucy anything about it, Marcy, who loved pigs, assumed that the neighbors would be pleased with the pigs being in the area. In a separate contract, Lucy also agreed to sell Marcy a used truck for $5,000. After the contract for the land sale was entered into, it was discovered that actually the spring did not run through the corner of Lucy's property. The area in which the spring ran actually belonged to a neighbor. Additionally, when Lucy brought Marcy the used truck, Marcy said, "That's not the truck!" It was discovered that Lucy, who had two trucks, thought that Marcy had bought the older truck when Marcy thought she had purchased the newer truck. Marcy was also surprised when she received a petition signed by all surrounding landowners objecting to the presence of the pigs and threatening to sue Marcy for nuisance. Assuming that Lucy fraudulently made a misrepresentation regarding the spring running through the corner of the farm knowing the statement was not correct, considering only the lack of a spring issue, which of the following is true if Marcy does not want to go through with the sale of the farm? A) Marcy may rescind the contract, and she will recover $10,000 in damages in accordance with the exact statutory amount set by federal law. B) Marcy may rescind the contract, but she may not recover damages. C) Marcy may sue for damages regardless of whether she can establish injury, but she may not rescind the contract. D) Marcy may rescind the contract, and she may also sue for damages if she can establish injury. E) Marcy may rescind the contract and she may also recover damages, but only nominal damages.
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66) Pet Pig Farm. Marcy wanted to buy Lucy's land and use it to breed small pigs to be kept as pets. Marcy told Lucy that having water on the property was very important. Lucy assured her that a spring ran through one corner of the property. Therefore, Marcy agreed to buy the farm. Although she did not ask Lucy anything about it, Marcy, who loved pigs, assumed that the neighbors would be pleased with the pigs being in the area. In a separate contract, Lucy also agreed to sell Marcy a used truck for $5,000. After the contract for the land sale was entered into, it was discovered that actually the spring did not run through the corner of Lucy's property. The area in which the spring ran actually belonged to a neighbor. Additionally, when Lucy brought Marcy the used truck, Marcy said, "That's not the truck!" It was discovered that Lucy, who had two trucks, thought that Marcy had bought the older truck when Marcy thought she had purchased the newer truck. Marcy was also surprised when she received a petition signed by all surrounding landowners objecting to the presence of the pigs and threatening to sue Marcy for nuisance. Which of the following would be the result if Marcy attempts to rescind the contract and recover damages only on the basis of the neighbors' objection to a pig farm? A) Marcy may rescind the contract and recover damages because Lucy made an implied misrepresentation. B) Marcy may rescind the contract, but she may not recover damages because the situation involved a mutual mistake. C) Marcy may recover damages, but she may not rescind the contract because Lucy made an implied misrepresentation. D) Marcy may not rescind the contract or recover damages because Marcy made a unilateral mistake. E) Marcy may rescind the contract, but she may not recover damages because Marcy made a unilateral mistake.
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67) Pet Pig Farm. Marcy wanted to buy Lucy's land and use it to breed small pigs to be kept as pets. Marcy told Lucy that having water on the property was very important. Lucy assured her that a spring ran through one corner of the property. Therefore, Marcy agreed to buy the farm. Although she did not ask Lucy anything about it, Marcy, who loved pigs, assumed that the neighbors would be pleased with the pigs being in the area. In a separate contract, Lucy also agreed to sell Marcy a used truck for $5,000. After the contract for the land sale was entered into, it was discovered that actually the spring did not run through the corner of Lucy's property. The area in which the spring ran actually belonged to a neighbor. Additionally, when Lucy brought Marcy the used truck, Marcy said, "That's not the truck!" It was discovered that Lucy, who had two trucks, thought that Marcy had bought the older truck when Marcy thought she had purchased the newer truck. Marcy was also surprised when she received a petition signed by all surrounding landowners objecting to the presence of the pigs and threatening to sue Marcy for nuisance. Which of the following is the most likely result in the dispute between Marcy and Lucy regarding which used truck was sold assuming that both Marcy and Lucy were each innocently mistaken and did not intend to defraud the other? A) The contract will be rescinded. B) Marcy will be allowed to pick the truck she wants to buy because she is the buyer, and she may also recover damages. C) Lucy will be allowed to pick the truck she wants to sell because she is the seller. D) Marcy will be allowed to pick the truck she wants to buy because she also had a contract on the ancillary farm. E) Marcy will be allowed to pick the truck she wants to buy because she is the buyer, but she may not recover damages.
68) Scheming Friends. Willy very much wants to rent a basement apartment in Weaver's home. Willy threatens to tell all Weaver's friends that he and Weaver had been arrested for illegally smoking marijuana unless Weaver rents the apartment to him for $100 per month. Weaver reluctantly agrees to rent the apartment to Willy for that amount. Willy also wants to buy Weaver's car. Weaver runs back the odometer on the car before Willy test-drives it. Willy is impressed by the low mileage and agrees to buy the car. Finally, Weaver offers to sell Willy a ring for Willy's fiancée. Weaver tells Willy that the ring is a diamond and believes that to be true. After the deal is made, however, a jeweler friend of Weaver's informs him that the ring is a fake. When Willy shows up with the money, Weaver says nothing. He just hands Willy the ring and takes the money. Later, Willy finds out that the odometer was run backwards from another friend to whom Weaver confided. Willy also finds out from his girlfriend that the ring is a fake. Which of the following legal terms indicate(s) Willy's threat to tell friends about the arrest unless Weaver rents the apartment?
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A) Duress B) Unconscionability C) Fraud D) Duress, unconscionability, and fraud E) Duress and unconscionability, but not fraud
69) Scheming Friends. Willy very much wants to rent a basement apartment in Weaver's home. Willy threatens to tell all Weaver's friends that he and Weaver had been arrested for illegally smoking marijuana unless Weaver rents the apartment to him for $100 per month. Weaver reluctantly agrees to rent the apartment to Willy for that amount. Willy also wants to buy Weaver's car. Weaver runs back the odometer on the car before Willy test-drives it. Willy is impressed by the low mileage and agrees to buy the car. Finally, Weaver offers to sell Willy a ring for Willy's fiancée. Weaver tells Willy that the ring is a diamond and believes that to be true. After the deal is made, however, a jeweler friend of Weaver's informs him that the ring is a fake. When Willy shows up with the money, Weaver says nothing. He just hands Willy the ring and takes the money. Later, Willy finds out that the odometer was run backwards from another friend to whom Weaver confided. Willy also finds out from his girlfriend that the ring is a fake. Which of the following would be the most likely result if Weaver attempts to rescind the agreement to rent the apartment? A) He will be able to rescind the agreement based upon Willy's extortion. B) He will be able to rescind the agreement based upon the threat to Willy's economic interests. C) He will be able to rescind the contract because of a misrepresentation. D) He will not be able to rescind the contract because he agreed to it. E) He will not be able to rescind the agreement unless he can show that he was not actually convicted of the crime alleged.
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70) Scheming Friends. Willy very much wants to rent a basement apartment in Weaver's home. Willy threatens to tell all Weaver's friends that he and Weaver had been arrested for illegally smoking marijuana unless Weaver rents the apartment to him for $100 per month. Weaver reluctantly agrees to rent the apartment to Willy for that amount. Willy also wants to buy Weaver's car. Weaver runs back the odometer on the car before Willy test-drives it. Willy is impressed by the low mileage and agrees to buy the car. Finally, Weaver offers to sell Willy a ring for Willy's fiancée. Weaver tells Willy that the ring is a diamond and believes that to be true. After the deal is made, however, a jeweler friend of Weaver's informs him that the ring is a fake. When Willy shows up with the money, Weaver says nothing. He just hands Willy the ring and takes the money. Later, Willy finds out that the odometer was run backwards from another friend to whom Weaver confided. Willy also finds out from his girlfriend that the ring is a fake. Which of the following is true regarding Willy's agreement to purchase the car? A) He will not be able to rescind the contract because Weaver made no affirmative statements. B) He will not be able to rescind the contract unless he can prove that he expressly asked Weaver if the mileage was run backwards on the car and Weaver failed to reveal that it had been altered. C) He will not be able to rescind the contract because there is no proof that the mileage alteration affected the car's engine. D) He will be able to rescind the contract because Weaver caused him duress. E) He will be able to rescind the contract because of Weaver's fraudulent misrepresentation.
71) Scheming Friends. Willy very much wants to rent a basement apartment in Weaver's home. Willy threatens to tell all Weaver's friends that he and Weaver had been arrested for illegally smoking marijuana unless Weaver rents the apartment to him for $100 per month. Weaver reluctantly agrees to rent the apartment to Willy for that amount. Willy also wants to buy Weaver's car. Weaver runs back the odometer on the car before Willy test-drives it. Willy is impressed by the low mileage and agrees to buy the car. Finally, Weaver offers to sell Willy a ring for Willy's fiancée. Weaver tells Willy that the ring is a diamond and believes that to be true. After the deal is made, however, a jeweler friend of Weaver's informs him that the ring is a fake. When Willy shows up with the money, Weaver says nothing. He just hands Willy the ring and takes the money. Later, Willy finds out that the odometer was run backwards from another friend to whom Weaver confided. Willy also finds out from his girlfriend that the ring is a fake. Which of the following is true regarding Willy's agreement to purchase the ring?
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A) He will not be able to rescind the contract because Weaver did not make an express false statement regarding the ring. B) He will not be able to rescind the contract because Weaver did not make an express false statement regarding the ring and because Weaver did not know the ring was a fake when the initial agreement was made. C) He will not be able to rescind the contract unless he can prove that Weaver was at least negligent in not realizing the ring was a fake when the initial agreement was made. D) He will be able to rescind the agreement because Weaver caused him duress. E) He will be able to rescind the agreement because Weaver committed fraudulent misrepresentation.
72) Shady lawyer. Brice had a number of ethical issues come up in law school involving alleged cheating but managed to graduate because nothing was ever proven. Upon obtaining his law license, Brice enjoyed living "on the edge" and engaged in tactics that were at least questionable. One of his clients was an older gentleman, Sam, with significant assets and significant legal issues involving a messy divorce stemming from his involvement with a local dog groomer, Susie. Brice told Sam that he felt certain that he could arrange matters so that Sam could live happily in the Caribbean with Susie but that, in addition to paying a hefty legal fee, Sam would need to name Brice as a significant beneficiary in his will and give Brice power of attorney over his assets. Sam agreed to do so. He gave Brice power of attorney and changed his will to reflect that upon his death, Brice would receive half his estate. The other half went to Susie. Sam also paid the hefty legal fee Brice demanded. At that point, Brice agreed to proceed with negotiations in the divorce. Shortly after the divorce, Sam had an unexpected heart attack and died immediately. Susie, the executor of the will, told Brice that she was reporting him to the state bar association and that he was not entitled to any assets from the estate. Brice told Susie that he knew that Susie had failed to pay income tax for all her dog grooming income and that he was reporting her unless she kept her mouth shut and consented to the terms of the contract. Brice also said that in return for keeping his mouth shut, he wanted additional sums purportedly for his work on Sam's divorce. Which of the following is true regarding Brice's dealing with Sam?
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A) Brice has caused Sam to experience duress. B) Brice has unduly influenced Sam. C) Brice has caused Sam to experience duress and unduly influenced Sam. D) Brice has committed fraudulent misrepresentation and caused Sam to experience duress. E) Brice has not committed any wrongdoing, unless it can be proven that Sam lacked mental capacity during his transactions with Brice; in that case, Brice has caused Sam to experience duress.
73) Shady lawyer. Brice had a number of ethical issues come up in law school involving alleged cheating but managed to graduate because nothing was ever proven. Upon obtaining his law license, Brice enjoyed living "on the edge" and engaged in tactics that were at least questionable. One of his clients was an older gentleman, Sam, with significant assets and significant legal issues involving a messy divorce stemming from his involvement with a local dog groomer, Susie. Brice told Sam that he felt certain that he could arrange matters so that Sam could live happily in the Caribbean with Susie but that, in addition to paying a hefty legal fee, Sam would need to name Brice as a significant beneficiary in his will and give Brice power of attorney over his assets. Sam agreed to do so. He gave Brice power of attorney and changed his will to reflect that upon his death, Brice would receive half his estate. The other half went to Susie. Sam also paid the hefty legal fee Brice demanded. At that point, Brice agreed to proceed with negotiations in the divorce. Shortly after the divorce, Sam had an unexpected heart attack and died immediately. Susie, the executor of the will, told Brice that she was reporting him to the state bar association and that he was not entitled to any assets from the estate. Brice told Susie that he knew that Susie had failed to pay income tax for all her dog grooming and that he was reporting her unless she kept her mouth shut and consented to the terms of the contract. Brice also said that in return for keeping his mouth shut, he wanted additional sums purportedly for his work on Sam's divorce. Which of the following is true regarding Brice's threat to report Susie for tax evasion? A) Brice has caused Susie to experience duress. B) Brice has unduly influenced Susie. C) Brice has caused Susie to experience duress and unduly influenced Susie. D) Brice has committed intentional wrongful disclosure. E) Brice has not done anything wrong, assuming Susie truly cheated on her taxes.
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74) Shady lawyer. Brice had a number of ethical issues come up in law school involving alleged cheating but managed to graduate because nothing was ever proven. Upon obtaining his law license, Brice enjoyed living "on the edge" and engaged in tactics that were at least questionable. One of his clients was an older gentleman, Sam, with significant assets and significant legal issues involving a messy divorce stemming from his involvement with a local dog groomer, Susie. Brice told Sam that he felt certain that he could arrange matters so that Sam could live happily in the Caribbean with Susie but that, in addition to paying a hefty legal fee, Sam would need to name Brice as a significant beneficiary in his will and give Brice power of attorney over his assets. Sam agreed to do so. He gave Brice power of attorney and changed his will to reflect that upon his death, Brice would receive half his estate. The other half went to Susie. Sam also paid the hefty legal fee Brice demanded. At that point, Brice agreed to proceed with negotiations in the divorce. Shortly after the divorce, Sam had an unexpected heart attack and died immediately. Susie, the executor of the will, told Brice that she was reporting him to the state bar association and that he was not entitled to any assets from the estate. Brice told Susie that he knew that Susie had failed to pay income tax for all her dog grooming and that he was reporting her unless she kept her mouth shut and consented to the terms of the contract. Brice also said that in return for keeping his mouth shut, he wanted additional sums purportedly for his work on Sam's divorce. Assuming that Sam had paid all amounts validly due from the divorce proceeding, which of the following is true regarding Brice's attempt to obtain additional fees? A) Brice has caused Susie to experience duress. B) Brice has unduly influenced Susie. C) Brice has caused Susie to experience duress and unduly influenced Susie. D) Brice has committed intentional wrongful disclosure. E) Brice is not guilty of anything, so long as he used no physical force to obtain Susie's agreement.
75) When _____ is present, both parties to the agreement are assumed to have made their own choices based on complete freedom to consent to or reject the terms of the bargain. A) duress B) undue influence C) legal assent D) fraud E) misrepresentation
76)
The injured party makes the case for duress by demonstrating that _____.
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A) the other party had a higher level of education B) the other party was a merchant C) there was a special relationship that caused him or her not to use free will D) the threat left him or her no reasonable alternatives E) the threat was non-material in nature
77) To make business transactions smoother and more dependable, the law has developed rules about when “yes” means _____. A) conditionally B) maybe C) probably D) with some reasonable degree of certainty E) yes
78) Parties to a contract cannot successfully claim they justifiably relied on a false assertion of fact when the error in the statement _____. A) was made by a merchant B) would have been clear to anyone who had inspected the item being exchanged C) involved an innocent misrepresentation D) involved negligent misrepresentation E) could not have been determined no matter how hard either party tried
79) Ellen and Kippen were discussing that Ellen was ready to sell her computer console and video games. Ellen said she wanted $750. Kippen said that was a good price, and Ellen said she would send her an email confirming their conversation. Later that night, Ellen sent Kippen an email offer to sell the computer console and video games; however, she accidentally typed $570 instead of $750. Kippen replied, “I’ll take it for $570.” Is this a valid contract?
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A) Yes, since Kippen agreed to the offer B) No, since this is a case of mutual mistake C) No, since this is a case of an innocent misrepresentation D) No, since Kippen knew or had reason to know of Ellen’s mistake E) No, since this case involves duress
ESSAY. Write your answer in the space provided or on a separate sheet of paper. 80) What is the result of a contract being voidable?
81) List the three (3) reasons referenced in the textbook that would permit a court to invalidate a contract on the basis of unilateral mistake.
82) What must a plaintiff prove in order to establish fraudulent misrepresentation and recover damages as a result?
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83) Constance was buying a used personal watercraft from Ralph. He told her that the engine on the watercraft was in good shape. Constance agreed to pay Ralph $4,000 for the watercraft. She was going to be out of town on vacation, so Ralph and Constance agreed that when she returned in a week, she would bring over the money and pick up the watercraft. During that week, the manufacturer notified Ralph that the watercraft was being recalled because it had a faulty engine that needed repair. Ralph said nothing about the condition of the engine or the recall when Constance came to pick up the watercraft. They chatted about other matters; she gave him the $4,000, and took the watercraft. Later, Constance started having problems with the watercraft and discovered that Ralph had been notified of the issue with the engine. She asked for a refund accusing Ralph of fraud. Ralph refused on the basis that he did not make any misrepresentation. Who is correct and why? For purposes of this question, assume that sales talk or puffery is not at issue.
84) Bob offered to sell Teresa his used motorcycle. She took a look at it and asked Bob how it ran, to which Bob replied that it was in good shape. Teresa thought the motorcycle was two years old when she purchased it. A few days later, she discovered that it was actually five years old. She asks Bob to take back the motorcycle. He tells her no way, that he thought she knew the age of that model, and that she should have asked him if she had any uncertainty. If Teresa sues, who is likely to win and why?
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Answer Key Test name: Chap 12_5_The Essentials_Kubasek 1) TRUE When a contract is voidable, it may be rescinded, or canceled. 2) TRUE Major obstacles to genuine assent include mistake, misrepresentation, undue influence, and duress. 3) TRUE European courts agree with the reluctance of American courts to interfere with a contract just because the value of the item in question has changed since the agreement. When they make the contract, the parties are assumed to have accepted that the value might change later. However, European courts permit contract rescission for a mistake of value when the mistake involves more than 50 percent of the value at the time of the contract. 4) TRUE Mistakes in contract law do not result from untrue statements made by one party to the contract; instead, a mistake results from an erroneous belief about the facts of a contract at the time the contract is concluded. 5) FALSE Generally, a unilateral mistake does not make a contract void. Courts are hesitant to interfere with a contract when one of the parties has a correct understanding of the material facts of the agreement. 6) TRUE
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When both parties to a contract are mistaken about either a current or a past material fact, either party can choose to rescind the contract.Rescinding such a contract is fair because any agreement between the parties was an illusion: An ambiguity in some key fact prevented the parties from being in actual agreement. 7) TRUE For a mutual mistake to interfere with legal consent, it must involve a basic assumption about the subject matter of the contract.It must also have a material effect on the agreement, and an adverse effect on a party that did not agree to bear the risk of mistake at the time of the agreement. 8) TRUE A misrepresentation is an untruthful assertion by one of the parties about a material fact.One party said something that prevented the parties from having the mental agreement necessary for a legal contract. The parties only appeared to agree, so their contract lacked legal assent. 9) TRUE An innocent misrepresentation is a false statement about a fact material to an agreement that the person who made the statement believed to be true. The person who made the false statement had no knowledge of the falsity of the claim. We say the person lacked scienter. 10) FALSE A fraudulent misrepresentation is a false representation of a material fact that is consciously false and is intended to mislead the other party. Fraudulent misrepresentation is intentional misrepresentation. Here, scienter is clear. The party making the misrepresentation either knows or believes that the factual claim is false or knows that there is no basis for the assertion. 11) TRUE
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Fraudulent misrepresentation has three elements: a) a false statement about a past or existing fact that is material to the contract; b) intent to deceive; and c) justifiable reliance on the false statement by the innocent party to the agreement. 12) TRUE In some contract negotiations, one party makes a statement of material fact that he thinks is true, but he is negligent in making the assertion. Such a negligent misrepresentation results when the party making the statement would have known the truth about the fact had he used reasonable care to discover or reveal it. 13) TRUE Even though negligent misrepresentation involves no actual intent to deceive, the party making the false statement is treated in contract law as if the intent were present. The impact of negligent misrepresentation is identical to that of fraudulent misrepresentation, and the injured party can sue for damages. 14) FALSE Concealment involves the active hiding of the truth about a material fact pertaining to a contract. Nondisclosure is different because it involves the failure to provide pertinent information about the projected contract. 15) TRUE Until recently, courts have been hesitant to use nondisclosure as a basis for rescinding a contract because it is a passive form of misleading conduct. Under ordinary situations associated with a legal bargain, it is not the obligation of one party to bring up any and all facts he or she might possess. Each individual is, to a large extent, treated as a reasonable decision-maker. 16) TRUE
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Today, nondisclosure is especially likely to provide the basis for rescission when one party has information about a basic assumption of the deal that is unavailable to the other party.As a result of this logic, sellers have a special duty to disclose because they know more about the structural makeup of the item being purchased. 17) TRUE Undue influence is a situation in which one person has taken advantage of his or her dominant position in a relationship to unduly persuade the other person. The persuasive efforts of the dominant person must have interfered with the ability of the weaker person to make his or her own decision. When people are bargaining with their attorney, doctor, guardian, relative, or anyone else in a relationship involving a high degree of trust, they can be persuaded by unusual pressures unique to that relationship. 18) TRUE Duress is a much more visible and active interference with free will than is undue influence. Duress is found when one party is forced into an agreement by the wrongful act of another. One way to establish duress is when one party threatens physical harm or extortion to gain consent to a contract. 19) FALSE The law in the Philippines is somewhat unusual in the way it limits the time for rescinding a contract. In the Philippines, if consent is given through mistake, violence, intimidation, undue influence, or fraud, contracts are valid until they are annulled. The period within which to annul such a contract is four years. In cases of intimidation, violence, or undue influence, the time period is measured from the time the defect in the assent ceases. In cases of mistake or fraud, it is measured from the time of the discovery of the defect. 20) A Version 1
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When a contract is voidable, it may be rescinded or canceled. 21) D The major obstacles to genuine assent include mistake, misrepresentation, undue influence, and duress. 22) D A mistake in contract law is an erroneous belief about the facts of a contract at the time the contract is concluded. Mistakes in contract law do not result from the untrue statements of the other party to the contract. 23) D A mistake is an erroneous belief about the facts of a contract at the time the contract is concluded. Mistakes in contracts may be classified as either unilateral or mutual. 24) A For a mutual mistake to interfere with legal consent, it must involve a basic assumption about the subject matter of the contract. To rise to the level of a basic assumption, the mistake would need to be about the existence, quality, or quantity of the items to be exchanged. 25) B The famous story of the Peerless ship has taught generations of students the importance of being very clear in defining material facts in any contract. The contracting parties had agreed that the vessel Peerless would deliver the cotton they were exchanging. Unfortunately for them, there were actually two ships named Peerless! So, when the deal was made, one party had one Peerless in mind while the other meant the second Peerless. This was a mutual mistake, an error by both parties about a material fact pertaining to the contract. 26) E
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In upholding an award to the plaintiff, the South Carolina Supreme Court explained that a contract may be rescinded for unilateral mistake only when the mistake has been induced by fraud, deceit, misrepresentation, concealment, or imposition of the party opposed to the rescission, without negligence on the part of the party claiming rescission, or when the mistake is accompanied by very strong and extraordinary circumstances that would make it a great wrong to enforce the agreement. According to the court, Mid-Carolina had not demonstrated the presence of any of the circumstances that would justify a rescission. 27) B For a mutual mistake to interfere with legal consent, it must involve a material (i.e., important in the context of the particular contract) effect on the agreement.A court will not void a contract for a non-material, mutual mistake. 28) D Any fraud on the party of a party to a contract provides a basis for contract rescission. The parties cannot be said to have assented when one of the parties was tricked into the agreement by a fraudulent misrepresentation. Thus, the agreement was not voluntary and can be rescinded on the grounds that there was no meeting of the minds. 29) D In Garage Solutions v. Monty J. Pearson, although Pearson did not initially raise the defense of duress, the court found there to be evidence enough to enlarge the scope of the pleadings, especially since Garage Solutions did not object. Being that Pearson was under duress, he did not lawfully consent to the agreements. Because there was no consent, there was no contract as well as harm to the company’s goodwill and reputation. 30) B Version 1
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A mistake is an erroneous belief about the facts of a contract at the time the contract is concluded. Mistakes in contracts may be classified as either unilateral or mutual. An error by one party about a material fact is known as a unilateral mistake. 31) A A mistake is an erroneous belief about the facts of a contract at the time the contract is concluded. Mistakes in contracts may be classified as either unilateral or mutual. An error on the part of both parties to an agreement is a mutual mistake. 32) D A mistake is an erroneous belief about the facts of a contract at the time the contract is concluded. Mistakes in contracts may be classified as either unilateral or mutual. A unilateral mistake is the result of an error by one contracting party about a material fact, while a mutual mistake is shared by both parties to the agreement. The distinction between unilateral and mutual mistakes is important in determining which contracts are voidable. 33) C In general, a unilateral mistake does not void a contract. Courts are hesitant to interfere with a contract when one of the parties has a correct understanding of the material facts of the agreement. 34) E The law in the Philippines is somewhat unusual in the way it limits the time for rescinding a contract. In the Philippines, if consent is given through mistake, violence, intimidation, undue influence, or fraud, contracts are valid until they are annulled. The period within which to annul such a contract is four years. In cases of intimidation, violence, or undue influence, the time period is measured from the time the defect in the assent ceases. In cases of mistake or fraud, it is measured from the time of the discovery of the defect. Version 1
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35) E For a mutual mistake to interfere with legal consent, it must have an adverse effect on a party that did not agree to bear the risk of mistake at the time of the agreement. 36) D For a mutual mistake to interfere with legal consent, it must involve a basic assumption about the subject matter of the contract, a material effect on the agreement, and an adverse effect on a party that did not agree to bear the risk of mistake at the time of the agreement. Courts will not void contracts for reason of mutual mistake if even one of the preceding attributes is missing. 37) A In the Peerless case, the contracting parties had agreed that the vessel Peerless would deliver the cotton they were exchanging. Unfortunately for them, there were actually two ships named Peerless! So, when the deal was made, one party had one Peerless in mind while the other meant the second Peerless. This was a mutual mistake, an error by both parties about a material fact pertaining to the contract. The times the ships sailed were materially different, so the court rescinded the contract. 38) E An innocent misrepresentation is a false statement about a fact material to an agreement that the person who made the statement believed to be true. The person who made the false statement had no knowledge of the falsity of the claim. 39) C
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If a person who made a false statement had no knowledge of the falsity of the claim, we say the person lacked scienter. Scienter is a legal term that refers to intent or knowledge of wrongdoing. This means that an offending party had knowledge of the wrongness of an act or event prior to committing it. 40) A In Indian law, duress is referred to as coercion, or the committing or threatening to commit any act forbidden by the Indian Penal Code to force a person into entering an agreement. 41) E Innocent misrepresentations permit the party that was misled by the false statement to rescind the contract. However, because the party that made the false statement had no intent to mislead, the aggrieved party cannot sue for damages. 42) D In some contract negotiations, one party makes a statement of material fact that he thinks is true, but he is negligent in making the assertion. Such a negligent misrepresentation results when the party making the statement would have known the truth about the fact had he used reasonable care to discover or reveal it. 43) E
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In some contract negotiations, one party makes a statement of material fact that he thinks is true, but he is negligent in making the assertion. Such a negligent misrepresentation results when the party making the statement would have known the truth about the fact had he used reasonable care to discover or reveal it. Even though there was no actual intent to deceive, the party making the false statement is treated in contract law as if the intent were present. The impact on the injured party of negligent misrepresentation is identical to that of fraudulent misrepresentation. Damages, however, tend to be greater for the injured party if fraudulent misrepresentation is at issue. 44) E Even in countries such as China that are trying to encourage joint ventures and global commercial activity, fraudulent claims can end the country’s hospitality to agreements with outsiders. In China, accusations of outsiders' fraudulent misrepresentation have resulted in heavy fines and even refusals to allow the fraudulent party to enter into any more agreements with Chinese firms. 45) B A fraudulent misrepresentation is a false representation of a material fact that is consciously false and is intended to mislead the other party. Fraudulent misrepresentation is intentional misrepresentation. The party making the misrepresentation either knows or believes that the factual claim is false or knows that there is no basis for the assertion. 46) D For fraudulent misrepresentation to be the basis for a contract rescission, the statement of fact need not be an actual assertion. Concealment can be treated as the equivalent of an actual assertion. Concealment involves the active hiding of the truth about a material fact. 47) B
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For fraudulent misrepresentation to be the basis for a contract rescission, the statement of fact need not be an actual assertion. Nondisclosure can be treated as the equivalent of an actual assertion. Nondisclosure involves the failure to provide pertinent information about a projected contract. 48) E Elements of fraudulent misrepresentation include: a) a false statement about a past or existing fact that is material to the contract; b) intent to deceive; c) justifiable reliance on the false statement by the innocent party to the agreement; and, if damages are sought, d) injury to the defrauded party as a result of the misrepresentation. 49) D Courts will now find nondisclosure as having the same legal effect as an actual false assertion when a relationship of trust exists between the parties to the contract, and when there is failure to correct assertions of fact that are no longer true in light of events that have occurred since the initial consent to the terms of the agreement. 50) B Innocent misrepresentations permit the party who was misled by the false statement to rescind the contract. However, because the party who made the false statement had no intent to mislead, the aggrieved party cannot sue for damages. 51) B Undue influence refers to a special relationship in which one person has taken advantage of his or her dominant position in the relationship to unduly persuade the other person. 52) A Duress is a much more visible and active interference with free will than is undue influence. Duress is found when one party was forced into the agreement by the wrongful act of another. Version 1
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53) D Economic duress occurs when one party threatens the other's economic interests, such as by refusing to perform according to a contract unless the other party either signs another contract or pays him a higher price than that specified in the original agreement. 54) A Duress is a much more visible and active interference with free will than is undue influence. Duress is found when one party was forced into the agreement by the wrongful act of another. An example of duress is when one party threatens physical harm to gain consent to a contract. 55) C Duress is a much more visible and active interference with free will than is undue influence. Duress is found when one party was forced into the agreement by the wrongful act of another. An example of duress is when one party threatens to file a criminal lawsuit unless another party gives consent to the terms of the contract. 56) A Duress is a much more visible and active interference with free will than is undue influence. Duress is found when one party was forced into the agreement by the wrongful act of another. An example of duress is when one party threatens to file a frivolous civil lawsuit unless another party gives consent to the terms of the contract. 57) E Duress is a much more visible and active interference with free will than is undue influence. Duress is found when one party was forced into the agreement by the wrongful act of another. Threats to file a civil case against a party do not constitute duress unless the suit is frivolous. 58) D
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Duress is found when one party was forced into the agreement by the wrongful act of another person. With duress, the point is that the free will necessary for legal consent had been removed by the specifics of the threat. 59) A In some contract negotiations, one party makes a statement of material fact that he thinks is true, but he is negligent in making the assertion. A negligent misrepresentation results when the party making the statement would have known the truth about the fact had he used reasonable care to discover or reveal it. 60) C A person who makes a false statement knowing of its falsity is said to have scienter. Scienter is a legal term that refers to intent or knowledge of wrongdoing. This means that an offending party has knowledge of the wrongness of an act or event prior to committing it. 61) A For a mutual mistake to interfere with legal consent, it must involve all of the following: a) a basic assumption about the subject matter of the contract; b) a material effect on the agreement; and c) an adverse effect on a party that did not agree to bear the risk of mistake at the time of the agreement. Courts will not void contracts for reason of mutual mistake if even one the preceding attributes is missing. 62) D
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Undue influence refers to those special relationships in which one person has taken advantage of his or her dominant position in the relationship to persuade the other person. The persuasive efforts of the dominant person must have interfered with the ability of the weaker person to make his or her own decision. When people are bargaining with their attorney, doctor, guardian, relative, or anyone else in a relationship involving a high degree of trust, unusual pressures unique to that relationship can persuade them. 63) A Rescission is available due to economic duress if one party threatens the other's economic interests, such as by refusing to perform according to a contract unless the other party either signs another contract or pays him a higher price than that specified in the original agreement. 64) B Innocent misrepresentations permit the party that was misled by the false statement to rescind the contract; but because the party that made the false statement had no intent to mislead, the aggrieved party cannot sue for damages. 65) D If damages are sought in a fraudulent misrepresentation case, the defrauded party must prove that he or she was injured by the intentional misrepresentation. 66) D A unilateral mistake is an error by one party about a material fact pertaining to the contract. In general, a unilateral mistake does not void a contract, and no exceptions apply here. 67) A
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For a mutual mistake to interfere with legal consent such as is the case here, it must involve all the following: a basic assumption about the subject matter of the contract, a material effect on the agreement, and an adverse effect on a party that did not agree to bear the risk of mistake at the time of the agreement. 68) A Duress is found when one party was forced into the agreement by the wrongful act of another person. For example, duress occurs when one party commits extortion to gain consent to a contract. 69) A Duress is found when one party was forced into the agreement by the wrongful act of another party. For example, duress occurs when one party commits extortion to gain consent to a contract. If one party commits extortion to gain consent to a contract, such an illegal demand would trigger a successful request for contract rescission. 70) E For fraudulent misrepresentation to be the basis for a contract rescission, the statement of fact need not be an actual assertion. For example, concealment can be treated as the equivalent of an actual assertion. Concealment involves the active hiding of the truth about a material fact. For example, a seller removing mileage from a car's odometer before selling it to a buyer constitutes concealment. 71) E For fraudulent misrepresentation to be the basis for a contract rescission, the statement of fact need not be an actual assertion. For example, nondisclosure can be treated as the equivalent of an actual assertion. Nondisclosure involves a failure to provide pertinent information about a projected contract. 72) B
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Undue influence refers to those special relationships in which one person has taken advantage of his or her dominant position in the relationship to unduly persuade the other person. The persuasive efforts of the dominant person must have interfered with the ability of the weaker person to make his or her own decision. 73) A Duress is found when one party was forced into the agreement by the wrongful act of another party. Duress occurs when one party threatens to file a criminal lawsuit unless consent is given to the terms of a contract. 74) A Duress is found when one party was forced into the agreement by the wrongful act of another person. Duress occurs when one party commits extortion to gain consent to a contract. 75) C When legal assent is present, both parties to the agreement are assumed to have made their own choices based on complete freedom to consent to or reject the terms of the bargain. 76) D Duress is found when one party was forced into the agreement by the wrongful act of another party. The injured party makes the case for duress by demonstrating that the threat left him or her no reasonable alternatives. 77) E To make business transactions smoother and more dependable, the law has developed rules about when "Yes" means "Yes." 78) B Parties to contracts cannot successfully claim they justifiably relied on a false assertion of fact when the error in the statement would have been clear to anyone who had inspected the item being exchanged. 79) D Version 1
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As a general rule, a unilateral mistake does not void a contract. However, any of the following conditions would permit a court to invalidate a contract due to a unilateral mistake: a) one party made a mistake about a material fact, and the other party either knew or had reason to know about the mistake; b) the mistake was caused by a clerical error that did not result from gross negligence; or c) the mistake was so serious that the contract is unconscionable (i.e., it is so unreasonable that it is outrageous). 80) When a contact is voidable, it may be rescinded or canceled. The cancellation of a contract permits the person who canceled it to require the return of everything she gave the other party. At the same time, the person who rescinds the contract must herself return whatever she has received from the other party. 81) As a general rule, a unilateral mistake does not void a contract. However, any of the following conditions would permit a court to invalidate a contract due to a unilateral mistake: a) one party made a mistake about a material fact, and the other party either knew or had reason to know about the mistake; b) the mistake was caused by a clerical error that did not result from gross negligence; or c) the mistake was so serious that the contract is unconscionable (i.e., it is so unreasonable that it is outrageous).
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82) A fraudulent misrepresentation is a false representation of a material fact that is consciously false and is intended to mislead the other party. Fraudulent misrepresentation is intentional misrepresentation. Here, scienter is clear. The party making the misrepresentation either knows or believes that the factual claim is false or knows that there is no basis for the assertion. In order to prove fraudulent misrepresentation, the plaintiff must establish: a) a false statement about a past or existing fact that is material to the contract; b) intent to deceive; c) justifiable reliance on the false statement by the innocent party to the agreement; and d) proof of injury. 83) Constance is correct. For fraudulent misrepresentation to be the basis for a contract rescission, the statement of fact need not be an actual assertion. Nondisclosure can be treated as the equivalent of an actual assertion. Nondisclosure involves a failure to provide pertinent information about a projected contract. Courts will find nondisclosure as having the same legal effect as an actual false assertion when there is a failure to correct assertions of fact that are no longer true in light of events that occurred since the initial consent to the terms of the agreement. 84) Bob is likely to win because a unilateral mistake on Teresa's part is involved. A unilateral mistake is the result of an error by one party about a material fact pertaining to the contract. In general, a unilateral mistake does not void a contract.
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CHAPTER 13 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) The statute of frauds relates to fraudulent contracts. ⊚ true ⊚ false
2) Statute of frauds legislation is generally state-specific, with some states having statutes of frauds created by judicial decisions. ⊚ true ⊚ false
3)
The statute of frauds serves to protect promisors from poorly written contracts. ⊚ true ⊚ false
4) The Uniform Commercial Code (UCC) requires that contracts for the sale of goods for $500 or more must be in writing in order to be enforceable. ⊚ true ⊚ false
5) Under the respondeat superior rule, contracts that would normally fall under the statute of frauds and need a writing if negotiated by the principal must be in writing even if negotiated by an agent. ⊚ true ⊚ false
6) Subrogation refers to an agreement in which a third party agrees to pay the debt owed by another party if that other party fails to pay his or her debt. ⊚ true ⊚ false
7) A prenuptial agreement is an agreement two parties enter into before marriage that clearly states the ownership rights each party enjoys in the other party's property.
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⊚ ⊚
true false
8) Although a mutual promise to marry falls within the statute of frauds, prenuptial agreements do not. ⊚ true ⊚ false
9) A secondary obligation arises when a party outside a primary agreement promises to fulfill one of the original party's obligations if the original party fails to fulfill his or her obligation. ⊚ true ⊚ false
10)
Mortgages and leases need not be in writing in order to be enforceable. ⊚ true ⊚ false
11) Partial performance can override the statute of fraud’s requirement for a written agreement. ⊚ true ⊚ false
12) If the buyer in an alleged contract for the sale of land has paid any portion of the sales price and either has begun to permanently improve the land or has taken possession of the land, the courts will consider the contract partially performed, and this partial performance will amount to proof of the contract. ⊚ true ⊚ false
13) In order to be recognized by a court, a writing signed by both parties is needed to enforce a contract if it is being offered as proof of an agreement. ⊚ true ⊚ false Version 1
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14) The parol evidence rule is a common law rule that specifically addresses the admissibility of written evidence as it relates to oral contracts. ⊚ true ⊚ false
15) In the context of the parol evidence rule, the word “parol” means the release of a prisoner temporarily for a special purpose or permanently before the completion of a sentence, on the promise of good behavior. ⊚ true ⊚ false
16) Whenever a written agreement under the statute of frauds contains a serious and obvious typographical error, parol evidence is inadmissible to correct the error. ⊚ true ⊚ false
17)
When a court deems a contract integrated, parol evidence is generally inadmissible. ⊚ true ⊚ false
18)
If William transfers his rights to Steve to receive his wages, this is a delegation of wages. ⊚ true ⊚ false
19)
The party who receives the rights of another party in a contract is called a delegatee. ⊚ true ⊚ false
20) When an assignor transfers her rights to an assignee, the assignor legally retains all rights she has to collect on the contract. ⊚ true ⊚ false Version 1
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21) In order for an assignment to be valid, an assignee must agree to accept the assigned rights. ⊚ true ⊚ false
22)
Both assignments and delegations transfer rights to a contract. ⊚ true ⊚ false
23) The Uniform Commercial Code (UCC) requires assignments to be in writing when the amount being assigned is less than $500. ⊚ true ⊚ false
24) An intended beneficiary is a third party to a contract whom the contracting parties intended to benefit directly from their contract. ⊚ true ⊚ false
25) A donee beneficiary is a third party who benefits from a contract in which the promisor agrees to pay the promisee's debt. ⊚ true ⊚ false
26)
A donee beneficiary is a type of incidental beneficiary. ⊚ true ⊚ false
27) Pursuant to the equitable theory of post hoc ergo propter hoc, an intended beneficiary can enforce her rights to a contract before the rights vest. ⊚ true ⊚ false
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28) An incidental beneficiary is one who intentionally gains a benefit from a contract between other parties. ⊚ true ⊚ false
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 29) Which of the following is incorrect regarding written contracts? A) Disputes are easier to settle when contractual terms are solidified in writing. B) The moment of writing allows both parties to reconsider terms and ensure what they desire. C) In general, written contracts aid in the conduct of smooth business contracts. D) The idea of requiring a writing comes from the English Act for the Prevention of Frauds and Perjuries. E) All contracts must be in writing in order to be enforced.
30) In 1677 the English Parliament passed which of the following to require that certain contracts be in writing? A) The Act of Fraud Protection B) The Act for the Prevention of Frauds and Perjuries C) An Act Prohibiting Commercial Misappropriation D) An Act Against Fraudulent Transfers E) The Perjuries, Fraud, and Consumer Protection Act
31)
Which of the following is incorrect regarding the statute of frauds?
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A) It relates to fraudulent contracts. B) It does not address illegal contracts. C) It does not exist at the federal level. D) It requires that certain contracts be in writing. E) Some states have statutes of frauds created by judicial decision rather than by legislation.
32)
What is the stated purpose of the statute of frauds?
A) To allow hearsay evidence to be introduced at trial to prove a contract existed B) To allow oral evidence to be admitted at trial indicating something other than what was agreed to in the written contract between the parties C) To prevent fraud in contracts D) To prevent unreliable oral evidence from interfering with a contractual relationship E) To allow a party to claim fraud in civil, rather than criminal, court.
33) Which of the following does the statute of frauds not impose on parties when dealing with a contract? A) Carefully consider the terms B) Agree to the terms C) Write the terms down D) Sign the agreement E) Give a copy of the contract to the court
34)
Which of the following types of contracts does not fall within the statute of frauds? A) Contracts that cannot be performed within one (1) year B) Promises made in consideration of marriage C) Contracts for one party to pay the debt of another party if the initial party fails to pay D) Agreements related to an interest in land E) Contracts for the sale of goods totaling more than $500
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35) Which of the following was the result on appeal in Heritage Constructors, Inc. v. Chrietzberg Electric, Inc. and Richard Marc Chrietzberg, the case in the textbook involving a wastewater treatment plant improvement project in which the project’s electrical work involved the use of a subcontractor, with the general contractor suing the subcontractor for withdrawing its bid? A) That the agreement between the contractor and the subcontractor fell within the statute of frauds and satisfied it; that the subcontractor was not liable for promissory estoppel damages; and that the subcontractor was not responsible for negligent misrepresentation damages B) That the agreement between the contractor and the subcontractor fell within the statute of frauds and satisfied it; that the subcontractor was liable for promissory estoppel damages; and that the subcontractor was not responsible for negligent misrepresentation damages C) That the agreement between the contractor and the subcontractor fell within the statute of frauds and satisfied it; that the subcontractor was liable for promissory estoppel damages; and that the subcontractor was responsible for negligent misrepresentation damages D) That the agreement between the contractor and the subcontractor fell within the statute of frauds but failed to satisfy it; that the subcontractor was liable for promissory estoppel damages; and that the subcontractor was responsible for negligent misrepresentation damages E) That the agreement between the contractor and the subcontractor fell within the statute of frauds but failed to satisfy it; that the subcontractor was not liable for promissory estoppel damages; and that the subcontractor was not responsible for negligent misrepresentation damages
36)
Which of the following is incorrect regarding the assignment of claims in Russia?
A) The assignment of rights, or "assignment of claims," in Russia is highly regulated by the Russian court of equity. B) Russian law does not address the assignment of a contract in the same manner as the United States. C) Economic or monetary rights of the assignor may be transferred to another person. D) Alimony rights may not be assigned to another person. E) Assignments must be in writing.
37) According to _____, a contract for the sale of goods that equals or exceeds $500 must be in writing.
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A) common law B) federal law C) judge-made law D) the Uniform Commercial Code (UCC) E) The Restatement of Contracts
38) Which of the following is incorrect regarding the statute of frauds and contracts whose terms prevent possible performance within one year? A) The one-year period begins to run the day after the contract is created. B) A contract does not come within the statute of frauds if it could be completed within one year, even if it is highly unlikely that a contract will be completed within one year. C) A contract for lifetime employment does not have to be in writing in order to be enforceable. D) Contracts whose performance, based on the terms of the contract, could not possibly occur within one year fall within the statute of frauds. E) The one-year period begins to run the day the contract is scheduled to begin.
39)
What does a prenuptial agreement do?
A) It requires equitable distribution if a couple divorces. B) It eliminates the statutory requirement of alimony and child support if a couple divorces. C) It establishes a mutual promise to marry. D) It states the ownership rights each party to a marriage enjoys in the other person’s property. E) It indicates that if there is a disagreement regarding property rights during the marriage, the property that is the subject of the dispute must be sold.
40) Which of the following is incorrect regarding the statute of frauds and promises made in consideration of marriage?
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A) Agreements regarding marriage in which one party is gaining something other than a return on his or her promise to marry are within the statute of frauds and must be in writing. B) Mutual promises to marry fall within the statute of frauds. C) Prenuptial agreements fall within the statute of frauds. D) A prenuptial agreement is not automatically enforceable just because it is in writing. E) Courts tend to privilege prenuptial agreements that involve consideration.
41) Which of the following is a term for contracts within the statute of frauds involving promises to pay the debt of another if the other party fails to pay? A) Secondary promises B) Primary promises C) Novation agreements D) Third-party debts E) Pecuniary assignments
42)
Which of the following are debts incurred in an initial contract? A) Secondary obligations B) Primary obligations C) Novation agreements D) Collateral promises E) Suretyship promises
43) Which of the following is incorrect regarding the main-purpose rule as it relates to a promise to pay someone else's debt?
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A) The main-purpose rule is an exception to the general rule that a promise to pay someone else’s debt needs to be in writing. B) If the main purpose for incurring a secondary obligation is to obtain a personal benefit, the promise does not need to be in writing. C) The main-purpose rule assumes that a party attempting to achieve a personal benefit will not back out of the agreement; thus, there is no need for a written record of the agreement. D) If the main purpose for incurring a primary obligation is to obtain a personal benefit, the promise does not fall within the statute of frauds and must be in writing. E) The court's job is to use the context surrounding the agreement to determine the third party's main purpose for entering the agreement.
44)
Under the statute of frauds, what is land considered? A) Personal property B) Ancillary property C) Hybrid property D) Real property E) Proscribed property
45)
Which of the following isincorrect regarding the statute of frauds and an interest in land?
A) The statute of frauds is intended to prevent oral claims to the existence of a contract for the sale of land. B) The statute of frauds requires a writing as evidence of a contract to sell land. C) Anything attached to land, such as trees or buildings, is considered real property under the statute of frauds. D) Mortgages of land are within the statute of frauds. E) Leases of land are not within the statute of frauds.
46)
Which of the following are considered an interest in land within the statute of frauds?
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A) Promises to sell crops annually B) Agreements between parties for profit sharing from the sale of real property C) Boundary disputes that have been settled through the use of land D) Promises to sell crops annually, agreements between parties for profit sharing from the sale of real property, and boundary disputes that have been settled through the use of land E) None of these
47) Which of the following was the result on appeal in the Shelby's, Inc. v. Sierra Bravo, Inc. case referenced in the textbook involving the issue of whether an agreement to deposit debris and soil on land comes within the statute of frauds? A) The court ruled that the agreement did not involve an interest in land and did not come within the statute of frauds. B) The court ruled that the agreement did involve an interest in land, that it therefore came within the statute of frauds, and that an oral agreement was not sufficient. C) The court ruled that the agreement did not involve an interest in land but, nevertheless, applied the statute of frauds in order to prevent injustice. D) The court ruled that the agreement was within the statute of frauds but that an oral agreement was sufficient. E) The court ruled that based on longstanding judicial precedent within the state of Missouri, including a recent decision by the Missouri Supreme Court, the statute of frauds does not apply to contracts for the sale of land.
48) Which of the following sections of the Uniform Commercial Code (UCC) addresses the requirement of a writing when the total price for a sale of goods is $500 or more? A) 2-201 B) 1-101 C) 3-102 D) 2-305 E) 4-203
49) To satisfy Uniform Commercial Code (UCC) Section 2-201, the contract or memorandum need only state which of the following with respect to the goods to be sold?
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A) Price B) Quality C) Delivery date D) Payment method E) Quantity
50) Under the _____ rule, a contract that would normally fall under the statute of frauds and need a writing if negotiated by the principal must be in writing even if negotiated by an agent. A) suretyship B) equal dignity C) assignment D) delegation E) substantial performance
51)
The statute of frauds writing requirement applies to which of the following? A) An admission B) Promissory estoppel C) Partial performance D) Contracts for services E) Hearsay evidence
52) Franklin and Jefferson agreed verbally that Franklin would sell Jefferson a 20-acre farm. When the deal fell through, Franklin sued Jefferson. In court, Jefferson stated that he indeed agreed verbally to buy the farm but changed his mind. This is called a(n) _____. A) plea B) denial of agreement C) admission D) subsequent agreement E) hearsay
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53)
All states except _____ adhere to the admission exception to the statute of frauds. A) Hawaii and Alaska B) Louisiana and New York C) Louisiana and California D) Kentucky and Florida E) North Carolina and Montana
54) If the buyer in an oral contract for the sale of land has paid any portion of the sale price, has begun to permanently improve the land, or has taken possession of the land, the courts will consider the contract partially performed under the theory of _____. A) partial performance B) substantial performance C) sales substantiation D) legal admission E) action against interest
55) Which of the following is the legal enforcement of an otherwise unenforceable contract due to a party's detrimental reliance on the contract? A) Promissory estoppel B) Substantial estoppel C) Substantial performance D) Frustration of purpose E) Commercial impracticability
56) Veronica agrees verbally to paint a picture of Sheridan’s prize-winning dog for $2,000. After she paints the picture Sheridan refuses to pay, stating that the agreement had to be in writing to be enforceable. Is Sheridan correct?
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A) Yes, since this is a sale of goods transaction B) Yes, since all contracts for goods and/or services must be in writing to be enforceable C) No, because if Sheridan does not like the painting, he does not have to pay for it D) No, because this is a customized good, and the agreement would be enforceable without a writing E) No, because this contract is subject to the parol evidence rule
57) In contracts other than those governed by the Uniform Commercial Code (UCC), which of the following is/are required for a writing to be considered sufficient under the statute of frauds? A) Identification of the parties to the contract B) Identification of the subject of the agreement C) Identification of the law applicable to the contract D) Identification of the parties to the contract, identification of the subject of the agreement, and identification of the law applicable to the contract E) Identification of the parties to the contract and the subject of the agreement, but not the law applicable to the contract
58) Which of the following is true regarding a signature on a document falling within the statute of frauds? A) There is no requirement of any signature of either party to satisfy the statute of frauds. B) Any party required to sign must sign at the beginning of the document. C) Any party required to sign must sign at the end of the document. D) Any party required to sign must sign both at the beginning and at the end of the document. E) So long as it is meant as a signature, a party required to sign may sign at any place on the document.
59) Which of the following parties must sign an agreement that is subject to the statute of frauds?
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A) The party against whom action is sought only B) The offeror only C) The offeree only D) A person who has agreed to pay the debt of another only E) All parties to the contract
60) Under the Uniform Commercial Code (UCC), which of the following does not constitute a writing? A) Faxes B) E-mails C) Invoices D) Bills of lading E) Oral agreements
61) The _____ rule is a common law rule that addresses the admissibility of oral evidence as it relates to written contracts. A) admission against interest B) statute of frauds C) parol evidence D) admission under oath E) admission under oath or affirmation
62)
Which of the following is an accurate description of the parol evidence rule?
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A) The parol evidence rule states that oral evidence of an agreement made after a written agreement is inadmissible when the parties intend the written agreement to be the complete and final version of their agreement. B) The parol evidence rule states that oral evidence of an agreement made prior to or contemporaneously with a written agreement is admissible when the parties intend the written agreement to be the complete and final version of their agreement. C) The parol evidence rule states that oral evidence of an agreement made prior to or contemporaneously with a written agreement is inadmissible when the parties intend the written agreement to be the complete and final version of their agreement. D) The parol evidence rule states that oral evidence of an agreement made prior to, but not contemporaneously with, a written agreement is inadmissible when the parties intend the written agreement to be the complete and final version of their agreement. E) The parol evidence rule states that oral evidence of an agreement made prior to or contemporaneously with a written agreement is inadmissible when the parties did not intend the written agreement to be the complete and final version of their agreement.
63)
What is a purpose of the parol evidence rule?
A) To restrict oral evidence from being admitted that supports an agreement in its written form B) To restrict written evidence from being admitted that supports an agreement in its written form C) To restrict oral and written evidence from being admitted that supports an agreement in its written form D) To restrict hearsay from being admitted that supports or contradicts an agreement in its written form E) To restrict evidence from being admitted that substantially contradicts an agreement in its written form
64) When may a court rule that parol evidence might be admissible to further the court's understanding of an agreement?
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A) When a court determines that a written agreement represents a complete and final version of the agreement B) When a court determines that a written agreement does not represent a complete and final version of the agreement C) When a court determines that there is disagreement between the parties over performance of the agreement D) When a court determines that the plaintiff failed to do sufficient research to determine if signing the agreement was advisable E) When a court determines that neither party failed to obtain counsel to determine if signing the agreement was advisable
65)
Which of the following is incorrect regarding the parol evidence rule? A) It is not limited to spoken words. B) It is a rule of evidence. C) It relates to substantive legal issues. D) It is an amalgamation of different rules and conditions. E) It applies to writings created at the same time as the written agreement.
66) A(n) _____ clause is a clause parties include in a written agreement within the statute of frauds that states that the written agreement accurately reflects the final, complete version of the agreement. A) adhesion B) addendum C) parol D) merger E) consolidation
67)
Which of the following is not an exception to the parol evidence rule?
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A) Contracts that have been subsequently modified B) Contracts conditioned on orally agreed-on terms C) Contracts that are not final as they are part written and part oral D) Contracts with ambiguous terms E) Contracts that are complete
68)
Which of the following is incorrect regarding a condition precedent?
A) When an entire contract is conditioned on something occurring first, that first thing is known as a condition precedent. B) The parol evidence rule does not apply to evidence of a condition precedent. C) Evidence of the existence of a condition precedent agreed to orally is inadmissible. D) A contract is not modified by evidence of the existence of a condition precedent. E) A contract’s enforceability is called into question by evidence of the existence of a condition precedent.
69)
What is the easiest way to determine the admissibility of parol evidence?
A) See whether the written contract, within the statute of frauds, is an integrated contract B) Have the written contract notarized by a court C) See if there is a “contract is complete” clause D) See if there is an exculpatory clause E) See if there are any handwritten terms
70) One way parties can indicate their desire to create an integrated contract is through the use of a(n) _____ clause. A) executory B) merger C) adhesion D) condition subsequent E) addendum
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71) Which of the following is a contractual party who agrees to do something for the other party? A) Obligor B) Obligee C) Assignor D) Assignee E) Delegator
72) Which of the following is a contractual party who agrees to receive something from the other party? A) Obligor B) Obligee C) Assignor D) Delegator E) Delegatee
73) Barbara transfers her rights to receive her tenant’s rents to Penelope. This is an example of a(n) _____. A) delegation B) subrogation C) novation D) assignment E) accord
74) What is the term for a party to a contract who transfers her rights under the contract to a third party?
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A) Donor beneficiary B) Debtor beneficiary C) Delegator D) Assignor E) Assignee
75)
What is the term for the third party who receives an assignment of contract rights? A) Principal B) Incidental beneficiary C) Delegatee D) Assignor E) Assignee
76)
Which of the following is incorrect regarding the rights of assignees and assignors? A) Assignees essentially fill in for the assignor as the legal recipient of contractual
duties. B) Assignees acquire the same rights as those of the assignor. C) Assignees are entitled to greater contractual protections than those afforded assignors. D) The obligor may raise any of the same defenses for nonperformance to the assignee that he would have been able to raise against the assignor. E) When an assignor transfers rights to an assignee, the assignor legally gives up all rights she previously had to collect on the contract.
77) Which of the following is correct regarding the form requirements for a valid assignment?
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A) In order for an assignment to be valid, a Uniform Commercial Code (UCC) Section 2-301 compliance statement is required. B) In order for an assignment to be valid, a Uniform Commercial Code (UCC) 4-305 perfection statement is required. C) In order for an assignment to be valid, an Internal Revenue Service (IRS) Form 2547 must be executed by the assignor. D) In order for an assignment to be valid, an Internal Revenue Service (IRS) Form 4298 must be executed by the obligor (the other party to the original contract who owes a duty to the assignee). E) No form is required for an assignment to be valid.
78)
Which of the following is true regarding oral assignments?
A) Assignments may not be made orally. B) The Uniform Commercial Code (UCC) requires that assignments be in writing when the amount being assigned is greater than $5,000. C) Assignments are not covered by the statute of frauds. D) The UCC requires that assignments be in writing when the amount being assigned is greater than $500. E) The UCC requires that an assignment of a right to receive goods be in writing when the value of the goods is $500 or more, and that an assignment of a right to receive a service be in writing when the value of the service is $1,000 or more.
79) Which of the following is an exception to the general rule that rights to a contract cannot be assigned when a contract is personal in nature? A) When the only part of the contract left to be fulfilled is the payment B) When the sale of goods is involved C) When no more than one-half of the contractual duties have been performed D) When no more than three-fourths of the contractual duties have been performed E) When at least one-third of the contractual duties have been performed
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80) Sally agrees to mow Paul's yard for $300 for the summer. Paul wishes to assign the contract to his grandmother. Sally objects because Paul's yard is very small while the grandmother's yard is over an acre. Which of the following is the correct legal outcome for the dispute between Sally and Paul? A) Sally will win because Paul's attempted assignment would increase the duties to which she agreed. B) Sally will win because all assignments are invalid without the obligor's consent. C) Sally will win unless Paul paid her the $300 in advance. D) Paul will win because he may validly assign the contract without Sally's consent. E) Paul will win if he informs Sally about the assignment before she begins performance.
81) Which of the following is determinative of the effectiveness of an anti-assignment clause? A) Common law in the jurisdiction where the anti-assignment clause was executed B) The wording of the anti-assignment clause C) Statutory law in the jurisdiction where the anti-assignment clause was executed D) The Restatement of the Law of Contracts E) The Restatement (Second) of the Law of Contracts
82) Which of the following may be assigned even in the presence of an anti-assignment clause? A) Assignments made by operation of law B) Assignments for the right to receive monetary payments C) Assignments for the right to receive damages for a breach of contract to sell goods or services D) Assignments made by operation of law and assignments for the right to receive monetary payments, but not assignments for the right to receive damages for a breach of contract to sell goods or services E) Assignments made by operation of law, assignments for the right to receive monetary payments, and assignments for the right to receive damages for a breach of contract to sell goods or services
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83) Josephine assigns her rights to a contract to Paul. At what point does this assignment actually take effect? A) Twenty-four (24) hours from the time of the assignment B) Forty-eight (48) hours from the time of the assignment C) Three (3) days from the time of assignment D) Immediately E) Only when the third-party beneficiary executes a waiver of assignor liability form
84) Which of the following states that in the case of multiple assignments of the same right, the first party granted the assignment is the party correctly entitled to the contractual right? A) The first-assignment-in-time rule B) The last-assignment-in-time rule C) The English rule D) The French rule E) The race-to-the-courthouse rule
85) Which of the following states that in the case of multiple assignments of the same right, the first assignee to give notice of assignment to the obligor is the party with rights to the contract? A) The first-assignment-in-time rule B) The last-assignment-in-time rule C) The English rule D) The French rule E) The race-to-the-courthouse rule
86) Samantha is obligated to wash Lillian’s car. Samantha transfers her duty to wash the car to Michael. This is an example of a(n) _____.
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A) assignment B) delegation C) accord D) novation E) satisfaction
87) A party to a contract who transfers her duty to perform to a third party who is not part of the original contract is called a(n) _____. A) delegatee B) delegator C) assignor D) assignee E) agent
88) A third party who is not part of an original contract but who is transferred a duty to perform set forth in the original contract is called a(n) _____. A) delegatee B) delegator C) assignor D) assignee E) transferor
89) Bill contracts with Judy to wash her car and then delegates the duty to Paul. Paul fails to wash the car. Which of the following is true regarding Bill's duty to Judy, if any? A) Bill has no duty to Judy if she did not expressly object to the delegation. B) Bill has no duty to Judy, regardless of whether she objected to the delegation. C) Bill continues to be contractually bound to Judy to ensure that her car gets washed. D) Bill continues to be contractually bound to Judy to ensure that her car gets washed, but only if the contract expressly prohibited delegation. E) Bill continues to be contractually bound to Judy to ensure that her car gets washed, unless he already paid Paul for the job.
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90) Xavier is hired to perform at a festival. He was hired for his unique signing ability. When the performance date arrived, Xavier delegated his singing responsibility to Jorge. The festival sued Xavier. Who will win? A) Xavier, since he has the right to delegate his duty to a third party B) Xavier, since he has the right to assign his right to a third party C) Xavier, since this involved an accord and satisfaction D) The festival, since this involved an improper delegation of a duty E) The festival, since this involved an invalid assignment of rights
91) How do courts generally rule in cases involving ambiguous contract language that makes it unclear what is being assigned or delegated? A) When ambiguous language is used, the court usually considers the assignment to be of both rights and duties. B) When ambiguous language is used, the court usually considers the assignment to be of rights but not duties. C) When ambiguous language is used, the court usually considers the assignment to be of duties but not rights. D) When ambiguous language is used, the court usually considers the assignment to be void. E) When ambiguous language is used, the court usually considers the assignment to be voidable.
92) Which of the following contracts is created when two individuals contract for the purpose of benefitting a third party? A) A parol evidence contract B) A novation contract C) A third-party beneficiary contract D) An accord and satisfaction contract E) A delegation of duty contract
93)
Which of the following is true regarding the rights of an intended beneficiary?
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A) Intended beneficiaries may enforce their rights to a contract when both parties to the contract intended for the third party to benefit. B) Intended beneficiaries may enforce their rights to a contract if only one of the parties to the contract intended for the third party to benefit. C) Intended beneficiaries may enforce their rights to a contract, even if the parties to the contract did not specifically (in other words, purposefully) intend for the third party to benefit. D) Intended beneficiaries have no rights under a contract. E) Intended beneficiaries have the same rights under a contract as incidental beneficiaries.
94) Hans and Gretchen enter into a life insurance contract that names their son Erik as the beneficiary. What type of beneficiary is Erik? A) An incidental beneficiary B) An intended beneficiary C) A secondary beneficiary D) A present beneficiary E) A direct beneficiary
95) The _____ in a third-party beneficiary contract is the party to the contract who owes something to the promisor in exchange for the promise made to the third-party beneficiary. A) promisee B) principal C) assignor D) assignee E) delegator
96)
Which of the following is/are a type of intended beneficiary?
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A) Creditor B) Donee C) Incidental D) Creditor, donee, and incidental E) Creditor and donee, but not incidental
97) A(n) _____ beneficiary is a third party who benefits from a contract in which the promisor agrees to pay the promisee's debt. A) creditor B) donee C) incidental D) promised E) avowed
98) Lawrence v. Fox, a case referenced in the textbook, was one of the earliest cases to recognize the rights of _____. A) tenants to sue their landlords B) delegators to sue delegatees C) third parties to sue promisors D) creditors to sue debtors E) obligors to sue obligees
99) A(n) _____ beneficiary is a third party who benefits from a contract in which a promisor agrees to give a gift to a third party. A) creditor B) donee C) incidental D) consequential E) putative
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100)
If an intended beneficiary wants to enforce his or he rights, they cannot do so until when? A) The right has perfected B) The right has been satisfied C) The right is vested D) The right has an ascertainable value E) The right becomes obligated to them by a court
101)
Third-party rights in a life insurance policy do not vest until the _____. A) promisor’s death B) promisee’s will is executed C) promisee’s death D) policy is recorded E) policy is executed
102) When a donee beneficiary may enforce his rights under a contract, he may do so against the _____. A) promisee only B) promisor only C) delegatee only D) promisee and promisor, but not the delegatee E) promisee, promisor, and delegatee
103) Nina watches as the city she lives in starts to pave the street in front of her house. Unfortunately, the city and the paving company become entangled in a contract dispute. Nina knows that the price of her house will increase once the street is paved. In this scenario, Nina would be a(n) _____ to the contract.
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A) creditor donee B) donee creditor C) incidental beneficiary D) intended beneficiary E) vested rights holder
104) Which of the following is true regarding the rights of an incidental beneficiary to a contract to sue to recover incidental rights? A) An incidental beneficiary may sue to enforce incidental contractual rights so long as those rights have vested. B) An incidental beneficiary may sue to enforce incidental contractual rights only if the incidental beneficiary is also a creditor beneficiary. C) An incidental beneficiary may sue to enforce incidental contractual rights only if the incidental beneficiary is also a donee beneficiary. D) An incidental beneficiary may sue to enforce incidental contractual rights only if the incidental beneficiary is also a second-party beneficiary. E) An incidental beneficiary cannot sue to enforce a contract that provides incidental benefits.
105) Which of the following is a consideration of courts in determining whether a person is an intended beneficiary or an incidental beneficiary? A) The courts ask if a reasonable person in the position of the party in question would believe the contracting parties intended to benefit the party in question. B) The courts ask if it is substantially certain that the contracting parties intended to benefit the party in question. C) The courts ask if it can be proven beyond a reasonable doubt that the contracting parties intended to benefit the party in question. D) The courts ask if the party in question paid something for the rights. E) The courts ask if the party in question paid at least $500 for the rights.
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106) Not So Rich Uncle. Bruce is attempting to convince Sally to marry him. He promises her that if she will marry him, he will buy a new Mercedes automobile for her within six months of the marriage and take her on a world tour within a year of the marriage date. Sally reluctantly agrees, and they sign an agreement by which Bruce agrees to provide the Mercedes and world tour. Bruce and Sally marry on January 1. Unexpectedly, on March 1, Bruce's supposedly rich uncle, Frank, dies. Frank has no living relatives other than Bruce, and Frank's will leaves everything to Bruce, who is also appointed executor. In attempting to settle the estate, Bruce agrees orally to pay out of his own pocket Frank’s debts totaling $10,000. Sally is concerned about Bruce's doing so. Bruce tells her not to worry because he will get all the money back when the estate settles. Bruce admits to a number of friends that he agreed to settle the debts out of his own pocket because he needed to obtain assets from the estate in a hurry. The assets were needed in large part to satisfy his obligations to Sally. Surprisingly, it later came to light that prior to his death Frank had signed away all his assets to his girlfriend in Argentina. There was nothing left in the estate for Bruce to inherit. Bruce disavowed his agreement to pay $10,000 to various creditors. Which of the following is the appropriate term for the marriage agreement entered into between Bruce and Sally? A) Separation agreement B) Marital dissolution agreement C) Prenuptial agreement D) Marriage acknowledgement agreement E) Marriage consideration agreement
107) Not So Rich Uncle. Bruce is attempting to convince Sally to marry him. He promises her that if she will marry him, he will buy a new Mercedes automobile for her within six months of the marriage and take her on a world tour within a year of the marriage date. Sally reluctantly agrees, and they sign an agreement by which Bruce agrees to provide the Mercedes and world tour. Bruce and Sally marry on January 1. Unexpectedly, on March 1, Bruce's supposedly rich uncle, Frank, dies. Frank has no living relatives other than Bruce, and Frank's will leaves everything to Bruce, who is also appointed executor. In attempting to settle the estate, Bruce agrees orally to pay out of his own pocket Frank’s debts totaling $10,000. Sally is concerned about Bruce's doing so. Bruce tells her not to worry because he will get all the money back when the estate settles. Bruce admits to a number of friends that he agreed to settle the debts out of his own pocket because he needed to obtain assets from the estate in a hurry. The assets were needed in large part to satisfy his obligations to Sally. Surprisingly, it later came to light that prior to his death Frank had signed away all his assets to his girlfriend in Argentina. There was nothing left in the estate for Bruce to inherit. Bruce disavowed his agreement to pay $10,000 to various creditors. Which of the following is true regarding Bruce's promises to Sally of a Mercedes and a trip? Version 1
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A) The promises fall within the statute of frauds. B) The promises do not fall within the statute of frauds because they involve material matters, not matters involving home and children. C) The promise regarding the Mercedes falls within the statute of frauds, but the promise regarding the trip does not. D) The promise regarding the trip falls within the statute of frauds, but the promise regarding the Mercedes does not. E) The promises would have fallen within the statute of frauds historically, but would not fall within the statute of frauds under current law.
108) Not So Rich Uncle. Bruce is attempting to convince Sally to marry him. He promises her that if she will marry him, he will buy a new Mercedes automobile for her within six months of the marriage and take her on a world tour within a year of the marriage date. Sally reluctantly agrees, and they sign an agreement by which Bruce agrees to provide the Mercedes and world tour. Bruce and Sally marry on January 1. Unexpectedly, on March 1, Bruce's supposedly rich uncle, Frank, dies. Frank has no living relatives other than Bruce, and Frank's will leaves everything to Bruce who is also appointed executor. In attempting to settle the estate, Bruce agrees orally to pay out of his own pocket debts of Frank totaling $10,000. Sally is concerned about Bruce's doing so. Bruce tells her not to worry because he will get all the money back when the estate settles. Bruce admits to a number of friends that he agreed to settle the debts out of his own pocket because he needed to obtain assets from the estate in a hurry. The assets were needed in large part to satisfy his obligations to Sally. Surprisingly, it later came to light that prior to his death Frank had signed away all his assets to his girlfriend in Argentina. There was nothing left in the estate for Bruce to inherit. Bruce disavowed his agreement to pay $10,000 to various creditors. Which of the following is the most likely result of Bruce's attempt to avoid his agreement to pay creditors of the estate out of his own pocket?
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A) He will be able to avoid the agreement because it was not in writing. B) He will be able to avoid the agreement because a promise to pay the debts of an estate would never come within the statute of frauds. C) A promise to pay debts of an estate out of an executor's own funds would come within the statute of frauds, but the oral agreement Bruce made will likely be enforceable under the substantial-purpose rule. D) A promise to pay debts of an estate out of an executor's own funds would come within the statute of frauds, but the oral agreement Bruce made will likely be enforceable under the main-purpose rule. E) A promise to pay debts of an estate out of an executor's own funds would come within the statute of frauds, but the oral agreement Bruce made will likely be enforceable under the primary-purpose rule.
109) Lake House. Harry has two houses, a house on the lake and a house in town. Rebecca wants to buy the house on the lake. Harry and Rebecca orally agree that Rebecca will buy the house on the lake for $300,000. Harry hurriedly writes out a contract providing that he would sell "his house" to Rebecca for $300,000. Harry signs the top of the document. Rebecca does not sign at all. No merger clause is included in the contract. Harry backs out of the contract, and Rebecca sues him. He tells the judge that the statute of frauds is not satisfied because he did not sign the document at the end and because Rebecca did not sign at all. He also tells the judge that, at any rate, the agreement referred to the house in town, not the house on the lake; and that under the parol evidence rule, he had the right to identify the correct house. Which of the following is true regarding Harry's assertion that the statute of frauds is not satisfied because he did not sign the document at the end? A) Harry is correct. B) Harry is incorrect, because while the statute of frauds would require his signature on the document, there is no requirement that the signature be at the end. C) Harry is incorrect because the statute of frauds did not require his signature so long as the selling price was referenced. D) Harry is incorrect because the statute of frauds did not require his signature so long as the type of subject matter involved was referenced. E) Harry is incorrect because the statute of frauds did not require his signature so long as both the selling price and the type of subject matter involved was referenced.
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110) Lake House. Harry has two houses, a house on the lake and a house in town. Rebecca wants to buy the house on the lake. Harry and Rebecca orally agree that Rebecca will buy the house on the lake for $300,000. Harry hurriedly writes out a contract providing that he would sell "his house" to Rebecca for $300,000. Harry signs the top of the document. Rebecca does not sign at all. No merger clause is included in the contract. Harry backs out of the contract, and Rebecca sues him. He tells the judge that the statute of frauds is not satisfied because he did not sign the document at the end and because Rebecca did not sign at all. He also tells the judge that, at any rate, the agreement referred to the house in town, not the house on the lake; and that under the parol evidence rule, he had the right to identify the correct house. Which of the following is true regarding Harry's assertion that the statute of frauds is not satisfied because Rebecca did not sign the document? A) Harry is incorrect because he is the one being sued, and he signed the document. B) Harry is incorrect because the statute of frauds did not require Rebecca’s signature so long as the type of subject matter involved was referenced. C) Harry is incorrect because the statute of frauds did not require Rebecca’s signature so long as the selling price was referenced. D) Harry is incorrect because the statute of frauds did not require Rebecca's signature so long as both the selling price and the type of subject matter involved was referenced. E) Harry is correct.
111) Lake House. Harry has two houses, a house on the lake and a house in town. Rebecca wants to buy the house on the lake. Harry and Rebecca orally agree that Rebecca will buy the house on the lake for $300,000. Harry hurriedly writes out a contract providing that he would sell "his house" to Rebecca for $300,000. Harry signs the top of the document. Rebecca does not sign at all. No merger clause is included in the contract. Harry backs out of the contract, and Rebecca sues him. He tells the judge that the statute of frauds is not satisfied because he did not sign the document at the end and also because Rebecca did not sign at all. He also tells the judge that, at any rate, the agreement referred to the house in town, not the house on the lake; and that under the parol evidence rule, he had the right to identify the correct house. Which of the following is true regarding Harry's assertion that under the parol evidence rule he alone had the right to identify the house referenced in the contract?
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A) Harry is correct. B) Harry is incorrect because under the parol evidence rule, Rebecca, as the buyer, would be allowed to identify the subject matter in the event of a discrepancy. C) Harry is incorrect because under the parol evidence rule, the judge would likely allow oral evidence regarding the house at issue in order to clarify an ambiguity. D) Harry is incorrect because the parol evidence rule would not apply in situations involving an ambiguity. E) Harry is incorrect because the parol evidence rule would not apply in the absence of a merger clause.
112) Painted House. Billy had a contract to paint Jan's house for $800 including the duty to clean up any debris. The contract between Billy and Jan did not contain an anti-assignment clause. Billy, who was very busy, assigned the contract, including the right to payment and the duty to paint, to Richard who was interested in making some extra money and had experience painting. Billy did not tell Jan about the assignment because he did not want any trouble nor did Richard mention the assignment to her. In fact, Richard never met Jan because he painted while she was at work. After Richard did a good job painting the house, Jan sent a check to Billy for $800. Billy needed the money to pay some bills, so he spent it. He thought he would have money coming in with which to pay Richard, but that did not happen. Richard asked Jan for $800 when it was not forthcoming from Billy. Jan refused. Richard said that he was going to sue her and Billy. Jan called Billy and told him that he had no right to assign the contract. Another problem involved disposal of debris. Although Richard was a good, competent painter, he forgot and left some old paint cans at Jan's house. Jan demanded that Billy come and properly dispose of the paint cans because they could not simply be put in the trash. Billy refused and told her that she would have to get Richard to dispose of the paint cans because that was his responsibility. What would be the likely result of a lawsuit brought by Richard against Jan to recover the $800? A) Richard will win because Jan accepted the risk that the contract would be assigned. B) Richard will win, but only if Billy has not been declared bankrupt because Jan will be able to recover the amounts at issue from Billy. C) Richard will win, but only if the assignment was for an amount under $1,000. D) Jan will win because she had no notice that the contract had been assigned and could, therefore, legally pay Billy. E) Jan will win, but only if the assignment was for an amount over $500.
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113) Painted House. Billy had a contract to paint Jan's house for $800 including the duty to clean up any debris. The contract between Billy and Jan did not contain an anti-assignment clause. Billy, who was very busy, assigned the contract, including the right to payment and the duty to paint, to Richard who was interested in making some extra money and had experience painting. Billy did not tell Jan about the assignment because he did not want any trouble nor did Richard mention the assignment to her. In fact, Richard never met Jan because he painted while she was at work. After Richard did a good job painting the house, Jan sent a check to Billy for $800. Billy needed the money to pay some bills, so he spent it. He thought he would have money coming in with which to pay Richard, but that did not happen. Richard asked Jan for $800 when it was not forthcoming from Billy. Jan refused. Richard said that he was going to sue her and Billy. Jan called Billy and told him that he had no right to assign the contract. Another problem involved disposal of debris. Although Richard was a good, competent painter, he forgot and left some old paint cans at Jan's house. Jan demanded that Billy come and properly dispose of the paint cans because they could not simply be put in the trash. Billy refused and told her that she would have to get Richard to dispose of the paint cans because that was his responsibility. What would be the likely result of a lawsuit brought by Richard against Billy to recover the $800? A) Richard will win. B) Richard will win, but only if he had no reason to know that Billy had not given notice of the assignment to Jan and was, therefore, not on notice to notify Jan himself. C) Richard will win, but only if he can prove that he first brought a lawsuit against Jan and lost. D) Billy will win because Richard's only right of recourse is against Jan. E) Billy will win because Richard should have given notice to Jan himself.
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114) Painted House. Billy had a contract to paint Jan's house for $800 including the duty to clean up any debris. The contract between Billy and Jan did not contain an anti-assignment clause. Billy, who was very busy, assigned the contract, including the right to payment and the duty to paint, to Richard who was interested in making some extra money and had experience painting. Billy did not tell Jan about the assignment because he did not want any trouble nor did Richard mention the assignment to her. In fact, Richard never met Jan because he painted while she was at work. After Richard did a good job painting the house, Jan sent a check to Billy for $800. Billy needed the money to pay some bills, so he spent it. He thought he would have money coming in with which to pay Richard, but that did not happen. Richard asked Jan for $800 when it was not forthcoming from Billy. Jan refused. Richard said that he was going to sue her and Billy. Jan called Billy and told him that he had no right to assign the contract. Another problem involved disposal of debris. Although Richard was a good, competent painter, he forgot and left some old paint cans at Jan's house. Jan demanded that Billy come and properly dispose of the paint cans because they could not simply be put in the trash. Billy refused and told her that she would have to get Richard to dispose of the paint cans because that was his responsibility. Which of the following is true regarding Jan's statement to Richard that he had no right to delegate duties under the contract? A) Jan is correct because a type of personal service was involved. B) Jan is correct because the contract did not specifically give Richard the right to assign the contract. C) Jan is correct, both because a type of personal service was involved and because the contract did not specifically give Richard the right to assign the contract. D) Jan is incorrect because the contract involved non-personal duties, and there was no requirement that the contract specifically reference the right to assign rights and delegate duties. E) Jan is incorrect, but only because the contract was for less than $1,000. Otherwise, Richard had no right to assign rights and delegate duties.
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115) Painted House. Billy had a contract to paint Jan's house for $800 including the duty to clean up any debris. The contract between Billy and Jan did not contain an anti-assignment clause. Billy, who was very busy, assigned the contract, including the right to payment and the duty to paint, to Richard who was interested in making some extra money and had experience painting. Billy did not tell Jan about the assignment because he did not want any trouble nor did Richard mention the assignment to her. In fact, Richard never met Jan because he painted while she was at work. After Richard did a good job painting the house, Jan sent a check to Billy for $800. Billy needed the money to pay some bills, so he spent it. He thought he would have money coming in with which to pay Richard, but that did not happen. Richard asked Jan for $800 when it was not forthcoming from Billy. Jan refused. Richard said that he was going to sue her and Billy. Jan called Billy and told him that he had no right to assign the contract. Another problem involved disposal of debris. Although Richard was a good, competent painter, he forgot and left some old paint cans at Jan's house. Jan demanded that Billy come and properly dispose of the paint cans because they could not simply be put in the trash. Billy refused and told her that she would have to get Richard to dispose of the paint cans because that was his responsibility. Which of the following is true regarding Billy's claim that he had no duty to pick up the paint cans? A) Billy is correct because he had validly delegated that duty to Richard. B) Billy is incorrect because the job was a personal service, and he had no right to assign either rights or duties under the contract. C) Billy is incorrect, but only because the job was for under $1,000. D) Billy is correct, but only because Richard had properly painted the house and was, therefore, responsible for the remaining duties. If Richard had improperly painted the house, Billy would have been responsible for the remaining duties. E) Billy is incorrect because his delegation did not affect his obligation to Jan.
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116) Portraits. Belinda, a famous portrait painter, agreed to paint Harry's portrait for $5,000. She also agreed to paint the portraits of Michelle's two Welsh Corgi dogs, Baby and Bree. Michelle agreed to pay Belinda $12,000 for the portraits. Belinda charged Michelle more because the dogs annoyed her. Belinda met the spoiled dogs, and they really got on her nerves. Plus, she was behind on finishing Harry's portrait. Belinda, therefore, proceeded to assign the right to receive the money for the dog portraits and the duty to paint the dog portraits to her assistant, Fred. He eagerly accepted and painted the portraits. As payment for amounts she owed him for various duties, Belinda also assigned to Fred the right to receive payment from Harry. Neither the contract Belinda had with Harry nor the contract she had with Michelle expressly prohibited assignment or delegation of contractual rights and duties. Belinda finished the portrait of Harry and called him to come and pick it up. Meanwhile, a disgruntled secretary who disliked Belinda told both Michelle and Harry about the agreements with Fred. Michelle was furious and refused to pick up the portrait or pay anyone. Harry likewise refused to pay for his portrait claiming that the right to payment could not be assigned. What would be the most likely result if Belinda sues Michelle for the $12,000 payment? A) Belinda will win, but only if Fred did a good job on the portraits. B) Belinda will win regardless of what type of job Fred did on the portraits so long as he was a qualified portrait painter. C) Belinda will win regardless of whether Fred was qualified and regardless of whether he did a good job because the duties were validly delegated, and Michelle's only right of recourse is against Fred. D) Belinda will win because the contract did not contain an express provision prohibiting assignment or delegation of contractual rights and duties. E) Michelle will win because painting the portrait was personal in nature and could not be delegated.
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117) Portraits. Belinda, a famous portrait painter, agreed to paint Harry's portrait for $5,000. She also agreed to paint the portraits of Michelle's two Welsh theCorgi dogs, Baby and Bree. Michelle agreed to pay Belinda $12,000 for the portraits. Belinda charged Michelle more because the dogs annoyed her. Belinda met the spoiled dogs, and they really got on her nerves. Plus, she was behind on finishing Harry's portrait. Belinda, therefore, proceeded to assign the right to receive the money for the dog portraits and the duty to paint the dog portraits to her assistant, Fred. He eagerly accepted and painted the portraits. As payment for amounts she owed him for various duties, Belinda also assigned to Fred the right to receive payment from Harry. Neither the contract Belinda had with Harry nor the contract she had with Michelle expressly prohibited assignment or delegation of contractual rights and duties. Belinda finished the portrait of Harry and called him to come and pick it up. Meanwhile, a disgruntled secretary who disliked Belinda told both Michelle and Harry about the agreements with Fred. Michelle was furious and refused to pick up the portrait or pay anyone. Harry likewise refused to pay for his portrait claiming that the right to payment could not be assigned. What would be the most likely result if Fred sues Michelle for the $5,000 payment? A) Fred will win, but only if Fred did a good job on the portraits. B) Fred will lose because Michelle's only obligation is to pay Belinda. C) Fred will win unless Michelle can prove that Fred knew that she did not want him to do the portraits. D) Fred will lose unless Fred can prove that he did not know that Michelle did not want him to do the portraits. E) Michelle will win because painting the portrait was personal in nature and could not be delegated.
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118) Portraits. Belinda, a famous portrait painter, agreed to paint Harry's portrait for $5,000. She also agreed to paint the portraits of Michelle's two Welsh Corgi dogs, Baby and Bree. Michelle agreed to pay Belinda $12,000 for the portraits. Belinda charged Michelle more because dogs annoyed her. Belinda met the spoiled dogs, and they really got on her nerves. Plus, she was behind on finishing Harry's portrait. Belinda, therefore, proceeded to assign the right to receive the money for the dog portraits and the duty to paint the dog portraits to her assistant, Fred. He eagerly accepted and painted the portraits. As payment for amounts she owed him for various duties, Belinda also assigned to Fred the right to receive payment from Harry. Neither the contract Belinda had with Harry nor the contract she had with Michelle expressly prohibited assignment or delegation of contractual rights and duties. Belinda finished the portrait of Harry and called him to come and pick it up. Meanwhile, a disgruntled secretary who disliked Belinda told both Michelle and Harry about the agreements with Fred. Michelle was furious and refused to pick up the portrait or pay anyone. Harry likewise refused to pay for his portrait claiming that the right to payment could not be assigned. What would be the most likely result if Fred sues Harry for the $12,000 payment? A) Harry will win because he did not expressly agree to the assignment. B) Fred will win because the right to receive payment could be validly assigned. C) Fred will win unless Harry can prove that Fred knew that Harry did not want the benefits assigned. D) Fred will lose unless Fred can prove that he was ignorant of the fact that Harry did not want the benefits assigned. E) Harry will win because the portrait was personal in nature and could not be assigned.
119) Third-Party Woes. Trudy owed Sam $40 for a book she purchased from him. Trudy mowed Betty's yard for $40 and agreed with Betty that Betty would pay Sam for the book. Sam is not initially aware of the agreement. Betty pays no one. Trudy also mowed Bob's yard for $40 in return for Bob's agreement to give the payment to Sally representing Trudy's birthday present to Sally. Bob later refuses to do so saying that promises to give gifts are not enforceable. He then moves out of town. Trudy tells both Sam and Sally that she is broke, that Sam needs to get his $40 for the book from Betty, and that Sally is owed $40 from Bob for her birthday present. Which of the following would be the likely result if Sam sues Trudy for the $40 she owes him for the book?
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A) Sam will win because Trudy cannot avoid her obligations through a delegation. B) Sam will win, but only because he was not aware of the assignment. C) Sam will win, but only because the contract was for an amount under $1,000. D) Sam will win, but only if Betty cannot be found for service of process. E) Trudy will win because she delegated the duty of payment to Betty.
120) Third-Party Woes. Trudy owed Sam $40 for a book she purchased from him. Trudy mowed Betty's yard for $40 and agreed with Betty that Betty would pay Sam for the book. Sam is not initially aware of the agreement. Betty pays no one. Trudy also mowed Bob's yard for $40 in return for Bob's agreement to give the payment to Sally representing Trudy's birthday present to Sally. Bob later refuses to do so saying that promises to give gifts are not enforceable. He then moves out of town. Trudy tells both Sam and Sally that she is broke, that Sam needs to get his $40 for the book from Betty, and that Sally is owed $40 from Bob for her birthday present. Which of the following is the likely result if Sam sues Betty for the $40 that Trudy owes him for the book? A) Sam will lose because the attempted delegation was against public policy. B) Sam will lose because his only right of action is against Trudy. C) Sam will lose because he was not aware of the assignment before the duties were completed. D) Sam will win, but only if he can prove that Trudy has insufficient funds with which to pay him. E) Sam will win.
121) Third-Party Woes. Trudy owed Sam $40 for a book she purchased from him. Trudy mowed Betty's yard for $40 and agreed with Betty that Betty would pay Sam for the book. Sam is not initially aware of the agreement. Betty pays no one. Trudy also mowed Bob's yard for $40 in return for Bob's agreement to give the payment to Sally representing Trudy's birthday present to Sally. Bob later refuses to do so saying that promises to give gifts are not enforceable. He then moves out of town. Trudy tells both Sam and Sally that she is broke, that Sam needs to get his $40 for the book from Betty, and that Sally is owed $40 from Bob for her birthday present. Which of the following would be the likely result if Sally sues Trudy for the $40 promised to her for her birthday?
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A) Sally will win because Trudy is responsible for Bob's failure to pay. B) Sally will win, but only if she can prove that Bob is insolvent and unable to pay. C) Sally will win, but only if she can prove that she cannot find Bob in order to serve process on him. D) Sally will win, but only if she can prove both that Bob is insolvent and unable to pay and that she cannot find Bob in order to serve process on him. E) Sally will lose because Trudy had no obligation to go through with the gift.
122) Third-Party Woes. Trudy owed Sam $40 for a book she purchased from him. Trudy mowed Betty's yard for $40 and agreed with Betty that Betty would pay Sam for the book. Sam is not initially aware of the agreement. Betty pays no one. Trudy also mowed Bob's yard for $40 in return for Bob's agreement to give the payment to Sally representing Trudy's birthday present to Sally. Bob later refuses to do so saying that promises to give gifts are not enforceable. He then moves out of town. Trudy tells both Sam and Sally that she is broke, that Sam needs to get his $40 for the book from Betty, and that Sally is owed $40 from Bob for her birthday present. What type of third-party beneficiary is Sam? A) Intended B) Creditor C) Both intended and creditor D) Donee E) Both creditor and donee
123) Third-Party Woes. Trudy owed Sam $40 for a book she purchased from him. Trudy mowed Betty's yard for $40 and agreed with Betty that Betty would pay Sam for the book. Sam is not initially aware of the agreement. Betty pays no one. Trudy also mowed Bob's yard for $40 in return for Bob's agreement to give the payment to Sally representing Trudy's birthday present to Sally. Bob later refuses to do so saying that promises to give gifts are not enforceable. He then moves out of town. Trudy tells both Sam and Sally that she is broke, that Sam needs to get his $40 for the book from Betty, and that Sally is owed $40 from Bob for her birthday present. What type of third-party beneficiary is Sally?
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A) Intended B) Creditor C) Both intended and creditor D) Both intended and donee E) Both creditor and donee
124) Only certain types of contracts fall within the statue of frauds. Which of the following is not required to be evidenced by a writing? A) An employment agreement for a 5-year period B) Joe and Jill’s prenuptial agreement C) Lillian’s promise to repay the bank if her daughter Sashaa does not pay her loan payment D) Wynne’s promise to sell his couch to Peter for $400 E) Henry and Leland’s agreement to sell an interest in land
125) Gloria and Isaac agree that Gloria will sell her baseball card collection worth $3,000 to Isaac. Gloria signs her name to the contract and Isaac signs an “X” at the top of the page. Is this signature allowed to represent Isaac’s assent to the contract? A) No, an “X” would not be considered a valid signature B) No, since the “X” is at the top of the page C) Yes, but only if Isaac always signs his name as an “X” and that can be proven in court D) Yes, but only if Gloria agrees that the “X” meant Isaac assented to the writing E) Yes, the signature can be any mark located anywhere on the document if the mark was placed with the intent to function as a signature
126)
The parol evidence rule is what type of rule?
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A) United States Supreme Court B) Federal statutory C) Uniform Commercial Code (UCC) D) Criminal statutory E) Common law
127) Although generally an assignment may be made either orally or in writing, the Uniform Commercial Code (UCC) requires the assignment to be in writing if the amount being assigned is greater than _____. A) $5,000 B) $2,500 C) $1,000 D) $500 E) $1
128) Marlow promises Cynthia that if she will rent an apartment to his daughter Susanne, he will pay the rent. Marlow is the _____ and Cynthia is the _____. A) creditor; donee beneficiary B) donor; donee C) intended beneficiary; incidental beneficiary D) promisor; promisee E) incidental beneficiary; intended beneficiary
129) Austin loves Smart Piggy hotdogs. The only place to get one is at the baseball stadium in his hometown. Tastee Meats, Inc. (Tastee), the maker of Smart Piggy hotdogs, gets into a contract dispute with the baseball stadium and stops selling hotdogs to the stadium. Austin, who purchased season tickets just to be able to get Smart Piggy hotdogs, sues the stadium because he believes he a beneficiary to the contract between Tastee and the baseball stadium. Is he correct?
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A) Yes, since he intended to receive Smart Piggy hotdogs at every ball game B) Yes, since Tastee intended to sell at the stadium C) Yes, since Austin is a donee beneficiary D) No, since Austin is a creditor beneficiary with has no implied rights under the contract E) No, since Austin is an incidental beneficiary who unintentionally gained a benefit
130)
If parties are not _____, they usually do not have rights to a contract. A) in pari delicto B) in privity of contract C) incidental beneficiaries D) delegatees E) donees
ESSAY. Write your answer in the space provided or on a separate sheet of paper. 131) Define the statute of frauds, and explain the three main purposes of the statute of frauds.
132)
What types of contracts does the statute of frauds require to be in writing?
133) Define the term "admission" as it relates to the applicability of the statute of frauds writing requirement. Discuss the advantages and disadvantages of the law regarding admissions, and set forth your reasoned opinion as to whether the law should recognize an admission.
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134)
Define the parol evidence rule, and list the eight exceptions to the parol evidence rule.
135) Richard has insurance with Exceptional Coverage Insurance Company, Inc. (Exceptional Coverage). Richard has a wreck with Susie. The adjuster for Exceptional Coverage orally agrees to pay Susie $1,000 for the damage to her car. The adjuster, however, gets in trouble with his boss for agreeing to pay too much. He tells Susie that he is backing out of the deal because the agreement is unenforceable on the basis that the statute of frauds requires that a contract to pay the debt of another be in writing. Is the adjuster correct? Why or why not?
136) Define what an assignment is and list and discuss two reasons why notice of assignment should be given to the obligor.
137)
List the types of contractual rights that cannot be assigned.
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138)
Define “donee beneficiary,” and give an example of a donee beneficiary contract.
139) Maurice is excited because a developer plans a subdivision full of high-priced homes that will adjoin his property. Maurice is so pleased that he puts in a new swimming pool to celebrate. Maurice believes that the subdivision will significantly increase the value of his property. The developer, however, changes his mind and decides not to develop the subdivision. Maurice is angry and asks if he can sue the developer, particularly since he can establish reliance. What would you tell Maurice, and why? Discuss whether you agree with the law on this issue, and why or why not.
140) Discuss the factors courts consider in determining whether a party is an intended beneficiary or merely an incidental beneficiary.
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Answer Key Test name: Chap 13_5_The Essentials_Kubasek 1) FALSE The statute of frauds is misleading in the sense that is does not relate to fraudulent contracts, nor does it address the issue of illegal contracts. 2) TRUE There is no federal statute of frauds; instead, such legislation exists at the state level, with the exception that Louisiana, Maryland, and New Mexico have statutes of frauds created by judicial decision rather than by legislation. 3) FALSE The statute of frauds serves to protect promisors from poorly considered oral contracts by requiring certain contracts to be in writing. 4) TRUE Agreements in which the total price for a sale of goods is $500 or more are required by Uniform Commercial Code Section 2-201 to be recorded in a written contract or a memorandum. 5) TRUE Under the equal dignity rule, contracts that would normally fall under the statute of frauds and need a writing if negotiated by the principal must be in writing even if negotiated by an agent. 6) FALSE Suretyship refers to an agreement in which a third party agrees to pay the debt owed by another party if that other party fails to pay his or her debt. 7) TRUE
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A prenuptial agreement is an agreement two parties enter into before marriage that clearly states the ownership rights each party enjoys in the other party’s property. 8) FALSE Although a mutual promise to marry does not fall within the statute of frauds, prenuptial agreements do.To be enforceable, prenuptial agreements must be in writing. 9) TRUE Primary obligations to pay a debt are not within the statute of frauds and, therefore, need not be in writing to be enforceable. Secondary obligations, however, are within the statute of frauds and need to be in writing. A secondary obligation arises when a party outside a primary agreement promises to fulfill one of the original party’s (the primary debtor’s) obligations if the original party (the primary debtor) fails to fulfill his or her obligation. 10) FALSE In addition to contracts for the sale of land, contracts transferring other interests in land are also within the statute of frauds. Mortgages and leases are within the statute of frauds because they are considered transfers of an interest in land. 11) TRUE Partial performance can override the statute of fraud’s requirement for a written agreement. The logic is that the actions of both parties demonstrate the existence of their agreement, so the agreement no longer needs to be in writing to be enforceable, even though a writing would otherwise be needed. 12) TRUE
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Although the statute of frauds requires a writing for sales of interests in land, there is an exception based on the theory of partial performance. Under partial performance, if the buyer in an alleged contract for the sale of land has paid any portion of the sales price and either has begun to permanently improve the land or has taken possession of the land, the courts will consider the contract partially performed, and this partial performance will amount to proof of the contract. 13) FALSE Although it is standard for both parties to sign the agreement, because the writing is being offered as proof of an agreement, only the party against whom action is sought needs to have signed the writing. If only one party signed, the agreement is enforceable against the signing party but not against the non-signing party. 14) FALSE The parol evidence rule is a common law rule that specifically addresses the admissibility of oral evidence as it relates to written contracts.The parol evidence rule states that oral evidence of an agreement made prior to or contemporaneously with a written agreement is inadmissible when the parties intend the written agreement to be the complete and final version of their agreement. 15) FALSE The word “parol” in the parol evidence rule means “speech” or “words,” specifically words outside the original writing. 16) FALSE
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Whenever a written agreement under the statute of frauds contains a serious and obvious typographical error, parol evidence is admissible to demonstrate that the typo was a typo and to set forth the proper term. Allowing parol evidence to correct typos does not fundamentally alter the written agreement because the typo is not an accurate reflection of the parties’ agreement. The agreement is not altered by correcting a typo; instead, the agreement is clarified. 17) TRUE An integrated contract is a written contract intended to be the complete and final representation of the parties’ agreement. When a court deems a contract integrated, unless an exception applies, parol evidence is inadmissible. 18) FALSE An assignment occurs when a party to a contract transfers her rights to a contract to a third party. 19) FALSE An assignment occurs when a party to a contract, the assignor, transfers her rights to a contract to a third party, the assignee. In other words, the assignor gives to the assignee the right to collect what was contractually agreed on in the original contract. 20) FALSE When an assignor transfers her rights to an assignee, the assignor legally gives up all rights she previously had to collect on the contract. After the transfer of rights, the assignee, not the assignor, may legally demand performance from the other party to the original contract. 21) TRUE
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In order for an assignment to be valid, an assignee must agree to accept the assigned rights. An assignee may decline an assignment if he has not legally agreed to the assignment and he declines in a timely fashion after learning about the assignment and its terms. There is no protocol an assignee must follow to reject an assignment, but once the assignment is rejected, it is considered rejected from the time it was first offered. 22) FALSE A delegation occurs when a party to a contract, the delegator, transfers her duty to perform to a third party who is not part of the original contract, the delegatee. Whereas assignments transfer rights to a contract, delegations transfer duties. Instead of the third party receiving something, as in an assignment, delegations require the delegatee to fulfill the delegator’s contractual obligation to the obligee, the party to the contract to whom a duty is owed. 23) FALSE Although assignments may, as a general rule, be given orally or in writing, the Uniform Commercial Code requires assignments to be in writing when the amount being assigned is greater than $5,000. 24) TRUE Third parties who are intended beneficiaries have the right to enforce contracts. An intended beneficiary is a third party to a contract whom the contracting parties intended to benefit directly from their contract. 25) FALSE A donee beneficiary is a third party who benefits from a contract in which the promisor agrees to give a gift to the third party. A creditor beneficiary is a third party who benefits from a contract in which the promisor agrees to pay the promisee’s debt. 26) FALSE
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A donee beneficiary is a third party who benefits from a contract in which the promisor agrees to give a gift to the third party. A donee beneficiary is a type of intended beneficiary, a third party to a contract whom the contracting parties intended to benefit directly from their contract. 27) FALSE Although an intended beneficiary can enforce her rights to a contract, she cannot do so until her rights to the contract vest, that is, until the rights mature so that a party can legally act on the rights. 28) FALSE Similar to intended beneficiaries, incidental beneficiaries are third-party beneficiaries to contracts. However, unlike the case with intended beneficiaries, the contract parties do not intend to benefit incidental beneficiaries. An incidental beneficiary is one who unintentionally gains a benefit from a contract between other parties. 29) E Only specific types of contracts fall within the statute of frauds and thus are required to be evidenced in writing. 30) B The idea of requiring that certain contracts be in writing comes from the English Act for the Prevention of Frauds and Perjuries, passed in 1677. 31) A The term “statute of frauds” is somewhat misleading because it does not relate to fraudulent contracts. 32) D A purpose of the statute of frauds is to prevent unreliable oral evidence from interfering with a contractual relationship. 33) E The statute of frauds imposes on parties the need to carefully consider the terms, agree to them, write them down, and sign the agreement. Version 1
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34) A Contracts whose terms prevent possible performance within one year are subject to the statute of frauds, and thus are required to be evidenced in writing. 35) E In Heritage Constructors, Inc. v. Chrietzberg Electric, Inc. and Richard Marc Chrietzberg, the court of appeals of Texas concluded that the agreement between the contractor and the subcontractor would have required more than one year to complete, and thus fell within the statute of frauds and failed to satisfy it; that because the subcontractor was not liable for breach of contract damages, it was also not liable for promissory estoppel damages; and that the negligent misrepresentation damages were indistinguishable from the other damages and were also not recoverable. 36) A The assignment of rights, or "assignment of claims," in Russia is highly regulated by the Russian Civil Code. 37) D The Uniform Commercial Code indicates that agreements in which the total price for a sale is $500 or more must be recorded in a written contract or a memorandum. 38) E The one-year period begins to run the day after the contract is created, not when the contract is scheduled to begin; and the statute is inapplicable if there is a possibility of completing a contract within one year. Also, contracts whose performance, based on the terms of the contract, could not possibly occur within one year must be in writing; but contracts for lifetime employment do not have to be in writing in order to be enforceable. 39) D Version 1
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A prenuptial agreement is an agreement two parties enter into before marriage that clearly states the ownership rights each party enjoys in the other party's property. 40) B A mutual promise to marry does not fall within the statute of frauds while a prenuptial agreement does. 41) A The terms "secondary promises," "collateral promises," or "suretyship promises" all refer to agreements in which a third party agrees to pay the debt owed by another party if that other party fails to pay his or her debt. 42) B Primary obligations are debts entered into in an initial contract. 43) D The main-purpose rule is an exception as to when a promise to pay someone else's debt needs to be in writing. If the main purpose for incurring a secondary obligation is to obtain a personal benefit, the promise does not fall within the statute of frauds and is, therefore, not required to be in writing. The assumption is that a party attempting to achieve a personal benefit will not back out of the agreement; thus, there is no need for a written record of the agreement. The court’s job is to use the context surrounding the agreement to determine the third party’s main purpose for entering the agreement. 44) D Under the statute of frauds, land is considered real property, such as the land and soil itself, as well as anything attached to the land, such as trees or buildings. 45) E Leases of land are within the statute of frauds because they are considered transfers of an interest in land. 46) E Version 1
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Promises to sell crops annually, agreements between parties for profit sharing from the sale of real property, and boundary disputes that have been settled through the use of land are not within the statute of frauds and, therefore, do not require evidence in writing. 47) A In Shelby’s, Inc. v. Sierra Bravo, Inc., the Court of Appeals of Missouri declined to create a new category to which the statute of frauds applies, that of a contract for services for the deposit of dirt and soil on land. 48) A Agreements in which the total price for a sale of goods is $500 or more are required by Uniform Commercial Code Section 2-201 to be recorded in a written contract or a memorandum. 49) E Agreements in which the total price for a sale is $500 or more are required by Uniform Commercial Code Section 2-201 to be recorded in a written contract or a memorandum. To satisfy this requirement, the contract or memorandum need only state the quantity to be sold. 50) B The equal dignity rule states that a contract that would normally fall under the statute of frauds and need a writing if negotiated by the principal must be in writing even if negotiated by an agent. 51) E As with most legal rules, there are certain exceptions to which the statute of frauds does not apply, even though under normal circumstances it would. These exceptions are: a) admission; b) partial performance; c) promissory estoppel; and d) although not under the statute of frauds, exceptions under the Uniform Commercial Code. 52) C
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An admission is a statement made in court, under oath, or at some stage during a legal proceeding in which a party against whom a lawsuit has been brought admits that an oral contract existed, even though the contract was required to be in writing. 53) C Except for Louisiana and California, all states adhere to the admission exception to the statute of frauds. 54) B According to the theory of partial performance, if the buyer in an alleged contract for the sale of land has paid any portion of the sales price and either has begun to permanently improve the land or has taken possession of the land, the courts will consider the contract partially performed, and this partial performance will amount to proof of the contract. 55) A Under certain circumstances, when a party relies on an oral contract that is within the statute of frauds, and therefore should have been in writing, the reliance can create a situation in which the contract is enforceable. Promissory estoppel is the legal enforcement of an otherwise unenforceable contract due to a party's detrimental reliance on the contract. 56) D Oral contracts for customized goods are enforceable even if they would normally have to be in writing. The reasoning is that customized goods are not likely to be able to be sold to a general audience. Accordingly, if one party backs out of an oral arrangement for the sale of customized goods, the party that did not back out probably incurred unreasonable costs due to the negated contract. 57) E
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Although there are no specific requirements for the form of a written contract under the statute of frauds, certain elements need to be present for a writing to constitute proper evidence of a written contract under the statute. Required elements in the writing include the identification of the parties to the contract, the subject of the agreement, the consideration given, and any pertinent terms of the contract. 58) E The contract must be signed, but the signature does not need to be located at the end, which is the traditional location for a signature. 59) A Although it is standard for both parties to sign the agreement, because the writing is being offered as proof of an agreement, only the party against whom action is sought needs to have signed the writing. If only one party signed, the agreement is enforceable against the signing party but not against the non-signing party. 60) E Similar to the statute of frauds, the Uniform Commercial Code (UCC) allows a variety of written documents to constitute a writing, including faxes, e-mails, invoices, bills of lading, sales slips, checks, or any combination of these documents. 61) C A problem arises with a written contract when a party asserts that the writing is in some way deficient. To smooth transactions by limiting the types of evidence admissible to address the written agreement, the courts rely heavily on the parol evidence rule. The parol evidence rule is a common law rule that specifically addresses the admissibility of oral evidence as it relates to written contracts. 62) C
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The parol evidence rule is a common law rule that specifically addresses the admissibility of oral evidence as it relates to written contracts. The parol evidence rule states that oral evidence of an agreement made prior to or contemporaneously with a written agreement is inadmissible when the parties intend the written agreement to be the complete and final version of their agreement. 63) E The purpose of the parol evidence rule is to restrict evidence from being admitted that substantially contradicts the agreement in its written form. Therefore, evidence of prior agreements and negotiations, as well as of contemporaneous agreements and negotiations, is typically excluded under the parol evidence rule. 64) B When a court determines that the written agreement does not represent a complete and final version of the agreement, evidence may be admissible to further the court's understanding of the agreement. The admissible evidence is limited to additional elements, missing in the writing, that are consistent with the written agreement. These elements may be terms typically included in similar transactions that were left out of the specific writing, or they may be separate agreements in which consideration was offered. 65) B The parol evidence rule is not a rule of evidence but, rather, relates to substantive legal issues, namely, what constitutes a legally binding agreement and how do we know what the agreement is. 66) D
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Sometimes parties take the initiative and attempt to signal to judges that the written agreement is intended to be the final and complete statement of the agreement. A merger clause is a clause parties include in a written agreement within the statute of frauds that states that the written agreement accurately reflects the final, complete version of the agreement. Where merger clauses are accepted, they greatly reduce the amount of guesswork courts must do in determining whether a written agreement was, in fact, intended to be the final statement of the agreement. 67) E Exceptions to the parol evidence rule pertain to: a) contracts that are subsequently modified; b) contracts conditioned on orally agreed-on terms; c) contracts that are not final as they are part written and part oral; d) contracts with ambiguous terms; e) incomplete contracts; f) contracts with obvious typographical errors; g) voidable or void contracts; and h) evidence of prior dealings or usage of trade. 68) C Evidence of the existence of a condition precedent agreed to orally is admissible, because the contract is not modified by such evidence; rather, its enforceability is called into question. Because the statute of frauds is concerned primarily with the enforceability of agreements, it logically follows that the parol evidence rule does not apply to evidence of conditions precedent. 69) A Integrated contracts are written contracts intended to be the complete and final representation of the parties' agreement. The easiest test to determine the admissibility of parol evidence is to check whether the written contract, within the statute of frauds, is an integrated contract. 70) B
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One way parties can indicate their desire to create an integrated contract is through the use of a merger clause. A merger clause explicitly states that the written contract is intended to be the complete and final version of the contract between the parties and that other possible agreements between the parties, besides the one in question, are not part of the final written agreement. 71) A Contracts typically involve an agreement between two parties in which both parties agree to do something for the other. In other words, both parties are obligors. 72) B Typically, contracting parties are both obligors and obligees. That is, both parties are obligors (contractual parties who agreed to do something for each other) and obligees (contractual parties who agreed to receive something from each other). 73) D An assignment involves a contracting party's transfer of his or her rights under a contract to a third party. 74) D An assignment occurs when a party to a contract transfers her rights to the contract to a third party. The assignor is the party to the original contract who transfers his or her rights under the contract to a third party, giving that third party the right to receive what was contractually agreed on in the original contract. 75) E An assignment occurs when a party to a contract transfers her rights to the contract to a third party. The assignee is the party who receives the rights of the assignor to collect what was contractually agreed on in the original agreement. 76) C Version 1
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When an assignor transfers her rights to an assignee, the assignor legally gives up all rights she previously had to collect on the contract. The assignee essentially fills in for the assignor as the legal recipient of the contractual duties. As such, the assignee acquires the same rights the assignor had. The assignee is offered no additional protections. Moreover, the obligor may raise any of the same defenses for nonperformance to the assignee as he would have been able to raise against the assignor. 77) E Legally, there is no required wording to be used or forms to be filled out for assignments to be valid. 78) B Although as a general rule assignments may be given orally or in writing, the Uniform Commercial Code requires that assignments be in writing when the amount being assigned is greater than $5,000. 79) A As a general rule, the rights to a contract cannot be assigned when the contract is personal in nature. For a contract to be personal in nature, the obligor must have promised something specific to the person receiving it. Because the subject matter of the contract is personal, a third party cannot legally become the recipient. The one exception occurs when the only part of a contract left to be fulfilled is the payment, because rights to payment can always be assigned. 80) A Although rights can be assigned as a general rule, they cannot be assigned when the assignment would increase the risk or duties the obligor would face in fulfilling the original contract. In this example,Sally will win in her legal dispute with Paul because Paul’s attempted assignment would increase her burden of performance. 81) B Version 1
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When parties include an anti-assignment clause in their contract, the parties are attempting to limit their ability to assign their rights under the contract. However, the wording of the anti-assignment clause is determinative regarding the effectiveness of the clause. That is, if worded improperly or ambiguously, the clause does not effectively limit assignments. 82) E Even in the presence of an anti-assignment clause, there are exceptions in which assignments can still be made including assignments made by operation of law, assignments for the right to receive monetary payments, and assignments for the right to receive damages for a breach of contract to sell goods or services. 83) D Assignments are effective immediately, regardless of notice. 84) A When an assignor assigns two or more parties the same right, confusion arises about which party has the right to the contract. To address such a situation, most states use the first-assignment-in-time-rule, which states that the first party granted the assignment is the party correctly entitled to the contractual right. 85) C When an assignor assigns two or more parties the same right, confusion arises about which party has the right to the contract. To address such a situation, a minority of states have adopted the English rule, which states that the first assignee to give notice of assignment to the obligor is the party with rights to the contract. Particularly when living in a state using the English rule, parties are well advised to give notice of assignments to ensure that they maintain their assigned rights. 86) B
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A delegation occurs when a party to a contract transfers her duty to perform to a third party that is not part of the original contract. Whereas assignments transfer rights to a contract, delegations transfer duties. 87) B A delegator is a party to a contract who transfers her duty to perform to a third party who is not part of the original contract. 88) A A delegatee is a party to a contract who receives a duty to perform transferred by a party to the original contract (the delegator). 89) C One important distinction between assignments and delegations involves the rights of the transferring party—the assignor or the delegator. In assignments, after the assignment is made, the assignor has no right left to the original contract. Conversely, with delegations, the delegator is not relieved of his duty to perform by making a delegation. If the delegatee fails to fulfill the contract, the delegator is still liable to the obligee for fulfillment of the contract. 90) D A duty that cannot be delegated is any duty of a personal nature. A duty is personal in nature when it requires the specific talents, skills, or expertise of the obligor, such as painting a portrait. Although personal duties typically cannot be delegated, any non-personal duties in a contract can be delegated. For example, the delivering of goods, mowing of one’s lawn, paying of money, or painting of a house are all considered non-personal duties. These duties are non-personal because they do not require particular skill or expertise and, therefore, can be completed by most people. 91) A
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Frequently, contracts contain ambiguous language that makes it unclear what is being assigned or delegated. Examples of ambiguous language are “I assign the contract” or “I assign all of my rights under the contract.” When a court cannot clearly tell what the parties intended, the court usually considers the assignment to be both of rights and duties. In other words, when ambiguous language is used, the court considers that the assignor has assigned his rights and delegated any duties he had under the contract. Doing so removes any right the assignor had to collect under the contract, but he is still liable to the obligee for any duties the delegatee, who is also the assignee, fails to perform. 92) C A third-party beneficiary contract is created when two parties enter into a contract with the intended purpose of benefiting a third party. 93) A An intended beneficiary is a third party to a contract whom the contracting parties intended to benefit directly from their contract. Intended beneficiaries may enforce their rights to a contract when both parties to the contract intended for the third party to benefit. 94) B An intended beneficiary is a third party to a contract whom the contracting parties intended to benefit directly from their contract. Intended beneficiaries may enforce their rights to a contract when both parties to the contract intended for the third party to benefit. In determining whether a third party is an intended beneficiary, courts ask whether the contracting parties intended the third party to be the direct, primary, or express beneficiary of the contract. 95) A
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A third-party beneficiary contract is created when two parties enter into a contract with the intended purpose of benefiting a third party. The promisee in a third-party beneficiary contract is the party to the contract who owes something to the promisor in exchange for the promise made to the third-party beneficiary. 96) E There are two types of intended beneficiaries: creditor beneficiaries and donee beneficiaries. 97) A There are two types of intended beneficiaries: creditor beneficiaries and donee beneficiaries. A creditor beneficiary is a third party who benefits from a contract in which the promisor agrees to pay the promisee's debt. 98) C In Lawrence v. Fox, the Court of Appeals of New York upheld the right of third parties to sue promisors to have agreements enforced. It was one of the first cases to do so. 99) B There are two types of intended beneficiaries: creditor beneficiaries and donee beneficiaries. Donee beneficiaries are third parties who benefit from a contract in which a promisor agrees to give a gift to the third party. 100) C Although an intended beneficiary can enforce her rights to a contract, she cannot do so until her rights to the contract vest; that is, until the rights mature so that a party can legally act on the rights. 101) C
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Although an intended beneficiary can enforce her rights to a contract, she cannot do so until her rights to the contract vest; that is, until the rights mature so that a party can legally act on the rights. For example, third-party rights in a life insurance policy do not vest until the promisee’s death. 102) B When a donee beneficiary can enforce his rights under a contract, he may do so only against the promisor. The reason the donee beneficiary cannot sue the promisee is that the promisee had no duty to the donee beneficiary. 103) C Similar to intended beneficiaries, incidental beneficiaries are third-party beneficiaries to contracts. However, unlike the case with intended beneficiaries, the contracting parties do not intend to benefit incidental beneficiaries. An incidental beneficiary is one who unintentionally gains a benefit from a contract between other parties. 104) E An incidental beneficiary is one who unintentionally gains a benefit from a contract between other parties. Unlike intended beneficiaries, incidental beneficiaries cannot sue to enforce a contract. Incidental beneficiaries maintain no rights to enforce other people’s contracts. 105) A In determining whether a party is an incidental beneficiary, the courts take a reasonable person approach: they ask if a reasonable person in the position of the party in question would believe that the contracting parties intended to benefit him or her. If the reasonable person would believe that the contracting parties consciously intended to benefit him or her, the courts will consider the party an intended beneficiary. Conversely, if the reasonable person would not find such intent, the third party is an incidental beneficiary. Version 1
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106) C A prenuptial agreement is an agreement two parties enter into before marriage that clearly states the ownership rights each party enjoys in the other party's property. 107) A Agreements regarding marriage in which one party is gaining something other than a return on his or her promise to marry are within the statute of frauds and must be in writing. 108) D There is an exception concerning when a promise to pay someone else’s debt needs to be in writing: the main-purpose rule. If the main purpose for incurring a secondary obligation is to obtain a personal benefit, the promise does not fall within the statute and need not be in writing. The assumption is that a party attempting to achieve a personal benefit will not back out of the agreement; thus, there is no need for a written record of the agreement. The court’s job is to use the context surrounding the agreement to determine the third party’s main purpose for entering the agreement. 109) B In order to satisfy the statute of frauds, the signature does not need to be located at the end of the document. 110) A While it is standard for both parties to sign the agreement, because the writing is being offered as proof of an agreement, only the party against whom action is sought needs to have signed the writing. If only one party signed, the agreement is enforceable against the signing party but not against the non-signing party. 111) C
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Ambiguity is an exception to the parol evidence rule. To attempt to reach the most accurate interpretation of the original agreement, the court allows evidence, even if it is oral, for the sole purpose of clarifying ambiguous terms. Evidence used to clarify ambiguity is not believed to modify a contract but, rather, to clarify it. Accordingly, oral evidence related to ambiguity is admissible only to clarify, and not to change, any of the contractual terms. 112) D Although notice need not be given to the obligor for a valid assignment, without notice of the assignment, the obligor can discharge his contractual duties simply by fulfilling his duties to the assignor. Because fulfilling the contract discharges the obligor’s duties, the act also constitutes a discharge of the assignee’s claim on the assignor’s right. However, after the obligor has been given notice, the obligor can discharge his contractual obligations only by fulfilling the contract for the assignee. 113) A An assignment occurs when a party to a contract, the assignor, transfers her rights to a contract to a third party, the assignee. In other words, the assignor gives to the assignee the right to collect what was contractually agreed on in the original contract. 114) D
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A delegation occurs when a party to a contract, the delegator, transfers her duty to perform to a third party, the delegatee, who is not part of the original contract. As with the assignment of rights, the initial assumption is that duties to a contract can be delegated. Any non-personal duties in a contract can be delegated. For example, the delivering of goods, mowing of one's lawn, paying of money, or painting of a house are all considered non-personal duties that may be delegated. These duties are nonpersonal because they do not require particular skill or expertise and, therefore, can be completed by most people. 115) E One important distinction between assignments and delegations involves the rights of the transferring party—the assignor or the delegator. In assignments, after the assignment is made, the assignor has no right left to the original contract. Conversely, with delegations, the delegator is not relieved of his duty to perform by making a delegation. If the delegatee fails to fulfill the contract, the delegator is still liable to the obligee for fulfillment of the contract. 116) E A delegation occurs when a party to a contract, the delegator, transfers her duty to perform to a third party who is not part of the original contract, the delegatee. As with the assignment of rights, the initial assumption is that duties to a contract can be delegated. There are, however, exceptions. One type of duty that cannot be delegated is any duty of a personal nature. A duty is personal in nature when it requires the specific talents, skills, or expertise of the obligor. 117) E
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A delegation occurs when a party to a contract, the delegator, transfers her duty to perform to a third party who is not part of the original contract, the delegatee. As with the assignment of rights, the initial assumption is that duties to a contract can be delegated. There are, however, exceptions. One type of duty that cannot be delegated is any duty of a personal nature. A duty is personal in nature when it requires the specific talents, skills, or expertise of the obligor. 118) B The right to assign monetary payments cannot be denied. One’s duty to pay is not affected when the party to whom one must make a payment changes. That is, no added burden is placed on the obligor when the recipient of a payment changes, requiring that payment be sent to a different party. 119) A One important distinction between assignments and delegations involves the rights of the transferring party—the assignor or the delegator. In assignments, after the assignment is made, the assignor has no right left to the original contract. Conversely, with delegations, the delegator is not relieved of his duty to perform by making a delegation. If the delegatee fails to fulfill the contract, the delegator is still liable to the obligee for fulfillment of the contract. 120) E A delegation occurs when a party to a contract, the delegator, transfers her duty to perform to a third party who is not part of the original contract, the delegatee. Delegations require that the delegatee fulfill the delegator's contractual obligation to the obligee. 121) E
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Donee beneficiaries are third parties who benefit from a contract in which a promisor agrees to give a gift to a third party. When a donee beneficiary can enforce his rights under a contract, he may do so only against the promisor. The reason the donee beneficiary cannot sue the promisee is that the promisee had noduty to the donee beneficiary. 122) C An intended beneficiary is a third party to a contract whom the contracting parties intended to benefit directly from their contract, and a creditor beneficiary is a third party who benefits from a contract in which the promisor agrees to pay the promisee's debt. 123) D An intended beneficiary is a third party to a contract whom the contracting parties intended to benefit directly from their contract, and a donee beneficiary is a third party who benefits from a contract in which a promisor agrees to give a gift to the third party. 124) D Only specific types of contracts fall within the statute of frauds and thus are required to be evidenced in writing. These types of contracts are (1) contracts whose terms prevent possible performance within one year, (2) promises made in consideration of marriage, (3) contracts for one party to pay the debt of another if the initial party fails to pay, and (4) contracts related to an interest in land. 125) E Required elements in the writing include the identification of the parties to the contract, the subject of the agreement, the consideration if any is given, and any pertinent terms of the contract. Furthermore, the contract must be signed, but the signature does not need to be located at the end, which is the traditional location for a signature. In fact, the signature need not be the full signature; a mark, such as an initial, is permissible as long as the mark is placed with the intent to function as a signature. Version 1
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126) E The parol evidence rule is a common law rule that specifically addresses the admissibility of oral evidence as it relates to written contracts. 127) A Although assignments may be given orally or in writing, the UCC requires assignments to be in writing when the amount being assigned is greater than $5,000. 128) D The promisor in a third-party beneficiary contract is the party to the contract who made the promise that benefits the third party. The promisee is the party to the contract who owes something to the promisor in exchange for the promise made to the third-party beneficiary. 129) E An incidental beneficiary is one who unintentionally gains a benefit from a contract between other parties. Unlike intended beneficiaries, incidental beneficiaries cannot sue to enforce a contract. Incidental beneficiaries maintain no rights to enforce other people's contracts. 130) B Contracts are typically private agreements, in the sense that the focus of the contract is the two parties involved and no one else. Accordingly, parties not in privity of contract (i.e., parties other than the contracting parties) usually do not have rights to a contract.
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131) The statute of frauds is a rule that requires certain types of contracts to be in writing to be enforceable. The statute of frauds has three main purposes. First, the statute of frauds attempts to ease contractual negotiations by requiring sufficiently reliable evidence to prove the existence and specific terms of a contract. Second, the statute of frauds prevents unreliable oral evidence from interfering with a contractual relationship. Requiring a written contract prevents the admittance of oral evidence denying or substantially altering the contract. Third, the statute of frauds prevents parties from entering into contracts with which they do not agree. The statute’s requirements impose on parties the need to consider the terms carefully, agree to them, write them down, and sign the contract. 132) Only specific types of contracts fall within the statute of frauds and thus are required to be evidenced in writing. They are: a) contracts whose terms prevent possible performance within one year; b) promises made in consideration of marriage; c) contracts for one party to pay the debt of another if the initial party fails to pay; and d) contracts related to an interest in land. Although required to be in writing under the Uniform Commercial Code (UCC) and not the statute of frauds, a related fifth category is contracts for the sale of goods totaling more than $500.
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133) As with most legal rules, there are certain exceptions to which the statute of frauds does not apply, even though under normal circumstances it would. One of those exceptions is an admission. An admission is a statement made in court, under oath, or at some stage during a legal proceeding in which a party against whom charges have been brought admits that an oral contract existed, even though the contract was required to be in writing. To the extent that the statute of frauds is intended to require proper evidence of agreements, the admission exception is well-reasoned. However, to the extent that the statute is intended to encourage care and caution in establishing the specific details of agreements, the admission exception seems to unnecessarily punish honest parties while rewarding dishonest ones. Students will vary in their opinions regarding whether the law should recognize an admission as an exception to the statute of frauds writing requirement. 134) The parol evidence rule is a common law rule that specifically addresses the admissibility of oral evidence as it relates to written contracts. The parol evidence rule states that oral evidence of an agreement made prior to or contemporaneously with a written agreement is inadmissible when the parties intend the written agreement to be the complete and final version of their agreement. As with the statute of frauds, there are exceptions to the general applicability of the parol evidence rule. The exceptions are: a) contracts that are subsequently modified; b) contracts conditioned on orally agreed-on terms; c) contracts that are not final as they are part written and part oral; d) contracts with ambiguous terms; e) incomplete contracts; f) contracts with obvious typographical errors; g) voidable or void contracts; and h) evidence of prior dealings or usage of trade.
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135) The adjuster is not correct. The insurer accepted the primary responsibility to pay damages caused by Richard. Primary obligations are debts entered into in an initial contract. Primary obligations are not within the statute of frauds and, therefore, do not need to be in writing to be enforceable. Had Exceptional Coverage agreed to pay if Richard could not pay, that would have been a secondary obligation. A secondary obligation arises when a party outside a primary agreement promises to fulfill one of the original party’s (the primary debtor’s) obligations if the original debtor (primary debtor) fails to fulfill his or her obligation. Secondary obligations are within the statute of frauds and need to be in writing in order to be enforceable. 136) An assignment occurs when a party to a contract, the assignor, transfers her rights to a contract to a third party, the assignee. Although notice need not be given for a valid assignment, it is usually a good idea for the assignor or the assignee to notify the obligor of the assignment. Assignments are effective immediately, regardless of notice, but by providing notice, the assignor can help avoid two serious complications with assignments. The first complication involves the obligors’ fulfilling of the contractual duty. Without notice of assignment, the obligor can discharge his contractual duties simply by fulfilling his duties to the assignor. However, if the obligor has been given notice, the obligor can discharge his contractual obligations only by fulfilling the contract for the assignee. The second complication regarding a lack of notice involves the granting of multiple assignments of the same right. When an assignor assigns two or more parties the same right, confusion arises as to which party has the right to the contract. In states that give greater rights in such cases to the first to provide notice, notice of assignment is particularly important.
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137) Contractual rights that cannot be assigned include: a) rights that are personal in nature; b) rights whose assignment would increase the obligor's risk or duties; c) rights whose assignment is prohibited by contract; and d) rights whose assignment is prohibited by law or public policy. 138) Donee beneficiaries are third parties who benefit from a contract in which a promisor agrees to give a gift to the third party. The most common form of donee beneficiary contract is a life insurance policy. Someone (the promisee) pays premiums on a life insurance plan to have the insurer (the promisor) agree to pay a third party (the donee beneficiary) on the promisee’s death. 139) Maurice cannot sue the developer because Maurice is an incidental beneficiary. An incidental beneficiary is one who unintentionally gains a benefit from a contract between other parties. Unlike intended beneficiaries, incidental beneficiaries cannot sue to enforce a contract. Incidental beneficiaries maintain no rights to enforce other people’s contracts. Student responses as to whether they agree or disagree with the law regarding incidental beneficiaries will likely vary. 140) In determining whether a party is an intended beneficiary or merely an incidental beneficiary, courts ask if a reasonable person in the position of the party in question would believe the contracting parties intended to benefit the party in question. Courts also consider whether performance of the contract is done directly to the third party, the third party's ability to control the specifics of performance of the contract, and whether the contract directly states that the third party is the benefiting party.
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CHAPTER 14 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) Under ordinary circumstances, a party's duty to perform the promise agreed to in a contract is conditional. ⊚ true ⊚ false
2) Contractual conditions may be either implied by law or expressly inserted into the contract by the parties. ⊚ true ⊚ false
3) There are three types of contractual conditions: condition precedent, condition subsequent, and concurrent conditions. ⊚ true ⊚ false
4) If a contract contains a clause in which an event must occur in order for a party's duty to arise, the contract contains a condition precedent. ⊚ true ⊚ false
5) There are three types of contractual conditions: condition precedent, condition subsequent, and concurrent conditions. ⊚ true ⊚ false
6) Express conditions are usually preceded by words such as conditioned on, if, provided that, or when. ⊚ true ⊚ false
7)
A breach occurs when both parties execute their contract.
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⊚ ⊚
true false
8) Once a contract has been anticipatorily repudiated, the nonbreaching party must wait until the other party’s contractually specified time period for performance has expired to sue for breach of contract and take other remedial measures. ⊚ true ⊚ false
9) When one party to a contract wants to substitute a different performance for his original duty under the contract, this is known as a civic exchange. ⊚ true ⊚ false
10) Under Japanese law, parties to a contract may specify liquidated damages recoverable when a contractual obligation is not performed at all or not performed by a specified date. ⊚ true ⊚ false
11) Damages that are the foreseeable result of special facts and circumstances arising outside the contract itself are known as nominal damages. ⊚ true ⊚ false
12) Courts frequently award specific performance as the main remedy for a breach of contract. ⊚ true ⊚ false
13)
Liquidated damage clauses in construction contracts are, as a matter of law, void. ⊚ true ⊚ false
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14) Restitution is the termination of a contract, and rescission is the return of any property given up under the contract. ⊚ true ⊚ false
15) Recovery under a quasi-contract theory requires proof that the defendant would be unjustly enriched from receiving a benefit conferred to him by the plaintiff without compensating the plaintiff for it. ⊚ true ⊚ false
16)
Usually, injunctions are prohibitions against actions. ⊚ true ⊚ false
17)
Reformation is an equitable remedy. ⊚ true ⊚ false
18)
Specific performance is also referred to as reformation. ⊚ true ⊚ false
19) Courts do not allow a nonbreaching party to intentionally increase his damages for breach of contract. ⊚ true ⊚ false
20) To recover damages in a breach of contract case, the plaintiff must demonstrate that he used reasonable efforts to minimize the damage resulting from the breach. This obligation is referred to as the duty of substantial performance. ⊚ true ⊚ false
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21)
Monetary damages are also referred to as equitable damages. ⊚ true ⊚ false
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 22) When a party’s contract obligations have been terminated, the obligations have been _____. A) reformed B) discharged C) nullified D) remediated E) rescinded
23)
Which of the following is not a way a party’s contractual obligations can be discharged? A) Performance B) The failure of a condition to occur C) Operation of law D) Disagreement between the parties E) Material breach by both parties
24) In order for her employment contract with the law firm Kornegay and Rhyne, PLLC to be valid, Heather (a recent law school graduate) must first pass the state bar examination. This is a(n) _____ contract. A) equitable B) executed C) illusory D) conditional E) adhesion
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25) Which of the following are types of conditions that affect the performance obligations of the parties? A) Conditions precedent and subordinate conditions B) Conditions subsequent and executory conditions C) Concurrent conditions and conditions subsequent D) Conditions precedent, conditions subsequent, and concurrent conditions E) Conditions precedent, executed conditions, and recurrent conditions
26) Jennifer is offered a two-year employment contract with the local police department that is contingent upon her first passing a physical examination. What type of contractual condition is involved in this case? A) Concurrent B) Recurrent C) Executed D) Subsequent E) Precedent
27) Frequently, real estate contracts are conditioned on an event such as the buyer’s ability to sell his current home by a certain date. If the home does not sell by the stipulated date, the condition is not satisfied and the parties are therefore discharged from the contract. This is an example of a contract that is subject to a _____. A) condition subsequent B) condition precedent C) concurrent condition D) deed of trust E) general warranty deed
28) Thomas has agreed to buy a set of vintage stereo speakers from Ace Pawn Shop, Inc. (Ace). Per the terms of their agreement, Ace must deliver the speakers to Thomas on July 1, and Thomas will pay $500 cash to Ace’s driver immediately upon taking delivery. This is an example of a contract that is subject to _____.
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A) a condition subsequent B) recurrent conditions C) concurrent conditions D) executed conditions E) an accord and satisfaction
29) Marlie’s contract explicitly states that she must perform her contract obligation by June 1 at 5:00 p.m. This is an example of _____. A) a concurrent condition B) a condition precedent C) an implied condition D) an express condition E) both a concurrent condition and an express condition
30)
Express conditions are usually preceded by which words? A) Conditioned on or if B) If or when C) Provided that, if, or when D) When or provided that E) Conditioned on, if, when, or provided that
31) Which of the following describes conditions that are inferred from the nature and language of the contract? A) Express B) Implied C) Concordant D) Concurrent E) Both express and concurrent
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32) Bob agreed to tutor Lola in Spanish for two (2) hours and Lola agreed to pay $25.00 per hour for the tutoring services. Bob tutored Lola and she paid Bob $50.00. This means that the parties have been _____. A) revoked by performance B) rescinded by operation of law C) discharged by performance D) rescinded by mutual agreement E) held in abeyance
33) Gregg has offered to perform his contract obligation and he is ready, willing, and able to perform. This offer of performance is known as _____. A) an abeyance B) an accord C) an accord and satisfaction D) tender E) render
34)
Which of the following are the two (2) primary kinds of contractual performance? A) Partial and significant B) Partial and complete C) Partial and substantial D) Complete and substantial E) Complete and significant
35) Kelly and Theo have both completed their respective obligations under their contract. This is _____ performance. A) complete B) substantial C) concurrent D) executory E) significant
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36)
Which of the following is correct regarding complete performance?
A) Courts today require complete performance in order enforce in any respect the rights of the obligor. B) Courts today do not recognize the doctrine of substantial performance. C) In many instances, complete performance is difficult if not impossible to attain, and courts today generally require only substantial performance. D) In many instances, complete performance is difficult if not impossible to attain, but courts today generally require something more than substantial performance. E) With due diligence, complete performance is always possible to attain.
37) Which of the following is a condition courts require in order to recognize substantial performance? A) Complete performance B) An executed, rather than an executory, contract C) Completion of all the terms of the agreement D) That ninety (90) percent or more of a party’s contractual obligation has been satisfactorily performed E) No willful departure from the terms of the agreement
38) When an objective standard of the satisfaction of a contracting party is used, courts ask whether a(n) _____ would be satisfied with the performance. A) reasonable judge B) reasonable person C) designated third-party beneficiary D) ordinary jury E) person of ordinary intelligence
39) Thomas did not perform his contract obligation on time or to proper specifications. This is considered a(n) _____ contract.
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A) implied B) executed C) rescinded D) breach of E) revoked
40) What type of breach discharges the nonbreaching party from his or her obligations under the contract? A) A conditional breach B) An executory breach C) A material breach D) An expedited breach E) A discharging breach
41) In their contract, Jordan (the homeowner) and Mel (the contractor) have stipulated that Mel will build Jordan a room addition with brick exterior for $40,000. Instead of using brick, however, Mel uses vinyl siding. This is an example of a(n) _____ breach of contract. A) executory B) exemplary C) non-material D) material E) putative
42) A(n) _____ of contract often arises when market conditions change and one party realizes that it will not be profitable to carry out the terms of the contract. A) preemptive repudiation B) conditional remediation C) conditional breach D) anticipatory repudiation E) remedial repudiation
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43) Henderson and Carl mutually agree that they will not be able to perform their contract obligations and therefore elect to discontinue the contract. This is considered a(n) _____. A) concurrent condition B) anticipatory breach C) concurrent breach D) novation E) mutual rescission
44) Which of the following occurs when parties agree that they wish to discharge each other from their mutual obligations and therefore rescind or cancel the contract? A) Accord and satisfaction B) Novation C) Bilateral breach D) Mutual rescission E) Accord and abeyance
45) Margo and Bruce have an agreement in which Margo will paint the entire first floor of Bruce’s house for $5,000. As it turns out, Bruce cannot afford to have the whole first floor painted. Margo and Bruce decide that instead of the entire first floor, Margo will paint the living room and dining room only for $2,500. They put the original contract into a paper shredder and enter into another contract indicating the new terms. This is an example of a(n) _____. A) substitute contract B) novation C) concurrent breach D) accord and satisfaction E) remediation
46) When one of the parties to an agreement wants to substitute a different performance for his original duty under the contract, he is seeking a(n) _____.
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A) accord and satisfaction B) novation C) substituted contract D) mutual rescission E) addendum
47)
In order for a novation to be valid, what has to happen?
A) All three parties must agree to the novation. B) The contract must be rewritten and new terms must be substituted. C) The parties must amend the agreement to add new consideration. D) There must be a concurrent accord and satisfaction. E) The parties to the agreement must substitute a different date for completion of the contract.
48)
Which of the following may not result in discharge of a contract by operation of law? A) Alteration of the contract B) Bankruptcy C) Mutual rescission D) Objective impossibility of performance E) Frustration of purpose
49) Which of the following is a basis for discharge by operation of law when performance is still objectively possible but would be extraordinarily injurious or expensive to one party? A) Frustration of purpose B) Commercial impracticability C) Subjective impossibility D) Anticipatory repudiation E) Substantial performance
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50) What doctrine arose from cases in England in which parties, who had contracted for rooms along a parade route for the king's coronation, received their money back when the coronation was canceled because the king became ill? A) Frustration of purpose B) Commercial impracticability C) Substantial performance D) Anticipatory repudiation E) Impossibility of performance
51)
Which of the following is not a type of damages awarded in contract law? A) Compensatory B) Nominal C) Liquidated D) Punitive E) Putative
52) If the plaintiff is seeking legal damages which would put him in the same position he would have been in had the contract been fully performed, he is suing for _____ damages. A) equitable B) compensatory C) nominal D) exemplary E) punitive
53) Suppose that Jeremiah was unfairly terminated before his employment contract expired, and he had to spend $500 to find another job. His job search expenditures would be considered _____ damages.
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A) incidental B) punitive C) liquidated D) nominal E) statutory
54) Selma is suing William for fraud that induced her to enter into a contract with him. William sold Selma worthless stocks that he falsely and intentionally claimed were very valuable. In attempting to punish William for his fraudulent misrepresentation, Selma will seek _____ damages. A) compensatory B) nominal C) liquidated D) consequential E) punitive
55)
Monetary damages awarded to a plaintiff in a very small amount are _____ damages. A) consequential B) punitive C) liquidated D) nominal E) exemplary
56)
Which of the following is not an equitable remedy available for a breach of contract? A) Rescission B) Restitution C) Specific performance D) Injunction E) Novation
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57) Which type of damages would occur if the parties specify in advance the amount of losses or a formula in assessing the losses against the breaching party? A) Consequential B) Punitive C) Liquidated D) Nominal E) Statutory
58) The obligation to use reasonable efforts to minimize damage resulting from a breach is referred as the duty to _____ one's damages. A) factor B) subjugate C) subrogate D) mitigate E) estimate
59)
From what country did equitable remedies recognized in the United States originate? A) France B) Italy C) England D) Spain E) Portugal
60)
Why did equitable remedies come into being? A) To fashion remedies when existing laws did not provide adequate ones B) To fashion substitute remedies for established and adequate legal remedies C) To provide a means by which to award nominal damages D) To provide a means by which to award consequential damages E) To provide a means by which to award liquidated damages
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61)
The termination of a contract is known as _____. A) rescission B) reformation C) restitution D) injunction E) execution
62) Which of the following is the return to its original owner of any property transferred under a contract? A) Rescission B) Reformation C) Restitution D) Injunction E) Execution
63) Under the Uniform Commercial Code (UCC), when may a court order the specific performance of a contract for the sale of goods? A) Only when the goods are unique B) Only when five hundred (500) or more units of goods are specified in the contract C) Only when the goods have been ordered at least six (6) months in advance D) When the goods are unique and when five hundred (500) or more units of goods are specified in the contract E) When the goods are unique or in other proper circumstances
64) College president Patterson contracts with Anissa to teach a business law class. Anissa does a fine job teaching, but she has an argument with Patterson and will not submit her final course grades. What type of order would Patterson seek to require Anissa to abide by her contract?
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A) An order of specific performance B) A compensatory order C) A nominal order D) A consequential order E) A demand order
65) Thomas has a classic 1966 Ford Mustang, and Jeffrey would like to buy it. The Mustang has less than ten thousand (10,000) original miles, it is in pristine condition, and it was only the third Mustang to “roll off” the Ford assembly line in Dearborn, Michigan in late 1965. Thomas and Jeff actually enter into a written contract for Jeff’s purchase of the car for $75,000, but Thomas later backs out of the deal for sentimental reasons (his late mother gave Thomas the car for his sixteenth birthday.) Jeff has already paid Thomas the $75,000 purchase price. In a breach of contract action against Thomas, which of the following is the likely remedy that Jeff will request and that the court will likely award him? A) Substantial performance B) Specific performance C) Substantial performance and $75,000 D) Specific performance and $75,000 E) Substantial performance and $300,000 (representing $75,000 in compensatory damages and $225,000 in statutory punitive damages)
66) If the plaintiff wants a court order requiring the defendant to stop doing something, the plaintiff is seeking a(n) _____. A) subpoena duces tecum B) abeyance C) continuance D) in rem decree E) injunction
67) If the plaintiff wants a court order that requires the defendant to fulfill the terms of the contract, the plaintiff is seeking _____.
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A) specific performance B) substantial performance C) frustration of purpose D) quasi-in-rem relief E) an injunction
68) Which of the following was the result in Thrifty Rent-A-Car System v. South Florida Transport, the case in the textbook where in response to a claim for amounts due on a franchise agreement involving the rental of vehicles, the defendant claimed that hurricanes had rendered its rental car business commercially impracticable? A) That a jury question existed as to whether the hurricanes made the business commercially impracticable B) That as a matter of law, the defense of commercial impracticability was unavailable to the defendant for reasons including that the absence of hurricanes was not a basic assumption of the agreement C) That as a matter of law, the defense of commercial impracticability was available to the defendant because the defendant established that it was current on its payments until the advent of the hurricane season D) That as a matter of law, the defense of commercial impracticability was available to the defendant because the defendant established that the hurricanes made the cost of performance of the terms of the agreement unduly burdensome E) That as a matter of law, the defense of commercial impracticability was available to the defendant because the plaintiff failed to establish that the defendant had been given sufficient opportunity to recover from its business interruption due to several hurricanes
69) Dream Home. Maurice finds a dream home on the lake. He wants to buy it but is unsure whether he can get a loan. He signs a contract with the seller that he will buy the home if he can get a loan. Maurice also includes a contractual clause in the contract with the seller that if the purchase goes through but he loses his job within one year, the seller will repurchase the house for the same price Maurice paid for it. After getting a loan and buying the home, Maurice decided that he wanted new windows put into the home. He entered into a contract with a window contractor. The window contractor visited the home, but Maurice was always gone. The contractor made several attempts to reach Maurice, but Maurice would not return phone calls and made no attempt to assist the contractor with installation. The provision that Maurice did not have to buy the house unless he was able to get a loan is referred to as which of the following?
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A) A condition subsequent B) A condition precedent C) An implied condition D) An express condition E) Both a condition precedent and an express condition
70) Dream Home. Maurice finds a dream home on the lake. He wants to buy it but is unsure whether he can get a loan. He signs a contract with the seller that he will buy the home if he can get a loan. Maurice also includes a contractual clause in the contract with the seller that if the purchase goes through but he loses his job within one year, the seller will repurchase the house for the same price Maurice paid for it. After getting a loan and buying the home, Maurice decided that he wanted new windows put into the home. He entered into a contract with a window contractor. The window contractor visited the home, but Maurice was always gone. The contractor made several attempts to reach Maurice, but Maurice would not return phone calls and made no attempt to assist the contractor with installation. The provision that the seller will repurchase the home if Maurice loses his job within one year of the sale is referred to as which of the following? A) A condition subsequent B) A condition precedent C) An implied condition D) An express condition E) Both a condition precedent and an express condition
71) Dream Home. Maurice finds a dream home on the lake. He wants to buy it but is unsure whether he can get a loan. He signs a contract with the seller that he will buy the home if he can get a loan. Maurice also includes a contractual clause in the contract with the seller that if the purchase goes through but he loses his job within one year, the seller will repurchase the house for the same price Maurice paid for it. After getting a loan and buying the home, Maurice decided that he wanted new windows put into the home. He entered into a contract with a window contractor. The window contractor visited the home, but Maurice was always gone. The contractor made several attempts to reach Maurice, but Maurice would not return phone calls and made no attempt to assist the contractor with installation. The responsibility of Maurice to make arrangements to give the window installer access to the home is referred to as which of the following?
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A) A condition subsequent B) A condition precedent C) An implied condition D) An express condition E) Both a condition precedent and an express condition
72) Powder Room Mess. For $300,000, Willis agrees to build a new home for Robert, who is very picky. Willis builds the home to Robert's specifications with one exception. The faucets and linoleum flooring in an upstairs powder room are not exactly what Robert specified. That was a mistake on Willis's part, but he had not intentionally failed to follow specifications. When Robert sees the powder room, he goes ballistic and tells Willis that he will not pay Willis anything for the house. It will take $300 to put in correct faucets and linoleum. Willis says that he is willing to pay $300 to put Robert in the position he would have been in had the correct faucets and linoleum been used, but that is all he is willing to pay. Which of the following is true regarding whether Willis breached the contract? A) Willis did not breach the contract. B) Willis materially breached the contract. C) Willis substantially breached the contract. D) Willis breached the contract, but the breach was not material. E) Willis committed an anticipatory breach of the contract.
73) Powder Room Mess. For $300,000, Willis agrees to build a new home for Robert, who is very picky. Willis builds the home to Robert's specifications with one exception. The faucets and linoleum flooring in an upstairs powder room are not exactly what Robert specified. That was a mistake on Willis's part, but he had not intentionally failed to follow specifications. When Robert sees the powder room, he goes ballistic and tells Willis that he will not pay Willis anything for the house. It will take $300 to put in correct faucets and linoleum. Willis says that he is willing to pay $300 to put Robert in the position he would have been in had the correct faucets and linoleum been used, but that is all he is willing to pay. Which of the following is most likely true regarding Robert's entitlement to damages from Willis?
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A) There are no damages because Willis did not breach the contract. B) Robert will not have to pay for the house because Willis failed to substantially perform. C) Even though Willis substantially performed, Robert will not have to pay for the house because Willis materially breached the contract. D) Robert is released from paying for the house because of an anticipatory breach. E) Any damages awarded would be in the range of $300, which is the amount it would take to fix the breach.
74) Powder Room Mess. For $300,000, Willis agrees to build a new home for Robert, who is very picky. Willis builds the home to Robert's specifications with one exception. The faucets and linoleum flooring in an upstairs powder room are not exactly what Robert specified. That was a mistake on Willis's part, but he had not intentionally failed to follow specifications. When Robert sees the powder room, he goes ballistic and tells Willis that he will not pay Willis anything for the house. It will take $300 to put in correct faucets and linoleum. Willis says that he is willing to pay $300 to put Robert in the position he would have been in had the correct faucets and linoleum been used, but that is all he is willing to pay. Willis's offer to put Robert in the position he would have been in had the proper faucets and linoleum been used is based on the measure used for what type of damages? A) Nominal B) Punitive C) Compensatory D) Liquidated E) Consequential
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75) Creaky and Toady. Beverly decides to go on a great trip to Hawaii. She needs someone, however, to take care of her two dogs, Creaky and Toady, while she is gone. Creaky has hives, and Toady passes gas frequently because of a digestive problem. Beverly hires Frank three months in advance, and they reach a contractual arrangement whereby he will be paid $200 for keeping the dogs for two weeks. Frank comes over two months before Beverly is set to leave, takes one look at Creaky and Toady, and declares that they are too creepy to be around. Beverly then hires Alice who agrees to care for Creaky and Toady. Two weeks before Beverly is set to leave, however, Alice calls and tells her that she just broke both her legs in an automobile accident, sustained other injuries, and has been put on bed rest for two months. Finally, Alice hires Betty to care for the dogs and heads off to Hawaii, where she has a great time. Unfortunately, when Beverly returns home, she finds that Betty fell in love with Creaky and Toady and has absconded with them. It was a month before Beverly was able to get a court order requiring their return. Which of the following is true regarding Frank's refusal to keep Creaky and Toady? A) He committed an anticipatory repudiation. B) He is not guilty of any breach because he gave Beverly sufficient warning that he was not willing to perform. C) He is not guilty of any breach because of the frustration of purpose doctrine. D) He is guilty of an immaterial breach because of the low value of the contract. E) He is guilty of a nominal breach.
76) Creaky and Toady. Beverly decides to go on a great trip to Hawaii. She needs someone, however, to take care of her two dogs, Creaky and Toady, while she is gone. Creaky has hives, and Toady passes gas frequently because of a digestive problem. Beverly hires Frank three months in advance, and they reach a contractual arrangement whereby he will be paid $200 for keeping the dogs for two weeks. Frank comes over two months before Beverly is set to leave, takes one look at Creaky and Toady, and declares that they are too creepy to be around. Beverly then hires Alice who agrees to care for Creaky and Toady. Two weeks before Beverly is set to leave, however, Alice calls and tells her that she just broke both her legs in an automobile accident, sustained other injuries, and has been put on bed rest for two months. Finally, Alice hires Betty to care for the dogs and heads off to Hawaii, where she has a great time. Unfortunately, when Beverly returns home, she finds that Betty fell in love with Creaky and Toady and has absconded with them. It was a month before Beverly was able to get a court order requiring their return. Which of the following is true regarding Alice's refusal to keep Creaky and Toady?
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A) She is discharged from performance because of frustration of purpose. B) She is discharged from performance because of impossibility of performance. C) She committed a material breach. D) She failed to substantially perform but only committed an immaterial breach. E) She is liable for only a nominal breach because she had a good excuse for breaching.
77) Creaky and Toady. Beverly decides to go on a great trip to Hawaii. She needs someone, however, to take care of her two dogs, Creaky and Toady, while she is gone. Creaky has hives, and Toady passes gas frequently because of a digestive problem. Beverly hires Frank three months in advance, and they reach a contractual arrangement whereby he will be paid $200 for keeping the dogs for two weeks. Frank comes over two months before Beverly is set to leave, takes one look at Creaky and Toady, and declares that they are too creepy to be around. Beverly then hires Alice who agrees to care for Creaky and Toady. Two weeks before Beverly is set to leave, however, Alice calls and tells her that she just broke both her legs in an automobile accident, sustained other injuries, and has been put on bed rest for two months. Finally, Alice hires Betty to care for the dogs and heads off to Hawaii, where she has a great time. Unfortunately, when Beverly returns home, she finds that Betty fell in love with Creaky and Toady and has absconded with them. It was a month before Beverly was able to get a court order requiring their return. Which of the following would be an order from the court requiring that Betty return Creaky and Toady to Beverly? A) An injunction B) A conciliation C) A mitigation D) A subpoena E) A subpoena duces tecum
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78) Earthquake. Stewart, the owner of ABC Construction, agreed with Joan, the owner of XYZ Hotel, that he would complete renovations on her upscale hotel on the beach in Florida by October 1. The amount due to Stewart under the contract was $250,000. The contract contained a clause by which Stewart would pay Joan $50,000 for each day he was late on completing the project. Unfortunately, an unexpected strong earthquake shook the area, and while the earthquake did not damage the hotel itself, Stewart encountered significant difficulty in getting supplies due to the high demand for building material following the earthquake. Because he believed that traveling himself to other states to obtain supplies would be prohibitively expensive, he delayed the project for two weeks while waiting for local stores to have sufficient supplies available. Stewart finished renovations six days late. Joan told Stewart that she owed him nothing but that he owed her $50,000. Stewart told Joan that he was suing for the entire $250,000 because it was not his fault the earthquake delayed matters. Which of the following is Stewart's best defense? A) Impossibility B) Commercial impracticability C) Frustration of purpose D) Profit reduction E) Material breach
79) Earthquake. Stewart, the owner of ABC Construction, agreed with Joan, the owner of XYZ Hotel, that he would complete renovations on her upscale hotel on the beach in Florida by October 1. The amount due to Stewart under the contract was $250,000. The contract contained a clause by which Stewart would pay Joan $50,000 for each day he was late on completing the project. Unfortunately, an unexpected strong earthquake shook the area, and while the earthquake did not damage the hotel itself, Stewart encountered significant difficulty in getting supplies due to the high demand for building material following the earthquake. Because he believed that traveling himself to other states to obtain supplies would be prohibitively expensive, he delayed the project for two weeks while waiting for local stores to have sufficient supplies available. Stewart finished renovations six days late. Joan told Stewart that she owed him nothing but that he owed her $50,000. Stewart told Joan that he was suing for the entire $250,000 because it was not his fault the earthquake delayed matters. Which of the following is the appropriate term for the agreement that Stewart would pay Joan $50,000 for each day he was late in completion?
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A) Mitigated damages term B) Liquidated damages clause C) Stipulated damages D) Acknowledged damages clause E) Approved and acknowledged damages clause
80) Earthquake. Stewart, the owner of ABC Construction, agreed with Joan, the owner of XYZ Hotel, that he would complete renovations on her upscale hotel on the beach in Florida by October 1. The amount due to Stewart under the contract was $250,000. The contract contained a clause by which Stewart would pay Joan $50,000 for each day he was late on completing the project. Unfortunately, an unexpected strong earthquake shook the area, and while the earthquake did not damage the hotel itself, Stewart encountered significant difficulty in getting supplies due to the high demand for building material following the earthquake. Because he believed that traveling himself to other states to obtain supplies would be prohibitively expensive, he delayed the project for two weeks while waiting for local stores to have sufficient supplies available. Stewart finished renovations six days late. Joan told Stewart that she owed him nothing but that he owed her $50,000. Stewart told Joan that he was suing for the entire $250,000 because it was not his fault the earthquake delayed matters. Assuming the earthquake does not affect Stewart's liability for damages, which of the following is true regarding the provision that he will pay $50,000 for each day he is late? A) It will be upheld based on the principle of freedom of contract. B) It will be upheld because the penalty per day is less than one-half the amount due for the job. C) It will be upheld as a stipulated amount. D) It is unenforceable because parties are prohibited as a matter of law from specifying damages. E) It is unenforceable as a penalty.
81) Larry Landlord changed the terms of the rental agreement of his tenant Telly without telling her. The changes most notably included doubling the monthly rent payment. This change to the contract is considered a(n) _____ and allows Telly to be discharged from the contract.
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A) novation B) alteration of contract C) accord and novation D) accord and satisfaction E) acceleration clause
82)
Remedies are generally classified as _____. A) putative or non-putative B) punitive or non-punitive C) liquidated or unliquidated D) legal or equitable E) foreseeable or unforeseeable
83) Courts are very reluctant to grant _____ and will do so only when monetary damages simply are not adequate, typically because the subject matter of the contract is unique. A) an injunction B) a novation C) an accord and satisfaction D) specific performance E) a declaratory judgement
ESSAY. Write your answer in the space provided or on a separate sheet of paper. 84) List the ways by which a party's contractual obligations can be terminated.
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85) Yolanda and Rodney agreed that Rodney would paint Yolanda's home for $800, with Yolanda supplying the paint. Rodney went to Yolanda's home on several occasions to do the job, but she never had the paint ready. Finally, he moved on to other jobs. Six months later Yolanda sues Rodney for not painting the home. Who is likely to win and why? Describe the legal term for Rodney's offer of performance.
86) List the elements required for substantial performance, and explain the effect substantial performance has on the damages awarded in a breach of contract action.
87) Explain anticipatory repudiation, and discuss the rights of a nonbreaching party when faced with anticipatory repudiation.
88) Distinguish between objective impossibility of performance and subjective impossibility of performance, and describe the three main situations in which courts find objective impossibility.
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Answer Key Test name: Chap 14_5_The Essentials_Kubasek 1) FALSE Under ordinary circumstances, a party's duty to perform the promise agreed to in a contract is absolute. Sometimes, however, a party’s duty to perform may be affected by whether a certain condition occurs. 2) TRUE Contracts containing conditions that affect the performance obligations of the parties are called conditional contracts.The conditions may be either implied by law or expressly inserted into the contract by the parties. 3) TRUE Condition precedent, condition subsequent, and concurrent conditions are the three types of contractual conditions. 4) TRUE A condition precedent is a particular event that must occur for a party’s duty to arise. If the event does not occur, the party’s duty to perform does not arise. 5) TRUE Condition precedent, condition subsequent, and concurrent conditions are the three types of contractual conditions. 6) TRUE Express conditions are explicitly stated in the contract and are usually preceded by words such as conditioned on, if, provided that, or when. 7) FALSE
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A breach occurs whenever a party fails to perform her obligations under the contract. If the breach is a minor one, it may entitle the nonbreaching party to damages, but it does not discharge the nonbreaching party from the contract. 8) FALSE Once a contract has been anticipatorily repudiated, the nonbreaching party is discharged from his obligations under the contract. He is free to go ahead and sue for breach and to find a similar contract elsewhere. However, if the nonbreaching party wishes, he may decide to give the party who repudiated the opportunity to change her mind and still perform. 9) FALSE Accord and satisfaction is used when one of the parties wants to substitute a different performance for his original duty under the contract. The promise to perform the new duty is called the accord, and the actual performance of that new duty is called the satisfaction. 10) TRUE Japanese law provides for liquidated damages similar to those available in the United States. Under Article 420 of the Japanese Code, parties to a contract may specify in advance the amount of compensation payable when a contractual obligation is not performed at all or not performed by a specified date. 11) FALSE
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The most frequently awarded damages in a breach of contract action are compensatory damages, damages designed to put the plaintiff in the position he would have been in had the contract been fully performed. One type of damages in contract cases that is often especially difficult to prove is consequential (special) damages. Consequential damages are foreseeable damages that result from special facts and circumstances arising outside the contract itself. These damages must be within the contemplation of the parties at the time the breach occurs. 12) FALSE Specific performance is sometimes called specific enforcement. It is an order requiring the breaching party to fulfill the terms of the agreement. Courts are very reluctant to grant specific performance and will do so only when monetary damages simply are not adequate, typically because the subject matter of the contract is unique. 13) FALSE Liquidated damage clauses are frequently used in construction contracts when the buyer needs to know that the property will be available by a specific date so that she can make her plans for moving in. In such a case, the parties may estimate in advance what it will cost the buyer for storage and temporary housing if the property is not ready by the specified date. The courts generally enforce such clauses as long as they appear to bear a reasonable relationship to what the actual costs will be. 14) FALSE Sometimes contracting parties want to be returned to their precontract status; they want to have the contract terminated and to have any transferred property returned to its original owner. That is, they want rescission and restitution. Rescission is the termination of a contract, and restitution is the return of any property given up under the contract. 15) TRUE
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To recover under a theory of quasi-contract, a plaintiff must prove that: a) the plaintiff conferred a benefit on the defendant; b) the plaintiff had reasonably expected to be compensated from the benefit conferred on the defendant; and c) the defendant would be unjustly enriched from receiving the benefit without compensating the plaintiff for it. 16) TRUE An injunction is an order either forcing a person to do something or prohibiting a person from doing something. Most commonly, injunctions are prohibitions against actions. 17) TRUE Reformation is an equitable remedy available for a breach of contract action. Sometimes a written contract does not reflect the parties’ actual agreement, or the contract may have inconsistencies. In such a case, the court may rewrite (i.e., reform) the contract to reflect the parties’ actual agreement. 18) FALSE Specific performance is also called specific enforcement. It is an order requiring the breaching party to fulfill the terms of the agreement. Reformation refers to a court rewriting a contract to reflect the parties’ actual agreement. 19) TRUE Courts do not allow a nonbreaching party to increase his damages for breach of contract intentionally. In fact, to recover damages in a breach of contract case, the plaintiff must demonstrate that he used reasonable efforts to minimize the damage resulting from the breach. 20) FALSE
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Courts do not allow a nonbreaching party to increase his damages for breach of contract intentionally. In fact, to recover damages in a breach of contract case, the plaintiff must demonstrate that he used reasonable efforts to minimize the damage resulting from the breach. This obligation is referred to as the duty to mitigate one’s damages. 21) FALSE Monetary damages are also referred to as legal damages, and they include compensatory, punitive, nominal, and liquidated damages. Whenever possible, courts award monetary damages rather than some form of equitable relief. 22) B When a party's obligations under a contract are terminated, those obligations aresaid to be discharged. 23) D Ways by which a party's contractual obligations can be terminated (discharged) include: a) performance; b) the happening of a condition or its failure to occur; c) material breach by one or both parties; d) agreement of the parties; or e) operation of law. 24) D Under ordinary circumstances, a party’s duty to perform the promise agreed to in a contract is absolute. Sometimes, however, a party’s duty to perform may be affected by whether a certain condition occurs. Contracts containing conditions affecting the performance obligations of the parties are called conditional contracts. 25) D The three types of conditions are conditions precedent, conditions subsequent, and concurrent conditions. 26) E
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A condition precedent is a particular event that must occur in order for a party's duty to arise. If the event does not occur, the party’s duty to perform does not arise. 27) B A condition precedent is a particular event that must occur in order for a party's duty to arise. If the event does not occur, the party’s duty to perform does not arise. Frequently, real estate contracts are conditioned on an event such as the buyer’s ability to sell his current home by a certain date. If the home does not sell, the condition does not arise, and the parties have no duty to perform and are thus discharged from the contract. This is an example of a contract that is subject to a condition precedent. 28) C Concurrent conditions occur when each party's performance is conditioned on the performance of the other. They occur only when the parties are required to perform for each other simultaneously. 29) D Conditions in contracts are described as being express or implied. Express conditions are explicitly stated in the contract. 30) E Express conditions are explicitly stated in the language of the contract and are usually preceded by words such as conditioned on, if, provided that, or when. 31) B Conditions in contracts are described as being express or implied. Implied conditions are those that are not explicitly stated but are inferred from the nature and language of the contract. 32) C
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In most situations, parties discharge their obligations by doing what they respectively agreed to do under the terms of the contract; this is called discharge by performance. 33) D Parties may discharge their duty by making an offer to perform and being ready, willing, and able to perform. This offer of performance is known as tender. 34) D The two primary kinds of performance are complete performance and substantial performance. 35) A Complete performance occurs when every aspect of the parties' duties under the contract is carried out perfectly. 36) C In many instances, complete performance is difficult, if not impossible, to attain, and courts today generally require only substantial performance. 37) E Substantial performance occurs when the following conditions have been met: a) completion of nearly all the terms of the agreement; b) an honest effort to complete all the terms of the agreement; and c) no willful departure from the terms of the agreement. 38) B If the contract does not clearly specify that the satisfaction is to be personal, the objective standard applies. When an objective standard is used, the courts ask whether a reasonable person would be satisfied with the performance. 39) D
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A breach occurs whenever a party fails to perform her obligations under the contract. If the breach is a minor one, it may entitle the nonbreaching party to damages, but it does not discharge the nonbreaching party from the contract. 40) C A breach occurs whenever a party fails to perform her obligations under the contract. If the breach is a minor one, it may entitle the nonbreaching party to damages, but it does not discharge the nonbreaching party from the contract. A material breach, however, discharges the nonbreaching party from his obligations under the contract. 41) D A material breach discharges the nonbreaching party from his obligations under the contract. A material breach occurs when a party unjustifiably fails to substantially perform his obligations under the contract. 42) D Anticipatory repudiation occurs when a contracting party decides not to complete the contract before the actual time of performance. This situation often arises when market conditions change and one party realizes that it will not be profitable to carry out the terms of the contract. 43) E Sometimes the parties to a contract agree to discharge each other from their obligations. They may do so through four primary means: a) discharge by mutual rescission; b) discharge by a substituted contract; c) discharge by accord and satisfaction; or d) discharge by novation. Bankruptcy is the discharge of contractual obligations by operation of law. 44) D
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Parties may agree that they simply wish to discharge each other from their mutual obligations and, therefore, rescind or cancel their contract. This is known as mutual rescission. 45) A Sometimes, instead of canceling their agreement and terminating their relationship, contracting parties may choose to substitute a new agreement in place of the original. The substituted contract immediately discharges the parties from their obligations under the old contract and replaces those obligations with the new obligations imposed by the substituted contract. 46) A An accord and satisfaction is used when one of the parties wishes to substitute a different performance for his original duty under the contract. The promise to perform the new duty is called the accord, and the actual performance of that new duty is called the satisfaction. 47) A Sometimes the parties to an agreement choose to replace one of the parties with a third party. This substitution of a party is called a novation. The original duties remain the same under the contract, but one party is discharged and the third party now takes the original party’s place. All three parties must agree to the novation for it to be valid. 48) C Sometimes a contract may be discharged not by anything the parties do, but instead by operation of law. Alteration of the contract, bankruptcy, tolling of the statute of limitations, objective impossibility of performance, commercial impracticability, and frustration of purpose are all situations in which a contract may be discharged by operation of law. 49) B
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Commercial impracticability is used to discharge a contract when performance is still objectively possible but would be extraordinarily injurious or expensive to one party. Commercial impracticability arises when, because of an unforeseeable event, one party would incur unreasonable expense, injury, or loss if that party were forced to carry out the terms of the agreement. 50) A The frustration of purpose doctrine arose from the so-called coronation cases in England. Numerous parties had contracted for rooms along the parade route for the king’s coronation, but the king became ill and the coronation was canceled. The courts held that the parties’ duties under the room contracts should be discharged, and that any payments made in advance should be returned because the essential purposes of the contracts could no longer be fulfilled, through no fault of any of the parties. 51) E Monetary damages are also referred to as legal damages, and they include compensatory, punitive, nominal, and liquidated damages. 52) B If the plaintiff is seeking legal damages which would put him in the same position he would have been in had the contract been fully performed, he is suing for compensatory damages. 53) A In addition to losing the benefit of the bargain, the plaintiff may suffer other losses caused directly by the breach. These losses may be compensated as incidental damages. 54) E If the plaintiff is seeking legal damages that are designed to punish the defendant and deter him and others from engaging in similar behavior in the future, the plaintiff is seeking punitive damages. Version 1
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55) D If no actual damages resulted from the breach of contract, the court may award the plaintiff nominal damages. The award is typically for $1 or $5, but it serves to signify that the plaintiff has been wronged by the defendant. 56) E Today, the most common equitable remedies include rescission and restitution, orders for specific performance, and injunctions. Novation is not an equitable remedy but is instead the substitution of a party in an agreement. 57) C Typically, the court determines the amount of damages to which a nonbreaching party is entitled. Sometimes, however, the parties recognize that if a breach of contract occurs, it will probably be somewhat difficult for the court to determine exactly what the damages are. To prevent a difficult court battle, the parties may specify in advance what the liquidated damages will be if there is a particular kind of breach. 58) D To recover damages in a breach-of-contract case, the plaintiff must demonstrate that he used reasonable efforts to minimize the damage resulting from the breach. This is known as the duty to mitigate one's damages. 59) C Equitable remedies grew out of the English courts. Today, the most common equitable remedies include rescission and restitution, orders for specific performance, and injunctions. 60) A
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Equitable remedies grew out of the English court’s authority to fashion remedies when existing laws did not provide adequate ones. These remedies were typically unique solutions specifically crafted to the demands of the situation. Today, the most common equitable remedies include rescission and restitution, orders for specific performance, and injunctions. 61) A Sometimes the parties simply want to be returned to their pre-contract status, and in order to do so, they want to have the contract terminated. The termination of the contract is known as rescission. 62) C Sometimes the parties simply want to be returned to their pre-contract status, and in order to do so, they want to have the contract terminated and to have any transferred property returned to its original owner. Restitution is the return of any property given up under the contract. 63) E Under the Uniform Commercial Code (UCC), orders for specific performance of a contract for the sale of goods may be awarded "where the goods are unique or in other proper circumstances." 64) A Specific performance, sometimes called specific enforcement, is an order requiring the breaching party to fulfill the terms of the agreement. 65) B Specific performance, sometimes called specific enforcement, is an order requiring the breaching party to fulfill the terms of the agreement. Courts are very reluctant to grant specific performance and will do so only when monetary damages simply are not adequate, typically because the subject matter of the contract is unique. 66) E
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If the plaintiff wants a court order requiring the defendant to stop doing something, the plaintiff is seeking an injunction. Most commonly, injunctions are prohibitions against actions. 67) A If the plaintiff wants a court order that requires the defendant to fulfill the terms of the contract, the plaintiff is seeking specific performance. Courts are very reluctant to grant specific performance and will do so only when monetary damages simply are not adequate, typically because the subject matter of the contract is unique. 68) B According to the United States District Court for the Northern District of Oklahoma, no genuine issue of material fact existed, and the defense of commercial impracticability was unavailable to the defendant for reasons including that the non-occurrence of hurricanes was not a basic assumption of the parties' agreement. 69) E A condition precedent is a particular event that must occur in order for a party's duty to arise. An express condition is explicitly stated in the contract and is usually preceded by words such as conditioned on, if, provided that, or when. 70) A A condition subsequent is a future event that terminates the obligations of the parties when it occurs. 71) C Implied conditions are those that are not explicitly stated but are inferred from the nature and language of the contract. 72) D
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A breach occurs whenever a party fails to perform her obligations under the contract. A material breach discharges the nonbreaching party from his obligations under the contract. A material breach occurs when a party unjustifiably fails to perform his obligations substantially under the contract. 73) E A breach occurs whenever a party fails to perform her obligations under the contract. If the breach is a minor one, it may entitle the nonbreaching party to damages, but it does not discharge the nonbreaching party from the contract. 74) C The most frequently awarded damages are compensatory damages. Compensatory damages are damages designed to put the plaintiff in the position he would have been in had the contract been fully performed. 75) A The breaching party may convey an anticipatory breach to the nonbreaching party either by making an express indication of her intent to no longer perform or by taking an action that would be inconsistent with her ability to carry out the contract when performance was due. 76) B Sometimes an unforeseen event occurs that makes it physically or legally impossible for a party to carry out the terms of the contract, and in such a situation, the parties will be discharged on grounds of impossibility of performance. 77) A An injunction is an order either forcing a person to do something or prohibiting a person from doing something. Most commonly, injunctions are prohibitions against actions. 78) B
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Commercial impracticability is used when performance is still objectively possible but would be extraordinarily injurious or expensive to one party. 79) B Typically, the court determines the amount of damages to which a nonbreaching party is entitled. Sometimes, however, the parties recognize that if there is a breach of contract, it will probably be somewhat difficult for the court to determine exactly what the damages are. To prevent a difficult court battle, the parties may specify in advance what the liquidated damages will be if there is a particular kind of breach. 80) E If the amount specified is so unreasonable as to not bear any logical relationship to foreseeable costs, the courts declare the clause a penalty clause and do not enforce it. 81) B If one of the parties materially alters a written contract without the knowledge of the other party, the courts have held that such alteration allows the innocent party to be discharged from the contract. 82) D The remedies the potential plaintiff will be thinking about can generally be classified as either legal remedies (also known as money damages) or equitable remedies, some form of court-ordered action. 83) D Courts are very reluctant to grant specific performance and will do so only when monetary damages simply are not adequate, typically because the subject matter of the contract is unique.
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84) When a party’s obligations under a contract are terminated, they are said to be discharged. There are a number of ways by which a party’s contractual obligations can be terminated or discharged. The first, and the one most parties hope to secure from the other when they enter into an agreement, is performance. The others are the occurrence of a condition or its failure to occur, material breach by one or both parties, agreement of the parties, and operation of law. 85) Rodney is most likely to win. The reason is that he discharged his duty by making an offer to perform and being ready, willing, and able to perform. Conversely, Yolanda delayed excessively. Rodney’s offer of performance is called tender. 86) Substantial performance occurs when the following conditions have been met: a) completion of nearly all the terms of the agreement; b) an honest effort to complete all the terms; and c) no willful departure from the terms of the agreement. Substantial performance discharges the party's responsibilities under the contract, although the court may require that the party compensate the other party for any loss in value caused by the failure to meet all of the standards set forth in the contract. 87) Sometimes a contracting party may decide not to complete the contract before the actual time of performance. The breaching party may convey the anticipatory breach to the nonbreaching party either by making an express indication of his intent not to perform or by taking an action that would be inconsistent with his ability to carry out the contract when performance was due. Once the contract has been anticipatorily repudiated, the nonbreaching party is discharged from her obligations under the contract. She is free to go ahead and sue for breach and to find a similar contract elsewhere. However, if the nonbreaching party wishes, she may decide to give the party who repudiated the opportunity to change her mind and still perform.
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88) Sometimes an unforeseen event occurs that makes it physically or legally impossible for a party to carry out the terms of the contract. In such a situation, the parties will be discharged on grounds of impossibility of performance. Courts distinguish between objective impossibility, meaning it is in fact not possible to lawfully carry out one’s contractual obligations, and subjective impossibility, meaning it would be very difficult to carry out the contract. Objective impossibility, but not subjective impossibility, discharges the parties’ obligations under the contract. There are three main situations in which courts find objective impossibility: a) destruction of the subject matter; b) the death or incapacity of a party whose personal services are necessary to fulfill the terms of the contract; and c) subsequent illegality.
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CHAPTER 15 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) Federal law governs the formation of sales and lease contracts. ⊚ true ⊚ false
2) The Uniform Commercial Code (UCC) is significant because it facilitates commercial transactions. ⊚ true ⊚ false
3) When in doubt, judges will try to interpret the Uniform Commercial Code (UCC) to keep an agreement in force. ⊚ true ⊚ false
4) Article 2 of the Uniform Commercial Code (UCC) governs lease contracts, while Article 2(A) governs sales contracts. ⊚ true ⊚ false
5) The Uniform Commercial Code (UCC) states that a sale consists of the passing of title from the seller to the buyer, with or without consideration. ⊚ true ⊚ false
6)
Trade fixtures are treated as intangibles under the Uniform Commercial Code (UCC). ⊚ true ⊚ false
7)
Under the Uniform Commercial Code (UCC), corporate stocks are not tangible. ⊚ true ⊚ false
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8) The Uniform Commercial Code (UCC) defines a mixed sale as a contract for the sale of two (2) or more goods. ⊚ true ⊚ false
9) Article 2(A) of the Uniform Commercial Code (UCC) does not cover leases related to real property. ⊚ true ⊚ false
10) The Uniform Commercial Information Transactions Act (UCITA) is federal law, binding on all states within the United States. ⊚ true ⊚ false
11) If a farmer agrees to sell all the grain his fields will produce but is unable to determine a specific amount, then the "quantity" element has been satisfied under the Uniform Commercial Code (UCC). ⊚ true ⊚ false
12) Under the Uniform Commercial Code (UCC), if an offer is made by a merchant it must be writing. ⊚ true ⊚ false
13) A court will uphold a contract for the sale or lease of goods as long as the parties intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy. ⊚ true ⊚ false
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14) Under the mirror-image rule, as long as the quantity is the same in the acceptance, the other terms do not have to be the same. ⊚ true ⊚ false
15) Under the Uniform Commercial Code (UCC), additional terms do not negate acceptance unless acceptance is made expressly conditional on assent to the additional terms. ⊚ true ⊚ false
16) Within its scope of applicability, the United Nations Convention on Contracts for the International Sale of Goods (CISG) has eliminated the statute of frauds. ⊚ true ⊚ false
17) The Uniform Commercial Code (UCC) does not recognize the concept of unconscionability. ⊚ true ⊚ false
18) The Uniform Commercial Code (UCC) does not require a contract modification to be supported by new consideration. ⊚ true ⊚ false
19)
There are three kinds of title: conditional title, unconditional title, and implied title. ⊚ true ⊚ false
20)
Someone who purchases stolen goods, knowingly or unknowingly, has implied title. ⊚ true ⊚ false
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21) As a general rule, if a person has void title, then no matter how honorable the intentions of the seller are, that good-faith seller cannot pass anything to the buyer but void title. ⊚ true ⊚ false
22) According to common law, when a seller transfers goods to a buyer, the buyer gets only voidable title if the buyer is a minor. ⊚ true ⊚ false
23) A conditional sales contract is a type of contract that occurs when the purchased goods are in some kind of storage under the control of a third party, such as a warehouseman. ⊚ true ⊚ false
24)
In a common-carrier delivery contract, the carrier is an agent of the seller. ⊚ true ⊚ false
25) If an owner entrusts the possession of goods to a merchant who deals in goods of that kind, the merchant cannot transfer ownership rights in the good to a buyer in the ordinary course of business. ⊚ true ⊚ false
26) An insurable interest is the right to insure the goods against any risk of loss such as damage or destruction. ⊚ true ⊚ false
27) A contract is a sale-or-return contract if the seller allows the buyer to take possession of the goods before deciding whether to complete the contract by making the purchase. ⊚ true ⊚ false
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28) A sale-on-approval contract occurs when the seller and buyer agree that the buyer may return the goods at a later time. ⊚ true ⊚ false
29) With an "ex-ship" shipping term, the risk of loss passes to the buyer when the seller delivers the goods alongside the ship at the place of shipment. ⊚ true ⊚ false
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 30) What are the three sources of law that interpret sales contracts? A) State common law, federal common law, and the Uniform Contracts Code B) State common law, federal common law, and the Uniform Commercial Code C) State common law, state statutory law, and the Uniform Contracts Code D) State common law, state statutory law, and the Uniform Commercial Code E) State statutory law, federal statutory law, and the Uniform Contracts Code
31) Louisiana has only adopted portions of the Uniform Commercial Code (UCC) that do not conflict with its _____. A) common law B) English-based code law C) French-based code law D) Netherland-based code law E) Canadian-based code law
32)
How many states have adopted the Uniform Commercial Code (UCC) in part?
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A) Ten (10) B) Twenty (20) C) Twenty-five (25) D) Forty-five (45) E) Fifty (50)
33)
How is the Uniform Commercial (UCC) code divided? A) Into sections known as articles B) Into sections known as amendments C) Into chapters by section D) Into chapters, then further by clauses specific to sections E) Into amendments, then further divided into sections
34) Article _____ of the Uniform Commercial Code (UCC) explains the creation and interpretation of sales contracts. A) 2 B) 2(A) C) 3 D) 4(A) E) 9
35) Paula is concerned about how to interpret her lease that she has with her commercial landlord. Which Article of the Uniform Commercial Code (UCC) can she go to for guidance? A) 1 B) 2 C) 2A D) 4 E) 4(A)
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36) If Article 2 of the Uniform Commercial Code (UCC) is silent on an issue of sales contract formation or interpretation, what law applies? A) State statutory law or state common law B) Federal statutory or federal common law C) Article 2 of the United States Constitution D) State statutory law or federal common law E) State common law or federal statutory law
37) Under Article 2 of the Uniform Commercial Code (UCC), which of the following consists of the passing of title from the seller to the buyer for a price? A) A lease B) An assignment C) A delegation D) A sale E) A license
38) Which Section of Article 2 of the Uniform Commercial Code (UCC) defines goods as "all [tangible] things . . . which are movable at the time of identification to the contract for sale." A) Section 2-101 B) Section 2-102 C) Section 2-104 D) Section 2-105 E) Section 2-106
39)
Under the Uniform Commercial Code (UCC), items are _____ if they exist physically. A) merchandise B) real C) tangible D) intellectual property E) serviceable
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40) Which of the following do not meet the Uniform Commercial Code (UCC) definition of a good? A) Real estate B) Corporate stocks C) Copyrights D) Real estate, corporate stocks, and copyrights E) Real estate and corporate stocks
41) Which of the following are considered goods under the Uniform Commercial Code (UCC)? A) Minerals taken from real estate and sold by the owner B) Soil taken from real estate and sold by the owner C) The right, sold by the owner to another party, to remove soil from real estate D) Minerals taken from real estate and sold by the owner; soil taken from real estate and sold by the owner; and the right, sold by the owner to another party, to remove soil from real estate E) Minerals taken from real estate and sold by the owner and soil taken from real estate and sold by the owner; but not the right, sold by the owner to another party, to remove soil from the real estate
42) Under Article 2 of the Uniform Commercial Code (UCC), a(n) _____ contract combines goods with a service. A) dual sale B) mixed sale C) goods and service D) option E) illusory
43) Bobby is selling his bakery to Julian. In the sale, Bobby is selling his display cases. The display cases under the Uniform Commercial Code (UCC) would be considered _____.
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A) non-sellable goods B) simple fixtures C) trade fixtures D) real property E) personal property
44) What did the court rule on appeal in Alfonso Candela v. Port Motors, Inc., the case in the textbook in which the plaintiff sued the defendant for breach of warranty of title, claiming that he was sold a stolen car? A) That the defendant passed good title as long as the defendant did not know that the car was stolen B) That the defendant passed voidable title as long as the defendant did not know that the car was stolen C) That a defendant selling stolen goods, regardless of good faith, can never pass a voidable or good title to the buyer D) That a defendant selling stolen goods can pass good title to a buyer as long as the buyer and seller were innocent and not in collusion E) That a defendant selling stolen goods does not pass good title, but the risk of loss is on the buyer
45) Under Article 2(A) of the Uniform Commercial Code (UCC), "a transfer of the right to possession and use of goods for a term in return for consideration" is a(n) _____. A) sale of goods B) lease C) assignment D) delegation E) consignment
46) Under the Uniform Commercial Code (UCC), what is the name of the individual who transfers the right to possession and use of goods for consideration?
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A) The tenant B) The lessee C) The lessor D) The payor E) The delegator
47) Under Article 2(A) of the Uniform Commercial Code (UCC), a person who acquires the right to possession and use of goods under a lease is a(n) _____. A) buyer B) delegatee C) lessee D) lessor E) assignee
48)
What governs international business-to-business sales contracts? A) The Uniform Commercial Code (UCC) B) The United Nations Convention on Contracts for the International Sale of Goods
(CISG) C) The International Convention on Commercial Goods (ICCG) D) Country-specific rules regarding international business-to-business sales contracts E) The European Union (EU) and the North American Free Trade Agreement (NAFTA)
49) Under Uniform Commercial Code (UCC) Section 2-205, if an irrevocable offer is made, for how long can the offer be irrevocable? A) Up to thirty (30) days B) Up to sixty (60) days C) Up to three (3) months D) Up to six (6) months E) Up to one (1) year
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50) Under the Uniform Commercial Code (UCC), a(n) _____ can be made by any reasonable means of communication. A) affirmation B) delegation C) acceptance D) novation E) accord
51)
Under the Uniform Commercial Code (UCC), when is an acceptance effective? A) When dispatched B) When received C) When received, if acceptance is sent by electronic means; otherwise, on dispatch D) When dispatched, if the United States Postal Service is used; otherwise, on receipt E) When dispatched, if the telephone is used; otherwise, on receipt
52) Under Uniform Commercial Code (UCC) Section 2-207(1), additional terms do not negate acceptance unless acceptance is made _____. A) expressly conditional on assent to the additional terms B) implicitly by the conduct of the parties C) with additional consideration D) in writing with additional consideration E) in writing in a bill of lading
53) A sale of goods priced at _____ or more must be in writing under the Uniform Commercial Code (UCC). A) $5,000 B) $2,500 C) $1,000 D) $500 E) $100
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54) Under the Uniform Commercial Code (UCC), lease contracts that require payments of _____ must be in writing to be enforceable. A) $100 or more B) $500 or more C) $1,000 or more D) $1,000 or less E) $500 or less
55) If a contract or a contract provision is _____, it is so unfair that a court would be unreasonable if it enforced the contract. A) punitive B) criminal C) non-profitable D) unconscionable E) illusory
56) What action(s) does the Uniform Commercial Code (UCC) allow a court to take if it discovers that a contract or a lease provision is unconscionable? A) The court must refer the matter to mediation. B) The court must refer the matter to arbitration. C) The court must refuse to enforce the entire contract or lease. D) The court can either refuse to enforce the contract or lease, or it can enforce the parts of it that are fair. E) The court has no power to enforce the contract or lease, and it must award the innocent party punitive damages.
57)
Which of the following is a treaty that provides a legal structure for international sales?
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A) The International Convention on Contracts for the Sale of Goods (ICCSG) B) The World Confederation for the Application and Enforcement of the International Commercial Code (ICC) C) The Global Federation for the Sale of Goods (GFSG) D) The United Nations Convention on Contracts for the International Sale of Goods (CISG) E) The League of Nations Pact for Uniformity in the International Sale of Goods (UISC)
58) title?
Someone who purchases stolen goods either knowingly or unknowingly has what type of
A) Valid if it is unknowingly B) Voidable if it is unknowingly C) Void if it is knowingly D) Void if it is knowingly or unknowingly E) Void or voidable, depending on state common law
59) If Hugo (the seller) and Laura (the buyer) decide that title to certain goods will not pass for six (6) months, title to the goods is considered _____. A) valid B) voidable C) void D) excepted E) conditional
60) Which of the following is true if an owner entrusts the possession of goods to a merchant who deals in goods of that kind?
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A) The merchant can transfer all rights in the goods to a buyer in the ordinary course of business. B) The merchant can only transfer voidable title until any funds in the possession of the merchant are transferred to the owner. C) The merchant can only transfer void title until the owner approves the sale. D) The merchant can only transfer temporary title until any funds in the possession of the merchant are transferred to the owner. E) The merchant must have any purchaser sign a document acknowledging that the purchaser will return the goods upon the request of the owner.
61)
An insurable interest in goods occurs_____.
A) whenever a contract for the bailment of goods is written in express terms B) when there is a right to insure the goods against any risk exposure such as damage or destruction C) at the time any goods are exchanged between merchants in a business-to-business (B2B) transaction D) once a promise to make payment is tendered by the purchaser E) once the goods have been inspected by a federal administrative agency (for example, the Federal Trade Commission)
62) Calvin negotiated and bought a used car for personal use from Lulu’s Peaches Automotive Sales, Inc. Once the agreement was executed, Calvin left with his car. What type of contract is this? A) A sale or return contract B) A simple bailment transaction C) A sale on approval contract D) A simple delivery contract E) A certified owner transfer agreement
63) What type of agreement do contracting parties have when the goods are delivered to a buyer via a common carrier, such as a trucking line?
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A) A simple delivery contract B) A common-carrier delivery contract C) A goods-in-bailment contract D) A consignment contract E) A subrogation contract
64) Shaun is a common-carrier who delivers goods on behalf of many different sellers. Shaun is an _____. A) agent of any seller B) employee of any seller C) agent and employee of any seller D) independent contractor E) independent contractor and agent of any seller
65) What type of agreement do contracting parties have when the sale itself is contingent on approval? A) A transferable contract B) An executed contract C) An implied-in-law contract D) A conditional sales contract E) A consignment contract
66) Under the Uniform Commercial Code (UCC), in a simple delivery contract, once goods are identified in a contract the contract is considered _____. A) delivered B) executory C) transferred D) executed E) excluded
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67) With a simple delivery contract involving goods sold by a merchant that are to be delivered to the buyer, when does risk of loss transfer to the buyer? A) When money is transferred from the buyer to the seller B) When the items are tendered to the buyer C) When the goods are delivered to the buyer D) Three (3) days after the goods are identified to the contract E) When the goods are identified to the contract
68)
When is an insurable interest in the buyer created in a simple delivery contract? A) When money is transferred from the buyer to the seller B) When the items are delivered to the buyer C) When the buyer takes possession D) When the goods are identified to the contract E) When the seller tenders delivery of the goods to the buyer
69) With a simple delivery contract in which the seller is a merchant, which party sustains the loss if, through no fault of either party, the goods are destroyed through fire prior to delivery to the buyer? A) The seller B) The buyer C) Both the buyer and seller, with the loss being apportioned fifty (50) percent to the buyer and fifty (50) percent to the seller D) Both the buyer and seller, with the loss being apportioned seventy-five (75) percent to the buyer and twenty-five (25) percent to the seller E) Both the buyer and seller, with the loss being apportioned twenty-five (25) percent to the buyer and seventy-five (75) percent to the seller
70) With a simple delivery contract in which the seller is not a merchant, which party sustains the loss if, through no fault of either party, the goods are destroyed through fire prior to delivery to the buyer?
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A) The seller, if tender of delivery has occurred B) The buyer, if tender of delivery has occurred C) Both the buyer and seller, with the loss being apportioned fifty (50) percent to the buyer and fifty (50) percent to the seller D) Both the buyer and seller, with the loss being apportioned seventy-five (75) percent to the buyer and twenty-five (25) percent to the seller E) Both the buyer and seller, with the loss being apportioned twenty-five (25) percent to the buyer and seventy-five (75) percent to the seller
71) A goods-in-_____ contract involves goods that are in some kind of storage, so the seller cannot transfer physical possession of them. A) consignment B) abeyance C) equity D) subrogation E) bailment
72)
Which of the following are types of common-carrier delivery contracts? A) Original and intermediary contracts B) Destination and transfer contracts C) Transfer and intermediary contracts D) Original, intermediary, and destination contracts E) Origin and destination contracts
73) Which of the following require that the seller make proper shipping arrangements and deliver goods to the buyer via a common carrier, but does not require a guarantee of the safety of goods to their destination?
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A) Origin contracts B) Destination contracts C) Transfer contracts D) Origin contracts, destination contracts, and transfer contracts E) Shipment and destination contracts, but not transfer contracts
74)
In an origin contract, when does title pass to the buyer? A) When money is transferred to the seller B) When the goods are delivered to the buyer C) At the time and place of shipment D) Two (2) days after the goods are identified to the contract E) When the goods are identified to the contract
75)
In an origin contract, who bears the risk of loss while the goods are in transit?
A) The seller B) The buyer C) Both the buyer and seller, with the loss being apportioned fifty (50) percent to the buyer and fifty (50) percent to the seller D) Both the buyer and seller, with the loss being apportioned seventy-five (75) percent to the buyer and twenty-five (25) percent to the seller E) Both the buyer and seller, with the loss being apportioned twenty-five (25) percent to the buyer and seventy-five (75) percent to the seller
76)
In a destination contract, who bears the risk of loss while the goods are in transit?
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A) The seller B) The buyer C) Both the buyer and seller, with the loss being apportioned fifty (50) percent to the buyer and fifty (50) percent to the seller D) Both the buyer and seller, with the loss being apportioned seventy-five (75) percent to the buyer and twenty-five (25) percent to the seller E) Both the buyer and seller, with the loss being apportioned twenty-five (25) percent to the buyer and seventy-five (75) percent to the seller
77)
What does the shipping term "FOB" indicate? A) Fee on board B) Fee on basis C) Freedom of board D) Free on board E) Free of bailment
78) Which of the following is true regarding transportation costs when the shipping term "FOB" is used in a contract for the sale of goods requiring delivery? A) The selling price includes transportation costs. B) The selling price does not include transportation costs. C) Both the buyer and seller bear transportation costs, with the costs being apportioned fifty (50) percent to the buyer and fifty (50) percent to the seller. D) Both the buyer and seller bear transportation costs, with the costs being apportioned seventy-five (75) percent to the buyer and twenty-five (25) percent to the seller. E) Both the buyer and seller bear transportation costs, with the costs being apportioned twenty-five (25) percent to the buyer and seventy-five (75) percent to the seller.
79)
What does the shipping term "FAS" indicate?
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A) Fee at ship B) Fee along shore C) First at shipment D) Free alongside E) Foundering at sea
80)
Which of the following is true when the shipping term "FAS" is used?
A) The buyer, at the buyer's expense, delivers the goods alongside the ship before the risk passes to the buyer. B) The buyer, at the seller's expense, delivers the goods alongside the ship before the risk passes to the buyer. C) The seller, at the seller's expense, delivers the goods alongside the ship before the risk passes to the buyer. D) The seller, at the buyer's expense, delivers the goods alongside the ship before the risk passes to the buyer. E) The common carrier, at the carrier's expense, delivers the goods alongside the ship before the risk passes to the buyer.
81)
What does the shipping term "CIF" indicate? A) Cost, insurance, and freight B) Collateral, insurance, and freight C) Commerce, insurance, and freight D) Collateral, indemnity, and freight E) Cost, insurance, and flight
82) Which of the following occurs when a contract for the sale of goods includes a "CIF" shipping term?
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A) The risk of loss passes from the seller to the buyer when the goods are identified to the contract. B) The risk of loss passes from the seller to the buyer when the goods are delivered to the buyer. C) The risk of loss remains with the seller for two (2) days after the sale. D) The risk of loss remains with the seller for three (3) days after the sale. E) The seller puts the goods in possession of a carrier before the risk passes to the buyer.
83) If the seller has a negotiable document of title in a goods-in-bailment contract, when does risk of loss transfer from the seller to the buyer? A) When the bailee is notified of the transfer of title B) When the negotiable instrument is endorsed over to the buyer C) When a reasonable time has elapsed since the transfer of title D) When the bailee is notified of the transfer of title and acknowledges the notification E) When the goods are identified to the contract
84) Which of the following occurs when a contract for the sale of goods includes a "CIF" shipping term? A) The risk of loss passes from the seller to the buyer when the goods are identified to the contract B) The risk of loss passes from the seller to the buyer when the goods are delivered to the buyer C) The risk of loss remains with the seller for two (2) days after the sale D) The risk of loss remains with the seller for three (3) days after the sale E) The seller puts the goods in possession of a carrier before the risk passes to the buyer
85) What do the words "deliver to the order of seller" indicate in a goods-in-bailment contract?
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A) A negotiable document of title B) A nonnegotiable document of title C) A shipment contract D) A destination contract E) A guaranty contract
86) A goods-in-bailment contract that lacks the words "to the order of" indicates a _____ document of title. A) negotiable B) nonnegotiable C) primary D) secondary E) bearer
87)
In a goods-in-bailment contract, when is an insurable interest created?
A) When the buyer has title to the goods B) When the seller has the risk of loss C) When either party has title, risk of loss, or some other economic interest attached to the goods D) Two (2) days after either party acquires title to the goods E) Never, becausean insurable interest cannot exist in a goods-in-bailment contract
88)
Which of the following are types of conditional sales contracts?
A) Sale-on-approval contracts B) Sale-or-return contracts C) Condition-on-sale contracts D) Sale-on-approval contracts, sale-or-return contracts, and condition-on-sale contracts E) Sale-on-approval contracts and sale-or-return contracts, but not condition-on-sale contracts
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89) In terms of conditional sales contracts, a contract is a(n) _____ contract if the seller allows the buyer to take possession of the goods before deciding whether to complete the contract by making the purchase. A) sale-on-approval B) sale-or-return C) condition-on-sale D) illusory E) implied-in-law
90) In terms of conditional sales contracts, a(n) _____ contract occurs when the seller and buyer agree that the buyer may return the goods at a later time. A) sale-on-approval B) sale-or-return C) condition-on-sale contract D) illusory E) implied-in-law
91) What may a buyer do if a seller does not provide goods that were described in the contract? A) Accept the nonconforming goods as is B) Reject the goods subject to the seller's curing the deficiency in the goods C) Reject the goods if no cure is possible D) Accept the nonconforming goods as is, reject the goods subject to the seller's curing the deficiency in the goods, or reject the goods if no cure is possible E) Sue and successfully recover from the seller statutorily established liquidated damages and/or punitive damages
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92) Carpet Woes. Beau went shopping at ABC Carpet. He saw some carpet he liked but could not make up his mind. The manager at ABC Carpet wrote down the proposed purchase price for him along with a statement that the price would be good for three months. Two months later Beau went back to ABC Carpet to purchase the carpet. Unfortunately, the price had gone up. Beau showed the manager his writing and guaranteed price, but the manager said that the offer was no longer good. Although he had to pay more than the ABC manager had initially promised, Beau proceeded to purchase his carpet from ABC Carpet, and he also contracted with ABC to do the installation. Unfortunately, Beau almost immediately started to have problems with the carpet. Beau told the sales manager of ABC Carpet that he was planning on bringing suit for breach of warranty. The sales manager, however, told him that the breach of warranty provisions only applied to sales of goods and that the carpet purchase was for installation, a service. What kind of offer did the manager at ABC Carpet make to Beau? A) An unenforceable offer B) A firm offer C) A consideration offer D) An illusory offer E) A mirror offer
93) Carpet Woes. Beau went shopping at ABC Carpet. He saw some carpet he liked but could not make up his mind. The manager at ABC Carpet wrote down the proposed purchase price for him along with a statement that the price would be good for three months. Two months later Beau went back to ABC Carpet to purchase the carpet. Unfortunately, the price had gone up. Beau showed the manager his writing and guaranteed price, but the manager said that the offer was no longer good. Although he had to pay more than the ABC manager had initially promised, Beau proceeded to purchase his carpet from ABC Carpet, and he also contracted with ABC to do the installation. Unfortunately, Beau almost immediately started to have problems with the carpet. Beau told the sales manager of ABC Carpet that he was planning on bringing suit for breach of warranty. The sales manager, however, told him that the breach of warranty provisions only applied to sales of goods and that the carpet purchase was for installation, a service. Which of the following is true regarding the enforceability of the offer made by the manager at ABC Carpet?
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A) ABC Carpet is not bound by the offer because Beau did not provide any consideration. B) ABC Carpet is bound by the offer, but only for a period of seven days. C) ABC Carpet is bound by the offer, but only for a period of ten days. D) ABC Carpet is not bound by the offer because Beau did not provide any consideration and because such an offer is only good for a period of ten days. E) ABC Carpet was bound by the offer, and Beau had the right to sue for its refusal to honor the agreement.
94) Carpet Woes. Beau went shopping at ABC Carpet. He saw some carpet he liked but could not make up his mind. The manager at ABC Carpet wrote down the proposed purchase price for him along with a statement that the price would be good for three months. Two months later Beau went back to ABC Carpet to purchase the carpet. Unfortunately, the price had gone up. Beau showed the manager his writing and guaranteed price, but the manager said that the offer was no longer good. Although he had to pay more than the ABC manager had initially promised, Beau proceeded to purchase his carpet from ABC Carpet, and he also contracted with ABC to do the installation. Unfortunately, Beau almost immediately started to have problems with the carpet. Beau told the sales manager of ABC Carpet that he was planning on bringing suit for breach of warranty. The sales manager, however, told him that the breach of warranty provisions only applied to sales of goods and that the carpet purchase was for installation, a service. Which of the following is true regarding whether the Uniform Commercial Code (UCC) applies to the contract Beau had with ABC Carpet? A) Common law applies, not the UCC, because the contract involves a mixed sale. B) The UCC applies, not common law, because the contract involves a mixed sale. C) The court will determine if the predominant purpose of the contract was for the sale of goods, and if it was, the UCC applies. D) The court will apply the "service-warranty" test to determine if the predominant purpose of the contract was for the provision of a service, and if it was, the UCC applies. E) The court will apply the "service-warranty" test to determine if the predominant purpose of the contract was for the sale of goods, and if it was, the UCC applies.
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95) Used Car Problems. Marcy purchased a used car from ABC Motors. Six months later, the police seized the car from Marcy because it was a stolen vehicle. Marcy asked for her money back from ABC Motors. The manager there told her that the car was not stolen; that even if it were stolen, ABC Motors acted in good faith with no knowledge of a theft; therefore, no refund was legally required. ABC Motors had also sold a used car to Frank, who wrote a bad check for the car and left town but not before he sold the car to Betty, who paid a fair price for the car believing that Frank had all rights to sell it. ABC Motors asked Betty to return the car, but she told ABC to forget it. Assuming that the thief who stole the car sold and delivered it to ABC Motors without the knowledge of any representative of ABC Motors of the theft, what kind of title did ABC Motors have? A) Void B) Valid C) Voidable, so long as ABC Motors can prove that it had never been charged with dealing in stolen merchandise D) Voidable, so long as ABC Motors can prove that none of its representatives were negligent in disregarding evidence of the theft at any time prior to its resale to Marcy E) Voidable, so long as no manager of ABC Motors had made an affirmative representation that the car was not stolen
96) Used Car Problems. Marcy purchased a used car from ABC Motors. Six months later, the police seized the car from Marcy because it was a stolen vehicle. Marcy asked for her money back from ABC Motors. The manager there told her that the car was not stolen; that even if it were stolen, ABC Motors acted in good faith with no knowledge of a theft; therefore, no refund was legally required. ABC Motors had also sold a used car to Frank, who wrote a bad check for the car and left town but not before he sold the car to Betty, who paid a fair price for the car believing that Frank had all rights to sell it. ABC Motors asked Betty to return the car, but she told ABC to forget it. Assuming that ABC Motors was an innocent purchaser from the thief, which of the following is true regarding the manager's statement that Marcy is not due a refund?
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A) The manager is correct, but only if ABC Motors can prove that it had never been charged with dealing in stolen merchandise. B) The manager is correct, but only if ABC Motors can prove that none of its representatives were negligent in disregarding evidence of the theft at any time prior to its resale to Marcy. C) The manager is correct. D) The manager is incorrect, but only if Marcy can prove that she specifically asked if there was any problem with the car prior to her purchase and was affirmatively told that the title was good. E) The manager is incorrect.
97) Used Car Problems. ABC Motors sold a used car to Frank, who wrote a bad check for the car and left town but not before he sold the car to Betty, who paid $1,100 (a fair price for the car) believing that Frank had all rights to sell it. ABC Motors asked Frank to return the car, but he told them that he already sold it to Betty. What kind of title did Frank have? A) Valid B) Void C) Voidable D) Absolute E) Illegal
98) Used Car Problems. ABC Motors sold a used car to Frank, who wrote a bad check for the car and left town but not before he sold the car to Betty, who paid $1,100 (a fair price for the car) believing that Frank had all rights to sell it. Assuming that ABC Motors was an innocent purchaser from the thief, which of the following is true regarding Betty's obligations, if any? A) She is not required to return the car because Frank held voidable title, not void title. B) She is not required to return the car under the Uniform Commercial Code (UCC) because she paid over $1,000 for it. C) She is required to return the title because Frank held voidable title, not void title. D) She is required to return the title under the UCC because she paid under $5,000 for it. E) Under the UCC, the car should be sold with ABC and Betty splitting the proceeds. Under the UCC, the car should be sold with ABC and Betty splitting the proceeds.
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99) Accidental Sale. ABC Motors ordinarily deals in used cars and does some amount of repair work. Robby entrusted his automobile to ABC Motors to have the oil changed and get new brakes. The car was parked in the lot along with other cars, some of which were for sale. The manager of ABC Motors accidentally sold the car to Connie because she saw it and took it upon herself to offer a good price. The manager was attempting to increase the shop's profit margin. Connie had no idea that the car did not belong to ABC Motors. When Robby went to pick up the car, he was very upset that it was gone. The manager told Robby that he was very sorry, but that he was not negligent and only made an honest mistake. According to the manager, Robby accepted the risk of this type of loss, and his only recourse was against Connie. Which of the following is a proper identifying term for Connie? A) A good-faith purchaser B) A valid purchaser C) A void purchaser D) A voidable purchaser E) An interested purchaser for value
100) Accidental Sale. ABC Motors ordinarily deals in used cars and does some amount of repair work. Robby entrusted his automobile to ABC Motors to have the oil changed and get new brakes. The car was parked in the lot along with other cars, some of which were for sale. The manager of ABC Motors accidentally sold the car to Connie because she saw it and took it upon herself to offer a good price. The manager was attempting to increase the shop's profit margin. Connie had no idea that the car did not belong to ABC Motors. When Robby went to pick up the car, he was very upset that it was gone. The manager told Robby that he was very sorry, but that he was not negligent and only made an honest mistake. According to the manager, Robby accepted the risk of this type of loss, and his only recourse was against Connie. Which of the following is true regarding the manager's statement that Robby's only recourse is against Connie? A) The manager is correct. B) The manager is incorrect, but only if Robby has a writing signed by a representative of the repair shop guaranteeing the safety of the car. C) The manager is correct, but only if Connie can be found and served with process. D) The manager is correct, but only if Connie's deal was for less than ten (10) percent of the fair market value of the car. E) The manager is incorrect.
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101) Accidental Sale. ABC Motors ordinarily deals in used cars and does some amount of repair work. Robby entrusted his automobile to ABC Motors to have the oil changed and get new brakes. The car was parked in the lot along with other cars, some of which were for sale. The manager of ABC Motors accidentally sold the car to Connie because she saw it and took it upon herself to offer a good price. The manager was attempting to increase the shop's profit margin. Connie had no idea that the car did not belong to ABC Motors. When Robby went to pick up the car, he was very upset that it was gone. The manager told Robby that he was very sorry, but that he was not negligent and only made an honest mistake. According to the manager, Robby accepted the risk of this type of loss, and his only recourse was against Connie. Which of the following is true regarding Connie's rights to the car? A) Connie can keep the car, but only if the repair shop voluntarily agrees to pay Robby the fair market value of the car. B) Connie can keep the car without paying any additional amounts, but only because she paid cash for it. C) Connie can keep the car without paying any additional amounts, and whether she paid cash makes no difference. D) Connie must give the car to Robby. E) Connie must return the car to the repair shop.
102) Wrecked Furniture. Ralph buys new furniture for his living room from Good Times Furniture. It is agreed that the goods will be placed with a common carrier for delivery. The contract between Ralph and Good Times is ambiguous regarding whether the seller had the duty to deliver the goods only to the common carrier's hands or whether the seller had the duty to deliver the goods to Ralph's home. Unfortunately, on the way to Ralph's home, through no fault of the delivery driver, the delivery truck was wrecked and the furniture was significantly damaged. Which of the following is the type of contract that Ralph and Good Times Furniture entered into? A) A common-carrier delivery contract B) A sale on approval contract C) A goods-in-bailment contract D) A conditional sales contract E) A conditional delivery contract
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103) Wrecked Furniture. Ralph buys new furniture for his living room from Good Times Furniture. It is agreed that the goods will be placed with a common carrier for delivery. The contract between Ralph and Good Times is ambiguous regarding whether the seller had the duty to deliver the goods only to the common carrier's hands or whether the seller had the duty to deliver the goods to Ralph's home. Unfortunately, on the way to Ralph's home, through no fault of the delivery driver, the delivery truck was wrecked and the furniture was significantly damaged. What type of contract is presumed based upon the fact that the contract was ambiguous regarding whether the seller had the duty to deliver the goods only to the common carrier's hands or whether the seller had the duty to deliver the goods to Ralph's home? A) Transit B) Location C) Destination D) Origin E) Voidable
104) Wrecked Furniture. Ralph buys new furniture for his living room from Good Times Furniture. It is agreed that the goods will be placed with a common carrier for delivery. The contract between Ralph and Good Times is ambiguous regarding whether the seller had the duty to deliver the goods only to the common carrier's hands or whether the seller had the duty to deliver the goods to Ralph's home. Unfortunately, on the way to Ralph's home, through no fault of the delivery driver, the delivery truck was wrecked and the furniture was significantly damaged. Which of the following is true regarding the risk of loss at the time the goods were damaged? A) The risk of loss was with the furniture store. B) The risk of loss was with Ralph. C) The risk of loss was split equally between Ralph and the furniture store. D) The risk of loss was with Ralph, but only if the driver is determined to be an agent of the furniture store. E) The risk of loss was with the furniture store, but only if the driver is determined to be an agent of the furniture store.
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105) Patty, who lives in East Tennessee, developed a new type of printer that required very little ink. As a merchant, she entered into contracts to sell the printer to a number of merchants of office supplies in the East Tennessee area for a charge of $600 each. She further entered into a number of contracts with merchants in other states and also in foreign countries. For printers sold in states other than Tennessee and for printers sold outside the United States, she charged $1,001 each. Patty was a trusting soul who did not require that her arrangements be in writing because she believed that a person's word was his or her bond. She did, however, send a confirming memo to each client to which she received no objections. Patty manufactured a number of printers but unfortunately, due to a downturn in the economy, a number of her buyers refused to proceed on their contracts, with several claiming that the contracts were unenforceable because they were not in writing. Which of the following is true regarding whether the contracts with clients in the East Tennessee area were required to be in writing? A) Because the contracts were for amounts priced at $500 or more, they were required to be in writing and signed by the buyer. B) Because the printers were sold in Patty's home state, no writing was required. C) Because the contracts were for amounts priced at $1,000 or more, they were required to be in writing and signed by the buyer. D) Because the contracts were for amounts priced at $500 or more, they were required to be in writing, but Patty's memo was sufficient to satisfy the requirement. E) Because the contracts were for amounts priced at $1,000 or more, they were required to be in writing and signed by the buyer, but Patty's memo was sufficient to satisfy the requirement.
106) Patty, who lives in East Tennessee, developed a new type of printer that required very little ink. As a merchant, she entered into contracts to sell the printer to a number of merchants of office supplies in the East Tennessee area for a charge of $600 each. She further entered into a number of contracts with merchants in other states and also in foreign countries. For printers sold in states other than Tennessee and for printers sold outside the United States, she charged $1,001 each. Patty was a trusting soul who did not require that her arrangements be in writing because she believed that a person's word was his or her bond. She did, however, send a confirming memo to each client to which she received no objections. Patty manufactured a number of printers but unfortunately, due to a downturn in the economy, a number of her buyers refused to proceed on their contracts, with several claiming that the contracts were unenforceable because they were not in writing. Which of the following is true regarding whether the contracts with clients in the U.S., but outside of Tennessee, were required to be in writing?
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A) Because the contracts were for amounts priced at $500 or more, they were required to be in writing and signed by the buyer. B) Because the printers were sold outside Patty's home state, no writing was required. C) Because the contracts were for amounts priced at $1,000 or more, they were required to be in writing and signed by the buyer. D) Because the contracts were for amounts priced at $500 or more, they were required to be in writing, but Patty's memo was sufficient to satisfy the requirement. E) Because the contracts were for amounts priced at $1,000 or more, they were required to be in writing and signed by the buyer, but Patty's memo was sufficient to satisfy the requirement.
107) Patty, who lives in East Tennessee, developed a new type of printer that required very little ink. As a merchant, she entered into contracts to sell the printer to a number of merchants of office supplies in the East Tennessee area for a charge of $600 each. She further entered into a number of contracts with merchants in other states and also in foreign countries. For printers sold in states other than Tennessee and for printers sold outside the United States, she charged $1,001 each. Patty was a trusting soul who did not require that her arrangements be in writing because she believed that a person's word was his or her bond. She did, however, send a confirming memo to each client to which she received no objections. Patty manufactured a number of printers but unfortunately, due to a downturn in the economy, a number of her buyers refused to proceed on their contracts, with several claiming that the contracts were unenforceable because they were not in writing. Assuming the United Nations Convention on Contracts for the International Sale of Goods (CISG) is in effect, which of the following is true regarding whether the contracts with clients outside the U.S. were required to be in writing? A) Because the contracts were for amounts priced at $500 or more, they were required to be in writing and signed by the buyer. B) Assuming credible and reasonable proof of any contract at issue, because the CISG applied, no writing was required. C) Because the contracts were for amounts priced at $1,000 or more, they were required to be in writing and signed by the buyer. D) Because the contracts were for amounts priced at $500 or more, they were required to be in writing, but Patty's memo was sufficient to satisfy the requirement. E) Because the contracts were for amounts priced at $1,000 or more, they were required to be in writing and signed by the buyer, but Patty's memo was sufficient to satisfy the requirement.
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108) Under the Uniform Commercial Code (UCC), the rules for transactions involving _____ differ from those for transactions involving regular buyers and sellers. A) financial institutions B) merchants C) private buyers and sellers D) state entities E) federal entities
109) If an owner sells a buyer the right to come and remove items from the ground, this interest is known as a _____. A) subrogated right B) lease C) license D) profit E) fee simple absolute
110) Why did the drafters of the Uniform Commercial Code (UCC) distinguish merchants from regular buyers and sellers? A) Because merchants have a greater ability to look out for themselves than do ordinary buyers and sellers B) Because merchants can purchase liability insurance C) Because merchants generally have more money than most buyers and sellers D) Because merchants have lawyers to help protect their interests E) Because the common law will always protect ordinary buyers and sellers
111) Which section of the Uniform Commercial Code (UCC) defines a lease as "a transfer of the right to possession and use of goods for a term in return for consideration?"
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A) 2A-301 B) 2A-103(j) C) 2A-104(d) D) 2A-202 E) 2A-301(c)
112) The United Nations Convention on Contracts for the International Sale of Goods (CISG) is important because if a problem arises with an international sale of goods and a party to the transaction initiates litigation, the Uniform Commercial Code (UCC) does not provide guidance in the litigation; instead, the CISG _____. A) preempts the UCC B) incorporates the UCC C) uses the laws of both the seller’s and the buyer’s countries D) defers to the laws of the seller’s country E) defers to the laws of the buyer’s country
113) If an owner _____ the possession of goods to a merchant who deals in goods of that kind, the merchant can transfer all rights in the goods to a buyer in the ordinary course of business. A) defers B) revokes C) entrusts D) rescinds E) suspends
114) What kind of contracts require the seller to deliver goods to the destination stipulated in the sales contract?
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A) Simple delivery B) Duty to deliver C) Shipment D) Destination E) Bailment
ESSAY. Write your answer in the space provided or on a separate sheet of paper. 115) List what is required in order for an offer to be considered a firm offer under the Uniform Commercial Code (UCC). Also, discuss the effect of a firm offer that is silent as to the time period for acceptance, and contrast that with the effect of silence as to the time period for acceptance of an offer under common law.
116)
List and describe the three (3) types of title.
117) List five (5) situations in which a buyer receives only voidable title in a contract for the sale of goods transaction.
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118) Belinda purchases a couch from Good Furniture Store. She pays for the couch, and the store agrees to deliver it. Unfortunately, on the way to her house, the vehicle overheats and burns, destroying the truck and the couch inside. Belinda asks for a refund or another couch. The storeowner refuses on the basis that risk of loss had passed to Belinda before the couch was destroyed. Who will win the dispute and why? What would have happened if Belinda had purchased the couch at a yard sale and the loss occurred while the seller was delivering it?
119) Discuss when title and risk of loss pass to the buyer in a goods-in-bailment contract when: (a) the seller has a negotiable document of title; (b) the seller has a nonnegotiable document of title; and (c) the seller has a contract or other instrument showing ownership that is not a negotiable or nonnegotiable document of title.
120) Who is considered a "merchant" under the Uniform Commercial Code (UCC), and how does the UCC treat merchants as compared to ordinary buyers and sellers?
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Answer Key Test name: Chap 15_5_The Essentials_Kubasek 1) FALSE Federal statutes do not govern the formation of sales and lease contracts. Instead, each state passes its own laws to outline rules in this area. 2) TRUE The Uniform Commercial Code (UCC) is significant because it clarifies sales law and makes this area of the law more predictable to businesses that engage in transactions in more than one state. Essentially, the UCC facilitates commercial transactions. 3) TRUE When in doubt, judges will try to interpret the Uniform Commercial Code (UCC) to keep an agreement in force.As the drafters of the UCC intended, the UCC is designed to facilitate commercial transactions, not construct ways to impede them. 4) FALSE Article 2 of the Uniform Commercial Code (UCC) governs sales contracts while Article 2(A) governs lease contracts. Specifically, Article 2 focuses on contracts for the sale of goods; Article 2(A) focuses on contracts for the lease of goods. 5) FALSE The Uniform Commercial Code (UCC) states that a sale consists of the passing of title from the seller to the buyer for a price. 6) FALSE
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The Uniform Commercial Code (UCC) defines goods as all tangible things which are movable at the time of identification to the contract for sale. Real estate cannot be moved, so it is not a good. Yet items attached to real estate that are used for business activities are known as trade fixtures and are treated as goods under the UCC. 7) TRUE The Uniform Commercial Code (UCC) defines goods as all tangible things which are movable at the time of identification to the contract for sale. Corporate stocks are not tangible, so they are not goods. 8) FALSE Sometimes, it is not easy to tell whether something is a good because a tangible item is tied to or mixed with something intangible, such as a service. A contract that combines a good with a service is a mixed sale. Article 2 of the Uniform Commercial Code (UCC) applies to mixed sales if the goods are the predominant part of the transaction 9) TRUE Article 2(A) of the Uniform Commercial Code (UCC) covers contracts for the lease of goods. This section of the UCC is increasingly important because consumers (both individuals and businesses) are more likely to lease goods today than ever before. Consumers lease cars, equipment, and machines. Article 2(A) does not cover leases related to real property. The UCC defines goods as all tangible things which are movable at the time of identification to the contract for sale. Real estate cannot be moved, so it is not a good. 10) FALSE
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The Uniform Commercial Information Transactions Act (UCITA) promises to do for electronic contracting what the Uniform Commercial Code (UCC) did for transactions in physical goods: protect consumers by providing predictability, uniformity, and clear rules. As with the UCC, states will choose whether to adopt UCITA. In 2001, Virginia became the first state to enact UCITA, probably because major internetrelated companies are headquartered in northern Virginia. 11) TRUE Although quantity must usually be specified in a contract or lease, the Uniform Commercial Code (UCC) does permit "output" terminology to determine quantity. If a farmer agrees to sell all the grain his fields will produce but is unable to determine a specific amount, then the "quantity" element has been satisfied under the UCC as an output contract. 12) TRUE Under the Uniform Commercial Code (UCC), offers made by merchants are considered firm offers if the offer is made in writing and gives assurances that it will be irrevocable for up to three months despite a lack of consideration for the irrevocability. 13) TRUE Under both the Uniform Commercial Code (UCC) and the United Nations Convention on Contracts for the International Sale of Goods (CISG), contracts for the sale or lease of goods may be made in any manner sufficient to show agreement. A court will uphold a contract for the sale or lease of goods as long as the parties intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy. 14) FALSE
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The mirror-image rule that applies under common law does not apply under the Uniform Commercial Code. The mirror-image rule states that an offeree's acceptance must be on the exact same terms as the offer. According to this rule, If the attempted acceptance includes additional terms, the acceptance becomes a counteroffer instead of an acceptance.Under the UCC, additional terms are permitted in the contract for the sale or lease of goods. 15) TRUE Under the Uniform Commercial Code (UCC), additional terms are permitted in contracts for the sale or lease of goods. Under UCC Section 2-207(1), additional terms do not negate acceptance unless acceptance is made expressly conditional on assent to the additional terms 16) TRUE The United Nations Convention on Contracts for the International Sale of Goods (CISG) has eliminated the statute of frauds writing requirement. The CISG requires only credible and reasonable proof that a contract exists, regardless of whether proof is documented or verbal. 17) FALSE A contract or contract provision is unconscionable if it is so unfair that a court would be unreasonable if it enforced the contract. The Uniform Commercial Code (UCC) outlines actions a court can take if it discovers that a contract or lease provision or the contract or lease as a whole is unconscionable. If a court finds that a contract or lease was unconscionable, in whole or in part, when it was made, the court can either refuse to enforce the contract or lease or enforce the parts that are fair. 18) TRUE
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Under the common law, when a contract is modified, it must be supported by new consideration. The Uniform Commercial Code (UCC) eliminates that requirement for the modification of sales and lease contracts. The UCC requires only that modifications be made in good faith. 19) FALSE There are three kinds of title: good title, void title, and voidable title. 20) FALSE Someone who purchases stolen goods, knowingly or unknowingly, has void title. Void title is not true title. 21) TRUE As a general rule, good faith is irrelevant when passing a void title. If a person has void title (for example, if a person has possession of stolen goods), then no matter how honorable the intentions of the seller are, that good-faith seller cannot pass anything to the buyer but void title. 22) TRUE When a seller transfers goods to a buyer, the buyer normally gets good title. However, according to common law, if the buyer is a minor, he or she only receives voidable title. 23) FALSE A goods-in-bailment contract is a type of contract that occurs when the purchased goods are in some kind of storage under the control of a third party, such as a warehouseman. 24) FALSE A common carrier is an independent contractor and not an agent of the seller. What makes the common carrier an independent contractor, rather than an agent, is that the carrier controls the primary aspects of performance, such as how the goods are actually delivered. 25) FALSE
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If an owner entrusts the possession of goods to a merchant who deals in goods of that kind, the merchant can either fraudulently or accidentally transfer all rights in the good to a buyer in the ordinary course of business. If the purchaser is a good-faith purchaser, then that purchaser gets good title. The original owner's only recourse is to bring suit against the merchant. The rationale behind this concept is the facilitation of commercial activity regarding good-faith purchasers in the marketplace. 26) TRUE An insurable interest is the right to insure the goods against any risk of loss such as damage or destruction. When an insurable interest is created in the goods is important. Both the buyer and the seller can insure themselves for potential loss in the event the goods are damaged or destroyed at some point in the transaction. A key point is identifying the earliest time in the transaction that the buyer can claim an insurable interest. 27) FALSE A contract is a sale-on-approval contract if the seller allows the buyer to take possession of the goods before deciding whether to complete the contract by making the purchase.In a sale-or-return contract, title and risk of loss remain with the seller until the buyer notifies the seller about the approval of the contract. 28) FALSE A sale-or-return contract occurs when the seller and buyer agree that the buyer may return the goods at a later time. Such contracts usually occur when the buyer is taking inventory to resell.A contract is a sale-onapproval contract if the seller allows the buyer to take possession of the goods before deciding whether to complete the contract by making the purchase. 29) FALSE
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With an "ex-ship" (delivery from the carrying vessel) shipping term, the risk of loss passes to the buyer when the goods leave the ship. 30) D Three sources of laws that interpret sales contracts exist: state common law, the Uniform Commercial Code, and state statutory law. Little, if any, federal law governs contracts for the buying and selling of items, and when such law does exist, it is highly specialized (for example, the buying and selling of stock under laws created by the Securities and Exchange Commission). 31) A Louisiana, not having the English common law heritage, has adopted only portions of the Uniform Commercial Code that do not conflict with its historically French-based code law. 32) E The Uniform Commercial Code (UCC) was created in 1952 and has been adopted in part by all 50 states, the District of Columbia, and the Virgin Islands. 33) A The Uniform Commercial Code (UCC) is divided into sections known as articles. These articles cover a wide range of topics, from sales contracts to secured transactions. 34) A Under UCC Article 2, the Uniform Commercial Code explains the creation and interpretation of sales contracts. 35) C Article 2(A) of the Uniform Commercial Code (UCC) governs lease contracts. 36) A
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When Article 2 of the Uniform Commercial Code (UCC) is silent on an issue of sales contract formation or interpretation, the common law rules apply. Of course, if a state has passed statutory law regarding contracts, that law always supersedes the common law. 37) D Section 2-106(1) of the Uniform Commercial Code (UCC) states that a sale "consists of the passing of title from the seller to the buyer for a price." 38) D Section 2-105 of the Uniform Commercial Code (UCC) defines goods as "all [tangible] things . . . which are movable at the time of identification to the contract for sale." Items are tangible if they exist physically. Corporate stocks and copyrights are not tangible, so they are not goods, and real estate cannot be moved, so it is not a good. 39) C Section 2-105 of the Uniform Commercial Code (UCC) defines goods as "all [tangible] things . . . which are movable at the time of identification to the contract for sale." Items are tangible if they exist physically. 40) D Section 2-105 of the Uniform Commercial Code (UCC) defines goods as "all [tangible] things . . . which are movable at the time of identification to the contract for sale." Items are tangible if they exist physically. Corporate stocks and copyrights are not tangible, so they are not goods, and real estate cannot be moved, so it is not a good. 41) E
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Minerals, clay, and soil can all be treated as goods, with their sales contracts governed by Article 2 of the Uniform Commercial Code (UCC) if the owner takes these items out of the ground and then sells them to the buyer; however, should the owner sell the buyer the right to come and remove the items, the contract would be governed not by the UCC but by common law for the sale of an interest in realty (more particularly, an interest known as a profit). 42) B Sometimes, it is not easy to tell whether something is a good because a tangible item is tied to or mixed with something intangible, such as a service. A contract that combines a good with a service is a mixed sale. Article 2 of the Uniform Commercial Code (UCC) applies to mixed sales if the goods are the predominant part of the transaction. 43) C Real estate cannot be moved, so it is not a good. Yet items attached to real estate that are used for business activities are known as trade fixtures and are treated as goods under the Uniform Commercial Code (UCC). 44) C According to the Supreme Court of New York, Appellate Division, a good-faith seller of stolen goods cannot pass a voidable or even good title to a good-faith innocent buyer. The court said that good faith and innocence have no bearing whatsoever on the matter. Someone who sells stolen goods, regardless of the degree of good faith, can never pass a voidable or good title to the buyer. The buyer has void title and, therefore, the rightful owner can reclaim the goods. 45) B Uniform Commercial Code (UCC) Section 2A-103(j) defines a lease as "a transfer of the right to possession and use of goods for a term in return for consideration." Version 1
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46) C Uniform Commercial Code (UCC) Section 2A-103(j) defines a lease as "a transfer of the right to possession and use of goods for a term in return for consideration." A lessor is "a person who transfers the right to possession and use of goods under a lease." 47) C Uniform Commercial Code (UCC) Section 2A-103(j) defines a lease as "a transfer of the right to possession and use of goods for a term in return for consideration." A lessee is "a person who acquires the right to possession and use of goods under a lease." 48) B In 1980, the United Nations Convention on Contracts for the International Sale of Goods (CISG) was offered as a treaty that countries could sign indicating their willingness to allow this treaty to govern international business-to-business sales contracts. 49) C Under Uniform Commercial Code (UCC) Section 2-205, offers made by merchants are considered firm offers if the offer is made in writing and gives assurances that it will be irrevocable for up to three (3) months despite a lack of consideration for the irrevocability. 50) C Under the Uniform Commercial Code (UCC), an acceptance may be made by any reasonable means of communication. 51) A Under the Uniform Commercial Code (UCC), an acceptance may be made by any reasonable means of communication, and it is effective when dispatched. 52) A
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The mirror-image rule that applies under common law does not apply under the Uniform Commercial Code (UCC). Under common law, the mirror-image rule states that an offeree's acceptance must be on the exact terms of the offer. If the acceptance includes additional terms, the acceptance becomes a counteroffer instead of an acceptance. Under the UCC, additional terms are permitted in contracts for the sale or lease of goods. Under UCC Section 2-207(1), additional terms do not negate acceptance unless acceptance is made expressly conditional on assent to the additional terms. 53) D Under the Uniform Commercial Code (UCC), contracts for the sale of goods must be in writing if they are priced at $500 or more. 54) C Under the Uniform Commercial Code (UCC), lease contracts that require payments of $1,000 or more must be in writing to be enforceable. 55) D A contract or contract provision is unconscionable if it is so unfair that a court would be unreasonable if it enforced the contract. 56) D If a court finds that a contract or lease was unconscionable, in whole or in part, when it was made, the court can either refuse to enforce the contract or lease, or it can enforce the parts that are fair. 57) D In 1980, the United Nations Convention on Contracts for the International Sale of Goods was offered as a treaty that countries could sign indicating their willingness to allow the treaty to govern international business-to-business sales contracts. 58) D
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Void title is not true title. Someone who purchases stolen goods, knowingly or unknowingly, has void title. 59) B The buyer gets only voidable title if any of the following apply: a) The buyer deceived the seller regarding his or her true identity, b) The buyer wrote a bad check for the goods, c) The buyer committed criminal fraud in securing the goods, d) The buyer and seller agreed that title would not pass until some later time, and e) The buyer is a minor. 60) A If an owner entrusts the possession of goods to a merchant who deals in goods of that kind, the merchant can transfer all rights in the goods to a buyer in the ordinary course of business. If the purchaser is a good-faith purchaser (in other words, did not know that the item belonged to someone else and paid a fair market value, not some unreasonable discounted value), then that purchaser gets good title. The original owner's only recourse is to bring suit against the merchant. The rationale behind this concept is the facilitation of commercial activity regarding good-faith purchasers in the marketplace. 61) B The buyer gets only voidable title if any of the following apply: a) The buyer deceived the seller regarding his or her true identity, b) The buyer wrote a bad check for the goods, c) The buyer committed criminal fraud in securing the goods, d) The buyer and seller agreed that title would not pass until some later time, and e) The buyer is a minor. 62) D With a simple delivery contract, the buyer and seller typically execute an agreement, and the buyer leaves with the goods. 63) B
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If a buyer and seller execute a contract and the seller subsequently places the goods with a common carrier for delivery to the buyer, the parties have executed a common-carrier delivery contract. 64) D In a common-carrier delivery contract, the common carrier is an independent contractor and not an agent (or employee) of the seller. What makes the common carrier an independent contractor, rather than an agent, is that the carrier controls the primary aspects of performance, such as how the goods are actually delivered. 65) D A sale-on-approval contract is a type of conditional sales contract. A sale-on-approval contract allows the buyer to take possession of the goods before deciding whether to complete the contract by making the purchase. Title and risk of loss remain with the seller until the buyer notifies the seller about the approval of the contract. 66) D In a common-carrier delivery contract, the common carrier is an independent contractor and not an agent (or employee) of the seller. What makes the common carrier an independent contractor, rather than an agent, is that the carrier controls the primary aspects of performance, such as how the goods are actually delivered. 67) C According to the Uniform Commercial Code (UCC), with a simple delivery contract involving goods sold by a merchant that are to be delivered to the buyer, the risk of loss remains with the seller until the goods are actually delivered to the buyer. 68) D
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According to the Uniform Commercial Code, with a simple delivery contract, an insurable interest is created in the buyer when the goods are identified to the contract (in other words, at the same time that title passes). 69) A According to the Uniform Commercial Code (UCC), with a simple delivery contract involving a merchant seller, the risk of loss remains with the seller until the goods are actually delivered to the buyer. 70) B According to the Uniform Commercial Code (UCC), with a simple delivery contract involving a non-merchant seller, the buyer assumes the risk of loss after tender of delivery. Tender of delivery is the moment the goods were available for the buyer to take. 71) E A goods-in-bailment contract involves goods that are in some kind of storage (for example, in a warehouse or on board a ship), so the seller cannot transfer physical possession of them. 72) E The Uniform Commercial Code names two kinds of common-carrier delivery contracts: a) origin, or shipment contracts and b) destination contracts. 73) A With an origin (also known as a shipment) contract, the seller is required to make proper shipping arrangements and deliver the goods into the common carrier's hands, and the buyer bears the risk of loss while the goods are in transit. 74) C With an origin contract, title passes to the buyer at the time and place of shipment. 75) B Version 1
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In an origin (also known as shipment) contract, title passes to the buyer at the time and place of shipment. Thus, the buyer bears the risk of loss while the goods are in transit. 76) A Destination contracts require the seller to deliver the goods to the destination stipulated in the sales contract. This destinationmay be the buyer's place of business or some other location. The seller bears the risk of loss until that time. 77) D The shipping term "FOB" means "free on board." 78) A The "FOB" shipping term means that the selling price includes transportation costs, and the seller carries the risk of loss to either the place of shipment ("FOB shipment") or the place of destination ("FOB destination"). 79) D The shipping term "FAS" means "free alongside." 80) C The shipping term "FAS" means that the seller, at seller's expense, delivers the goods alongside the ship before the risk passes to the buyer. 81) A The shipping term "CIF" means cost, insurance and freight. 82) E The shipping term "CIF" means that the seller puts the goods in possession of a carrier before the risk passes to the buyer. 83) B If the seller has a negotiable document of title in a goods-in-bailment contract, then both title and risk of loss transfer from the seller to the buyer as soon as the negotiable instrument is endorsed over to the buyer. 84) E Version 1
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The shipping term "CIF" means that the seller puts the goods in possession of a carrier before the risk passes to the buyer. 85) A In a goods-in-bailment contract, a negotiable document of title is indicated by the words "deliver to the order of seller." 86) B In a goods-in-bailment contract, a nonnegotiable document of title lacks the words "to the order of." 87) C In a goods-in-bailment contract, an insurable interest is created when either party has title, risk of loss, or some other economic interest attached to the goods (for example, a creditor who secures a loan by taking the goods as collateral). 88) E Conditional sales contracts are either sale-on-approval contracts or saleor-return contracts. 89) A A contract is a sale-on-approval contract if the seller allows the buyer to take possession of the goods before deciding whether to complete the contract by making the purchase. 90) B A sale-or-return contract occurs when the seller and buyer agree that the buyer may return the goods at a later time. Such contracts usually occur when the buyer is buying inventory to resell. 91) D
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The failure to deliver goods is the most common way a sales contract is breached. If the seller does not provide the goods that were described in the contract, the buyer may either a) accept the nonconforming goods as is or b) reject the goods subject to the seller's curing the deficiency in the goods. The buyer may reject the goods if no cure is possible or the seller fails to cure the deficiency within a reasonable time. 92) B Under Uniform Commercial Code Section 2-205, offers made by merchants are considered firm offers if the offer a) is made in writing and b) gives assurances that it will be irrevocable for up to three months despite a lack of consideration for the irrevocability. 93) E The Uniform Commercial Code (UCC) creates a new category of offers: the firm offer. Under UCC Section 2-205, offers made by merchants are considered firm offers if the offer a) is made in writing and b) gives assurances that it will be irrevocable for up to three months despite a lack of consideration for the irrevocability. This contrasts sharply with the common law, under which an offer is revocable at any time prior to acceptance unless a period of irrevocability (also known as an option) is supported by some kind of consideration. 94) C Sometimes, it is not easy to tell whether something is a good because a tangible item is tied to or mixed with something intangible, such as a service. A contract that combines a good with a service is a mixed sale. Article 2 of the Uniform Commercial Code applies to mixed sales if the goods are the predominant part of the transaction. 95) A Someone who purchases stolen goods, knowingly or unknowingly, has void title. Void title is not true title. 96) E Version 1
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The manager is incorrect because void title is not true title. 97) C The buyer gets only voidable title if, for example, the buyer wrote a bad check for the goods. In this case, Frank had only voidable title. 98) A Voidable title occurs in certain situations in which the contract between the original parties would be void but the goods have already been sold to a third party. In this case, because the title was not void, Frank could pass good title to Betty, a good faith purchaser for value. 99) A A good-faith purchaser is a purchaser who did not know that the item belonged to someone else and paid a fair market value, not some unreasonable discounted value. 100) E If a merchant accidentally sells to a good-faith purchaser an item entrusted to him for repair, the original owner has recourse against the merchant. 101) C If a merchant accidentally sells to a good-faith purchaser an item entrusted to him for repair, the purchaser gets good title, and the original owner's only recourse is to bring suit against the merchant. 102) A If a buyer and seller execute a contract and the seller subsequently places the goods with a common carrier for delivery to the buyer, the parties have executed a common-carrier delivery contract. 103) D
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If the contract is vague or ambiguous, an origin contract will be presumed. An origin (also known as a shipment) contract requires the seller to ship the goods to the buyer by a common carrier. The seller is required to make proper shipping arrangements and deliver the goods into the common carrier's possession. 104) B If the shipment contract is an origin contract (if the contract is vague or ambiguous, an origin contract will be presumed), title passes to the buyer when the goods are turned over by the seller to the common carrier. The risk of loss in an origin contract transfers from the seller to the buyer simultaneously with the title (in other words, when the goods are turned over by the seller to the common carrier). 105) D Under the Uniform Commercial Code, contracts for the sale of goods must be in writing if they are priced at $500 or more; however, if two merchants have an oral agreement, a written memorandum from either party to the other satisfies the statute of frauds, even if the receiving party does not acknowledge it. If the memo is not objected to within ten days of receipt, the oral agreement, memorialized by the memo, is binding. 106) D Under the Uniform Commercial Code, contracts for the sale of goods must be in writing if they are priced at $500 or more; however, if two merchants have an oral agreement, a written memorandum from either party to the other is deemed to satisfy the statute of frauds, even if the receiving party does not acknowledge it. If the memo is not objected to within ten days of receipt, the oral agreement, memorialized by the memo, is binding. 107) B
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The CISG has eliminated the statute of frauds writing requirement for contracts and only requires credible and reasonable proof that a contract exists regardless of whether the proof is documented or oral. 108) B It is important to note that under the Uniform Commercial Code (UCC), the rules for transactions involving merchants differ from those for transactions involving regular buyers and sellers. 109) D If an owner sells a buyer the right to come and remove items from the ground, the contract would be governed not by the Uniform Commercial Code (UCC) but by common law for the sale of an interest in realty, in this case, an interest known as a profit. 110) A The drafters of the Uniform Commercial Code (UCC) assumed that merchants have a greater ability to look out for themselves than do ordinary buyers and sellers. 111) B Uniform Commercial Code (UCC) Section 2A-103(j) defines a lease as "a transfer of the right to possession and use of goods for a term in return for consideration." A lessor is "a person who transfers the right to possession and use of goods under a lease." 112) A The United Nations Convention on Contracts for the International Sale of Goods (CISG) is important because if a problem arises with an international sale and a party to the transaction initiates litigation, the Uniform Commercial Code (UCC) does not provide guidance in the litigation; instead, the CISG preempts the UCC. 113) C
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If an owner entrusts the possession of goods to a merchant who deals in goods of that kind, the merchant can transfer all rights in the goods to a buyer in the ordinary course of business. 114) D Destination contracts require the seller to deliver the goods to the destination stipulated in the sales contract. 115) Under the Uniform Commercial Code (UCC), offers made by merchants are considered firm offers if the offer a) is made in writing and b) gives assurances that it will be irrevocable for up to three months despite a lack of consideration for the irrevocability. If a firm offer is silent as to time, the UCC assumes a three-month irrevocability period. The UCC contrasts with common law, under which an offer is revocable at any time prior to acceptance unless a period of irrevocability is supported by some kind of consideration. 116) There are three (3) kinds of title: good title, void title, and voidable title. Good title is title that is acquired from someone who already owns the goods free and clear. Void title is not true title. Someone who purchases stolen goods, knowingly or unknowingly, has void title. Voidable title occurs in certain situations such as where the contract between the original parties would be void, but the goods have already been sold to a third party.Voidable title also may arise from voidable transactions, such as contracting with a minor. 117) A buyer gets only voidable title if: a) the buyer has deceived the seller regarding his or her true identity; b) the buyer wrote a bad check for the goods; c) the buyer committed criminal fraud in securing the goods; d) the buyer and seller agreed that title would not pass until some later time; or e) the buyer is a minor.
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118) Belinda would win the dispute with the furniture store because the store was a merchant. If the seller is a merchant, the risk of loss remains with the seller until the goods are actually delivered to the buyer. In the case of the yard sale, Belinda would have borne the risk of loss. If the seller is not a merchant, the risk of loss rests with the buyer upon tender of delivery. Tender of delivery is the moment the goods were available for the buyer to take. When Belinda purchased the couch at the yard sale, she could have taken it with her. 119) If the seller has a negotiable document of title, both title and risk of loss transfer from the seller to the buyer as soon as that negotiable instrument is endorsed over to the buyer. If the document of title is nonnegotiable, title passes with the instrument of title, but the risk of loss does not pass to the buyer until the bailee (the custodian of the goods) is notified of the transfer or a reasonable time has elapsed since the transaction. If there is not a negotiable or nonnegotiable document of title, title passes at the time the sales contract is executed, but the risk of loss does not pass to the buyer until the bailee is notified of the transaction and acknowledges such notification. 120) Under the UCC, a merchant is a person who regularly sells goods as his or her business or trade or employs people to sell those goods. Additionally, anyone who works for that person selling those goods is a merchant. Plus, anyone who holds himself or herself out as a "merchant" or a "dealer" will be treated as a merchant under the UCC. The drafters of the UCC assumed that merchants have a greater ability to look out for themselves than do ordinary buyers and sellers. Generally speaking, the UCC assumes that merchants, with their business experience and acumen, need less protection than those who are non-merchants.
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CHAPTER 16 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) Under the Uniform Commercial Code (UCC), buyers and lessees are obligated to accept and pay for conforming goods in accordance with the contract. ⊚ true ⊚ false
2) Courts rely on UCC rules to clarify obligations when the contract the parties agreed to is unclear. ⊚ true ⊚ false
3) The Uniform Commercial Code requires good faith in the performance and enforcement of a contract, but only if the parties expressly include the good faith obligation in their agreement. ⊚ true ⊚ false
4) Conforming goods are goods that have substantially complied with contract specifications based on a reasonable person standard. ⊚ true ⊚ false
5) The perfect tender rule requires that the seller deliver goods in conformity with the terms of the contract. ⊚ true ⊚ false
6)
The perfect tender rule is set forth in federal statutory law. ⊚ true ⊚ false
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7) As an exception to the perfect tender rule, parties may agree with a level of performance that is less than perfect. ⊚ true ⊚ false
8) Common law usually substitutes the perfect tender rule with the doctrine of substantial performance. ⊚ true ⊚ false
9) The Uniform Commercial Code defines course of dealing as previous commercial transactions between the same parties. ⊚ true ⊚ false
10) Under Uniform Commercial Code Sections 2-508 and 2A-513, sellers and lessors have the right to fix problems with nonconforming goods. This is known as the right to an accord and satisfaction. ⊚ true ⊚ false
11) According to the Uniform Commercial Code, if goods are identified at the time the parties enter into a contract and the goods are destroyed through no fault of the parties before risk passes to the buyer or lessee, the parties are excused from performance. ⊚ true ⊚ false
12) According to the Uniform Commercial Code, a buyer who has accepted goods may later revoke the acceptance even if the buyer cannot demonstrate that the defects substantially impair the value of the goods. ⊚ true ⊚ false
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13) According to the Uniform Commercial Code, a buyer or lessee may reject an installment of a particular item only if the defects substantially impair the value of the goods and cannot be cured. ⊚ true ⊚ false
14) Under the Uniform Commercial Code, a delay in delivery is a breach of contract even in circumstances in which performance has been made impracticable because a contingency has occurred that was not contemplated when the parties reached an agreement. ⊚ true ⊚ false
15) Unless the parties have agreed otherwise, the buyer or lessee typically inspects the goods after paying for them. ⊚ true ⊚ false
16) At common law, the obligations and responsibilities of the contractual parties are determined by the express terms of the contract. ⊚ true ⊚ false
17)
An implied warranty is part of a contract only if the parties consent to its inclusion. ⊚ true ⊚ false
18) There are three (3) basic categories of warranties: conditional warranties, unconditional warranties, and implied warranties. ⊚ true ⊚ false
19)
Express warranties cannot be created by statements made in advertisements or brochures. ⊚ true ⊚ false
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20)
The Uniform Commercial Code assumes that the seller has valid title to the goods. ⊚ true ⊚ false
21) The Uniform Commercial Code assumes that the seller has the right to transfer title free and clear of any liens, judgments, or infringement of intellectual property rights of which the buyer does not have knowledge. ⊚ true ⊚ false
22) A mountain bike purchased at a bicycle shop is covered by the implied warranty of merchantability; a bike purchased from a neighbor, however, is not covered by the implied warranty of merchantability unless the neighbor is a bicycle merchant. ⊚ true ⊚ false
23) An implied warranty is any description of the good’s physical nature or its use, either in general or specific circumstances, that becomes part of the contract. ⊚ true ⊚ false
24) According to common law, if the seller or lessor makes an express warranty, it is a material term of the sale or lease contract. ⊚ true ⊚ false
25) In terms of third-party beneficiaries of warranties, all states hold that a seller’s warranties extend to anyone injured by the good. ⊚ true ⊚ false
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26) In order for an implied warranty of fitness for a particular purpose to be created, the seller must be a merchant. ⊚ true ⊚ false
27) A seller may disclaim the implied warranty of fitness for a particular purpose either orally or in writing. ⊚ true ⊚ false
28) According to the Magnuson-Moss Act, if a written warranty is silent regarding whether it is a full or limited warranty, it is presumed to be a limited warranty. ⊚ true ⊚ false
29) The Uniform Commercial Code allows a seller or lessor to cancel the contract if the buyer or lessee is in breach. ⊚ true ⊚ false
30) The Uniform Commercial Code does not allow a seller to resell or dispose of the goods when the buyer is in breach and the goods have not yet been delivered; instead, the seller must seek an order of specific performance against the breaching buyer. ⊚ true ⊚ false
31) According to the Uniform Commercial Code, “in transit” means that the seller has delivered the goods to a carrier, and the carrier has turned the goods over to the buyer. ⊚ true ⊚ false
32) According to the Uniform Commercial Code, if the seller initially breached the contract, the buyer need not demonstrate good faith to properly “cover” (i.e., purchase substitute goods).
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⊚ ⊚
33)
true false
Liquidated damages are identified before a breach of contract occurs. ⊚ true ⊚ false
34) The Uniform Commercial Code does not allow buyers and sellers to seek the remedy of specific performance when the goods are unique or a remedy at law is inadequate. ⊚ true ⊚ false
35)
Specific performance usually allows the seller to deliver substitute goods to the buyer. ⊚ true ⊚ false
36) According to the Uniform Commercial Code, a buyer may always revoke acceptance of nonconforming goods. ⊚ true ⊚ false
37) According to the UCC, if a buyer accepts nonconforming goods, the buyer may not seek damages. ⊚ true ⊚ false
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 38) Which of the following determines the obligations of sellers and buyers?
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A) Terms the parties outline in agreements B) Custom C) Rules outlined by the Uniform Commercial Code D) Terms the parties outline in agreements, custom, and rules outlined by the Uniform Commercial Code E) Terms the parties outline in agreements and rules outlined by the Uniform Commercial Code, but not custom, since past actions do not govern present agreements.
39) The Uniform Commercial Code requires that buyers are obligated to accept and pay for _____ goods in accordance with the contract. A) substantially conforming B) select conforming C) even nonconforming D) preponderantly conforming E) conforming
40) If obligations under a buyer and seller’s contract arise, which law will courts rely on to clarify the obligations? A) Federal common law B) Federal statutes C) The Commerce Clause of the United States Constitution D) The Restatement of Contracts E) The Uniform Commercial Code
41) Timothy, a non-merchant, enters into a contract with Phil’s Pipe Company, a merchant. Under the UCC, what is Timothy’s good faith obligation?
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A) Nothing, since Timothy is a non-merchant B) Equity C) Honesty in fact D) Reasonable commercial standards of fair dealing E) Equity, honesty in fact, and reasonable commercial standards of fair dealing
42) Hemi’s Car Parts, Inc. and Jule’s Jewels Automotive, LLC are in a contract dispute. Under UCC Section 1-304, what is the good faith standard imposed on merchants? A) Honesty in fact and reasonable commercial standards of fair dealing B) Nothing, since merchants are held to a higher standard than non-merchants in terms of protecting themselves in contract negotiations and disputes C) Nothing, since the UCC only imposes a good faith obligation on merchants in transactions with non-merchants D) Reasonable customer service based on a subjective standard E) Reasonable customer service based on an objective standard
43)
The term "reasonable commercial standards of fair dealing" is often called _____. A) commercial equity B) commercial reasonableness C) transactional equity D) good faith E) capitalism with a conscience
44)
The Uniform Commercial Code requires lessors to _____ goods to lessees. A) tender materially conforming B) proffer substantially conforming C) tender conforming D) factor in equity E) proffer in equity
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45) Under the Uniform Commercial Code, _____ requires that the seller have and hold conforming goods at the disposal of the buyer and give the buyer reasonable notification to enable him or her to take delivery. A) tender of delivery B) substantial performance C) proffer of performance D) conforming delivery E) service of process
46) What was the result in Alaska Pacific Trading Co. v. Eagon Forest Products Inc., the case in the textbook in which the defendant rejected a shipment of logs? A) By not shipping the logs in a timely manner according to the contract, the seller failed to satisfy the perfect tender rule, thereby releasing the defendant buyer from its duty to accept the logs. B) The seller satisfied the perfect tender rule despite the fact that the logs were late, and the defendant buyer breached the contract by refusing to accept the logs. C) The seller was entitled to rely on the common law doctrine of material breach, but the seller did not substantially perform, thereby releasing the buyer from its contractual duties. D) The seller was entitled to rely on the common law doctrine of material breach, the seller substantially performed, and the buyer was in breach of contract. E) The seller was entitled to rely on the perfect tender rule, and the buyer materially breached the contract by refusing to accept the logs.
47) David sells computer components to local computer dealers. Under the common law rule of _____, David must deliver goods that are in conformity with the terms of the contract, right down to the last detail. A) substantial compatibility B) perfect tender C) substantial performance D) promissory estoppel E) equitable estoppel
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48) What do Uniform Commercial Code Sections 2-601 and 2A-509 indicate regarding the perfect tender rule? A) If goods or tender of delivery fails in any respect to conform to the contract, the buyer has the right to accept the goods, reject the entire shipment, or accept part and reject part. B) If goods or tender of delivery fails in any material respect to conform to the contract, the buyer has the right to accept the goods, reject the entire shipment, or accept part and reject part. C) If goods or tender of delivery fails in any respect to conform to the contract, the buyer has the right to accept all of the goods or reject the entire shipment, but not the right to accept part and reject part. D) If goods or tender of delivery fails in any material respect to conform to the contract, the buyer has the right to accept all of the goods or reject the entire shipment, but not the right to accept part and reject part. E) If goods or tender of delivery fails in any respect to conform to the contract, the buyer only has the right to accept the entire shipment and sue for damages.
49) Which of the following refers to a practice that members of a particular industry expect to be part of their dealings? A) Trade appropriations B) Commercial equity C) Usage of trade D) Substantial performance E) Course of performance
50) Which UCC provision defines course of dealing as previous commercial transactions between the same parties? A) Section 1-201 B) Section 2-201 C) Section 2-201(a) D) Section 1-205(1) E) Section 2-206(1)
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51) According to the Uniform Commercial Code, which of the following refers to the history of dealings between the parties in the particular contract at issue? A) Trade dress B) Course of dealing C) Commercial equity D) Usage of trade E) Course of performance
52) Catessa’s Home Furnishings, Inc. (Catessa’s), a merchant seller, sent nonconforming goods to Victor’s Stately Homes, Inc. (Victor’s), a merchant buyer. Catessa’s right to provide conforming goods to Victor’s is known as _____. A) a fixture B) an accord and satisfaction C) litigation preemption via remedial measures D) cure E) mitigation
53) If goods are identified at the time the parties entered into a contract and these goods are destroyed through no fault of the parties before risk passes to the buyer, which of the following is true? A) The parties are excused from performance. B) The seller has seven (7) days within which to cure. C) The seller has ten (10) days within which to cure. D) The seller has thirty (30) days within which to cure. E) The seller is responsible to the buyer for compensatory damages if the seller did not obtain insurance coverage to underwrite the loss.
54) Which of the following is true if goods are identified at the time the parties entered into a contract and these goods are partially destroyed through no fault of the parties before risk passes to the buyer?
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A) The contract is void. B) The buyer may inspect the goods and decide whether to a) treat the contract as void or b) ask the seller for a reduction of the contract price and then accept the damaged goods. C) The buyer has three (3) business days to determine whether to void the contract or enforce the seller’s obligations under it. D) Unless the parties can agree on a reduced price, the matter must be submitted to arbitration for a determination regarding an appropriate price. E) Unless the parties can agree on a reduced price, the contract is voidable at the option of the seller if the seller chooses not to remedy the partial destruction of the goods.
55) Xavier Industries, Inc. (Xavier), a merchant buyer, accepts certain goods from Keltar Machine Parts, LLC (Keltar), a merchant seller. The goods are defective. What option does Xavier have if it can show that the defect substantially impairs the value of the goods? A) Nothing, since Xavier initially accepted the goods B) Revoke acceptance of the goods C) Keep the goods that conform and return the others to Keltar D) Recover both compensatory and punitive damages from Keltar E) Keep the goods and refuse to pay for them
56) According to the Uniform Commercial Code, a delay in delivery or non-delivery, in whole or in part, is not a breach in circumstances in which performance has been made _____ because a contingency has occurred that was not contemplated when the parties reached the agreement. A) cumbersome B) unprofitable C) less profitable D) impracticable E) more difficult
57) Under UCC Sections 2-301 and 2A-516(1), buyers and lessees are obligated to accept and pay for _____.
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A) conforming goods in accordance with the contract B) goods if they substantially meet specifications set forth in the contract C) goods if they conform to most standards set forth in the contract D) goods if they are inspected before acceptance E) goods if they are nonconforming but were not inspected before acceptance
58) Under Uniform Commercial Code Sections 2-513(1) and 2A-515(1), the seller or lessormust provide the buyer or lessee _____. A) the right to revoke acceptance of conforming goods B) the right to reject conforming goods C) an opportunity for inspection before enforcing payment D) ninety (90) days within which to revoke acceptance of the goods E) thirty (30) days within which to inspect the goods
59)
Which of the following is true regarding a buyer's acceptance of goods?
A) Goods may be accepted in total even if they are nonconforming. B) The seller may presume acceptance if the buyer fails to reject goods within a reasonable period of time. C) The buyer may make a partial acceptance of nonconforming goods when the seller has failed to cure defects. D) Goods may be accepted in total even if they are nonconforming, the seller may presume acceptance if the buyer fails to reject goods within a reasonable period of time, and the buyer may make a partial acceptance of nonconforming goods when the seller has failed to cure defects. E) Goods may be accepted in total even if they nonconforming, and the seller may presume acceptance if the buyer fails to reject goods within a reasonable period of time; however, the buyer may not make a partial acceptance of nonconforming goods when the seller has failed to cure defects.
60) Uniform Commercial Code Section _____ requires good faith in the performance and enforcement of every contract.
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A) 1-204 B) 2-205 C) 3-301 D) 3-302 E) 1-304
61) Belinda orders a certain type of hybrid rose for her wedding. A disease sweeps through that type of rose and the florist can only obtain the roses at great cost, if at all. Which of the following is the appropriate term for the florist's best defense? A) Frustration of purpose B) Commercial impracticability C) Substantial performance D) Unforeseen circumstances E) Substantial impairment
62) Which of the following generally arise in conjunction with a sale or a lease that impose certain duties on the seller or lessor, and if the seller or lessor fails to live up to these duties, he or she may be sued for breach? A) Trade usage B) Warranties C) Course of dealing D) Liquidated damages E) Exemplary damages
63) Which of the following means that the warranty or guarantee is automatically a part of the contract? A) Equitable B) Implied C) Express D) Quasi E) Constructive
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64)
Under common law, the warranty _____ is the only implied warranty in a contract. A) against encumbrances B) of merchantability C) of title D) of assignability E) of fitness for a particular purpose
65) The three (3) warranties of quality that arise under the Uniform Commercial Code are _____. A) the implied warranty of title, express warranty, and the implied warranty of habitability B) the implied warranty of title, express warranty, and the implied warranty of merchantability C) the implied warranty of title, express warranty, and the implied warranty of fitness for a particular purpose D) the implied warranties of merchantability, fitness for a particular purpose, and trade usage E) express warranty, the implied warranty of merchantability, and the implied warranty of fitness for a particular purpose
66)
What does an express warranty provide that becomes part of the contract?
A) The fitness for use of a good for either general or particular purposes B) That the seller will transfer title upon the buyer’s proper inspection of and payment for the goods C) A general description of the good’s use D) A specific description of the good’s physical nature E) Any description of a good's physical nature or its use, in either general or specific circumstances
67)
Which of the following is true regarding common law and express warranties?
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A) Although common law does not use the term express warranty, the concept and its application do exist in common law. B) Common law specifically incorporates and defines the term express warranty. C) To use common law language, an express warranty is a non-material term of the sale or lease contract. D) To use common law language, an express warranty is an equitable requirement of any sale or lease contract. E) To use common law language, an express warranty must be incorporated in a written sale or lease contract in order to be enforceable.
68) Harvey orally promises Anna that the refrigerator she is prepared to purchase from him is Energy Star-rated for energy efficiency. This promise is _____. A) puffery B) sales talk C) just an opinion D) an express warranty E) an implied warranty
69) Which of the following was the result on appeal in Webster v. Blue Ship Tea Room, Inc., the case in the textbook in which the plaintiff sued after getting a bone caught in her throat while eating New England seafood chowder? A) The plaintiff could recover based upon the implied warranty of merchantability. B) The plaintiff could recover based upon the implied warranty of fitness for a particular purpose. C) The plaintiff could recover based on an express warranty. D) The plaintiff could not recover because she waited too long to sue and since she was not the immediate purchaser of the fish. E) The plaintiff could not recover because she should have anticipated that fish bones might remain in New England seafood chowder.
70) Which of the following is true regarding the implied warranty of fitness for a particular purpose?
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A) It applies in every case in which an express warranty arises. B) It applies in every case in which an implied warranty of merchantability arises. C) It applies in every case in which either an express warranty or an implied warranty of merchantability arises. D) It applies in every sales transaction involving a merchant. E) It applies when the seller knows why the buyer is purchasing the goods, and that the buyer is relying on him or her to make the selection.
71)
In order for goods to be merchantable, the goods must _____.
A) pass without substantial objection in the trade or market for similar goods B) pass without objection in the trade or market for similar goods; and be fit for the particular purpose(s) for which the buyer intends to use such goods C) pass without substantial objection in the trade or market for similar goods; be fit for the particular purpose(s) for which the buyer intends to use such goods; and be adequately contained, packaged, and labeled as the agreement may require D) pass without substantial objection in the trade or market for similar goods; be fit for the particular purpose(s) for which the buyer intends to use such goods; be adequately contained, packaged, and labeled as the agreement may require; and conform to the promises or affirmations made on the container or label (if any) E) pass without objection in the trade or market for similar goods; be fit for the ordinary purposes for which such goods are used; be adequately contained, packaged, and labeled as the agreement may require; and conform to the promises or affirmations made on the container or label, if any
72) To invoke the implied warranty of _____, the buyer or lessee must have purchased or leased the good from a merchant. A) merchantability B) fair dealing C) against encumbrances D) good faith E) of title
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73) For the implied warranty of fitness for a particular purpose to arise, there must be a sale or lease involved and _____. A) both parties must be merchants B) both parties must be merchants and the warranty must be in writing C) the lessor must agree to at least a one-year lease contract D) the seller must provide an express warranty E) the seller or lessor does not have to be a merchant
74) If it is generally accepted in the trade that a certain product is always preassembled and shrink-wrapped, the failure of the seller to deliver the goods in that condition would be a breach of the _____. A) implied warranty of merchantability B) implied warranty of fitness for a particular purpose C) implied warranty of trade usage D) implied warranty of merchantability, the implied warranty of fitness for a particular purpose, and the implied warranty of trade usage E) implied warranty of merchantability and the implied warranty of trade usage, but not the implied warranty of fitness for a particular purpose
75) Which of the following is true regarding state choice(s) in recognizing the rights of thirdparty beneficiaries of warranties?
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A) According to the Uniform Commercial Code, states must recognize that a seller's warranties extend to the buyer's household members and guests only. B) According to the Uniform Commercial Code, states must recognize that a seller's warranties extend to any reasonable and foreseeable user. C) According to the Uniform Commercial Code, states must recognize that a seller's warranties extend to anyone injured by the good. D) States are given the following three (3) choices regarding third-party beneficiaries of warranties: a) a seller's warranties extend to the buyer's household members and guests; b) a seller's warranties extend to any reasonable and foreseeable user; or c) a seller's warranties extend to anyone injured by the good. E) States are given the following two (2) choices regarding third-party beneficiaries of warranties: a) a seller's warranties extend to the buyer's household members and guests; or b) a seller's warranties extend to any reasonable and foreseeable user.
76) Which option have most states adopted regarding the rights of third-party beneficiaries of warranties?
A) A seller's warranties extend to the buyer's household members and guests. B) A seller's warranties extend to any reasonable and foreseeable user. C) A seller's warranties extend to anyone injured by the good. D) A seller's warranties do not extend beyond the buyer and the buyer's immediate family. E) A seller's warranties do not extend beyond the buyer and the buyer's immediate family living in the same household.
77) In terms of sale of goods transactions in the United States, which of the following is true regarding disclaimer of the warranty of merchantability?
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A) The disclaimer must be in writing in order to be enforceable. B) Some states require the term merchantability to be used in the disclaimer. C) The disclaimer may be made either orally or in writing. D) The disclaimer must be in writing, and some states require the term merchantability to be used in the disclaimer. E) The disclaimer may be made either orally or in writing, and some states require the term merchantability to be used in the disclaimer.
78)
What right does a buyer have to waive warranties?
A) A buyer may waive either express or implied warranties. B) A buyer may waive both express and implied warranties; however, if she does so, she loses all legal and equitable rights to sue the seller for breach of contract. C) A buyer may waive only implied warranties. D) A buyer may waive only express warranties. E) A buyer may waive both express and implied warranties.
79)
How can a buyer waive warranty rights?
A) By failing to examine goods for which an express warranty was created by a sample or model B) By failing to comply with the seller's request to inspect the goods C) By failing to examine goods for which an express warranty was created by a sample or model, or by failing to comply with the seller's request to inspect the goods D) By failing to require that warranties be given in writing, or by failing to comply with the seller's request to inspect the goods E) Pursuant to a Uniform Commercial Code mandate advancing the public policy interests of consumer protection, a buyer cannot waive rights associated with implied and express warranties.
80) What is the effect of a buyer’s failure to comply with the statute of limitations recognized by the Uniform Commercial Code for a breach of contract action?
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A) The buyer waives his or her warranty rights under the contract. B) There is no effect if the buyer can establish that he or she was not aware of the statute of limitations. C) It operates as a waiver of the buyer’s warranty rights, but only if the seller can establish by a preponderance of the evidence that the buyer had actual knowledge of the statute of limitations. D) It results in the buyer only having the right to sue the seller for injunctive relief, not damages. E) It results in the buyer only having the right to sue the seller for damages, not injunctive relief.
81) What is the time limit allowed for a buyer to bring a lawsuit for the seller’s breach of contract? A) Thirty (30) days from when the breach occurred or the buyer became aware of it B) Sixty (60) days from when the breach occurred or the buyer became aware of it C) Four (4) years from when the breach occurred or the buyer became aware of it D) Six (6) years from when the breach occurred or the buyer became aware of it E) There is no statute of limitations for a buyer to bring such a lawsuit, since the Uniform Commercial Code seeks to preserve and advance the buyer’s interests if the seller breaches the contract.
82) Under the Uniform Commercial Code, a seller must bring a lawsuit on a breached contract within _____ of when the breach occurred or when the seller became aware of it. A) thirty (30) days B) one (1) year C) two (2) years D) four (4) years E) six (6) years
83) Which of the following is true regarding whether the buyer and seller may negotiate contractually for a shorter time period to sue for breach of contract than the statute of limitations period ordinarily recognized by the Uniform Commercial Code?
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A) The buyer and seller may not negotiate for a shorter time period to sue for breach of contract; instead, they must recognize the statute of limitations period established by the Uniform Commercial Code. B) Without limitation, the buyer and seller may negotiate for a shorter time period to sue for breach of contract than the statute of limitations period ordinarily recognized by the Uniform Commercial Code. C) The buyer and seller may negotiate for a shorter time period to sue for breach of contract than the statute of limitations period ordinarily recognized by the Uniform Commercial Code, so long as the contractually-agreed-upon time period is not for less than one year. D) The buyer and seller may negotiate for a shorter time period to sue for breach of contract than the statute of limitations period ordinarily recognized by the Uniform Commercial Code, so long as the contractually-agreed-upon time period is not for less than six months. E) The buyer and seller may negotiate for a shorter time period to sue for breach of contract than the statute of limitations period ordinarily recognized by the Uniform Commercial Code,so long as the time period is not for less than two years.
84) The _____ provides that if a seller issues a written warranty, the seller must indicate whether the warranty is full or limited. A) Uniform Commercial Code B) Magnuson-Moss Act C) Ferguson-Thompson Act D) Restatement of Contracts E) Townsend-Thompson Act
85) Which of the following is required by the Magnuson-Moss Act when the seller issues a written warranty for a consumer good?
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A) The seller must indicate whether the warranty is a full warranty or a limited warranty. B) The seller must provide a full warranty, and the seller must indicate full warranty protection in its written contract with the buyer. C) The seller must provide an express warranty and a warranty of merchantability, and the seller must indicate the express warranty and the warranty of merchantability in its written contract with the buyer. D) The seller must provide a warranty of trade usage, and the seller must indicate the warranty of trade usage in its written contract with the buyer. E) The seller must provide a warranty of trade usage and a warranty of merchantability, and the seller must indicate the warranty of trade usage and the warranty of merchantability in its written contract with the buyer.
86) Which of the following is true regarding whether a seller must provide a warranty under the Magnuson-Moss Act? A) The seller must provide an express, full warranty. B) The seller must provide an implied, full warranty. C) The seller must provide at least an express, limited warranty. D) The seller must provide at least an implied, limited warranty. E) The act does not require the seller to provide any warranties.
87) Which of the following is true under the Magnuson-Moss Act if a written warranty does not address whether it is a full warranty? A) It is presumed to be a limited warranty. B) It is presumed to be an express, limited warranty. C) It is presumed to be a limited warranty of merchantability. D) It is presumed to be a limited usage of trade warranty. E) It is presumed to be a full warranty.
88)
Under the Magnuson-Moss Act, what is the effect of a full warranty?
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A) It means that if the good fails or is defective, the good or its defective part will be replaced; and that if replacement cannot be timely effected, the buyer has the right to a refund or a full replacement. B) It means only that the good or its defective part will be repaired. The buyer has no other remedy. C) It means that if the good fails or is defective, the good or its defective part will be replaced; that if replacement cannot be timely effected, the buyer has the right to a refund or a full replacement; and that the buyer will receive additional funds to account for expenses incurred in seeking warranty recognition and enforcement. D) It means that the seller must immediately refund the buyer the full purchase price. E) It means that the buyer has the option of either an immediate refund of the full purchase price or repair of the good.
89)
Which of the following is true regarding custom? A) It is the exclusive factor to be used in determining the obligations of sellers and
buyers. B) It cannot be used to determine the obligations of sellers and buyers, since such obligations are addressed exclusively by the terms the parties outline in their agreements. C) It cannot be used to determine the obligations of sellers and buyers, since such obligations are addressed exclusively by the Uniform Commercial Code. D) It cannot be used to determine the obligations of sellers and buyers, since such obligations are addressed exclusively by the terms the parties outline in their agreements and the Uniform Commercial Code. E) It is a factor that can be used to determine the obligations of sellers and buyers.
90) Which of the following damages may a seller receive if the seller resells goods to another buyer when the original buyer is in breach of contract?
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A) The difference between the resale price and the contract price, plus incidental damages and minus expenses saved B) The difference between the resale price and the contract price C) The difference between the resale price and the contract price, minus expenses and without any allowance for incidental damages D) The difference between the resale price and the contract price, plus incidental damages, with no deduction for expenses saved E) Nominal damages
91) A(n) _____ damages clause states in advance what damages each party will be responsible for if a breach of contract occurs. A) punitive B) liquidated C) exemplary D) nominal E) compensatory
92)
Which of the following is generally true regarding a liquidated-damage clause? A) A liquidated-damage clause is per se illegal. B) A liquidated-damage clause is void in the interests of public policy. C) A liquidated-damage clause is voidable in the interests of public policy. D) A liquidated-damage clause is enforceable if it is not punitive in nature. E) A liquidated-damage clause will be enforced regardless of whether it is punitive in
nature.
93) What does the Uniform Commercial Code provide for liquidated damages if the parties do not otherwise agree to them?
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A) That the nonbreaching seller may claim against a breaching buyer 20 percent of the purchase price or $500, whichever is less, as liquidated damages B) That the nonbreaching seller may claim against a breaching buyer 20 percent of the purchase price or $500, whichever is more, as liquidated damages C) That the nonbreaching seller may claim against a breaching buyer 30 percent of the purchase price or $1,000, whichever is less, as liquidated damages D) That the nonbreaching seller may claim against a breaching buyer 30 percent of the purchase price or $1,000, whichever is more, as liquidated damages E) The Uniform Commercial Code does not establish an amount for liquidated damages if the parties do not otherwise agree to them.
94) Which of the following means that the seller has delivered the goods to a carrier, but the carrier has not yet turned them over to the buyer? A) In process B) In transit C) Intermediation D) Carrier-ready E) Transport-ready
95) Assuming a buyer that is insolvent has breached a contract by not paying for goods that are in transit, which of the following may occur? A) The carrier may stop delivery regardless of the quantity shipped. B) The carrier may stop delivery, but only if the quantity shipped is a large shipment. C) The carrier may stop delivery, but only if the buyer expressly agreed in a signed writing to the remedy of stopping shipment. D) The carrier may stop delivery, but only if ordered to do so by a bankruptcy judge. E) The carrier may not stop delivery under any circumstances.
96) Which of the following is the right of a buyer to substitute goods for those due under a sales agreement?
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A) Consignment B) Subrogation C) Cover D) Revocation E) Reallocation
97)
Which of the following must a buyer do in obtaining cover?
A) Demonstrate good faith in obtaining the substitute goods, and pay a reasonable amount for the substitute goods B) Pay a reasonable amount for the substitute goods, and act without unreasonable delay in purchasing the substitute goods C) Act without unreasonable delay in purchasing the substitute goods, and purchase goods that are reasonable substitutes D) Pay a reasonable amount for the substitute goods, act without unreasonable delay in purchasing the substitute goods, and purchase goods that are reasonable substitutes E) Demonstrate good faith in obtaining the substitute goods, pay a reasonable amount for the substitute goods, act without unreasonable delay in purchasing the substitute goods, and purchase goods that are reasonable substitutes.
98) Which of the following are damages for lost profits a buyer may recover in the event of a breach of contract? A) Nominal B) Consequential C) Reformation D) Nominal, consequential, and reformation E) Nominal and consequential, but not reformation
99) Under the Uniform Commercial Code, buyers may recover goods identified in the contract if the seller becomes insolvent within _____ days after receiving the first payment due under the agreement.
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A) five (5) B) ten (10) C) sixteen (16) D) thirty (30) E) sixty (60)
100) Which of the following usually requires that the seller deliver the particular goods identified in the contract? A) Substantial performance B) Strict performance C) Specific performance D) Commercial equity E) Commercial practicability
101) When does the Uniform Commercial Code allow buyers to seek the remedy of specific performance? A) Only when the goods are unique B) Only when a remedy at law is inadequate C) Only when the goods are worth more than $500 D) When the goods are unique, when a remedy at law is inadequate, or when the goods are worth more than $500 E) When the goods are unique or when a remedy at law is inadequate, but not because the goods are worth more than $500
102) Which of the following is true regarding buyers or lessees who want to accept nonconforming goods and then seek monetary damages?
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A) Buyers and lessees are allowed to do so in order to receive the benefit of the bargain, but they must give the seller/lessor reasonable notice of the defect. B) Buyers and lessees are allowed to do so in order to receive the benefit of the bargain, and there is no requirement that they give the seller/lessor prior notice of the defect. C) Buyers may do so in order to receive the benefit of the bargain so long as reasonable notice of the defect is given, but lessors may not. D) Lessors may do so in order to receive the benefit of the bargain so long as reasonable notice of the defect is given, but buyers may not. E) Buyers and lessors may do so, but only if the seller/lessee agrees to the retention of the nonconforming goods and does not request their return.
103) Under which of the following circumstances will a court refuse to uphold modifications or limitations to remedies agreed upon by the parties? A) When they seem unfair according to a subjective standard of reasonableness B) When they seem unfair according to an objective standard of reasonableness C) When the party seeking to enforce the modification or limitation is a corporation D) When one or both parties were not represented by an attorney E) When the remedies fail in their essential purpose
104) Which of the following was the result in Hill v. Gateway 2000, the case in the textbook in which the purchaser of a computer failed to read a contract requiring arbitration that came packaged with the computer and asked the court to determine that a seller of computers could not limit buyers' remedies or require arbitration by bundling hardware and legal documents? A) The contract was binding on the purchaser because the purchaser accepted the risk of not reading the contract. B) The contract was binding on the purchaser because the contract's requirement of arbitration was reasonable. C) The contract was binding on the purchaser because the contract's requirement of arbitration was actually in the purchaser's favor. D) The contract was unconscionable and nonbinding. E) The contract was nonbinding because it should have been provided to the purchaser for review before the computer was shipped.
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105) Stacy, located in Florida, is entering into a contract with Natasha, located in Russia, for the purchase of snow globes to sell to people who do not typically get to see snow. Stacy is familiar with the Uniform Commercial Code, but she is uneasy about what law would apply if she has a dispute with Natasha regarding the contract. She would like for Florida law to apply. Which of the following is the best advice to Stacy? A) Stacy should attempt to have a contract clause inserted providing that the law of Florida would govern any dispute. B) Since a requirement that Florida law would govern the dispute would likely be deemed unconscionable, Stacy should attempt to have a contract clause inserted providing that international law would govern any dispute. C) There is nothing that Stacy can do because Russian law, the law of the seller, would govern any dispute. D) Stacy does not need to do anything because as a matter of law, Florida law, the law of the buyer in this case, would govern any dispute. E) It depends on the value of the contract. If it is for $1,000 or more, Stacy should attempt to secure a provision in the contract that Florida law governs; otherwise, she has no option but to allow a court to later determine the conflict-of-law issue.
106) Ann chipped a tooth on a peach pit while eating a can of mixed fruit. She wants to sue the manufacturer of the fruit mix. Which of the following would be the manufacturer's best defense? A) That food products are not covered by the implied warranty of merchantability B) That the seller made no express warranty C) That the seller made no implied warranty of fitness for a particular purpose D) That any reasonable consumer should have expected the presence of the peach pit in the mixed fruit, since it is a natural part of a peach E) That the injury was minor
107) Priscilla, who worked for a dry cleaner, came up with a great new idea for a type of press that sped up the process immensely. She quit her job, hired labor and purchased materials, and manufactured a number of the presses. She sold the presses to her friend Phil for resale. Phil began advertising and distributing the press, but was notified by ABC Company that the sales violated its patent. After investigation, Phil determined that ABC had the better argument and demanded that Priscilla refund the purchase price. Priscilla declined on the basis that she had no idea that a patent on a similar press was in existence. Who will likely win the dispute and why?
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A) Phil will likely win because Priscilla violated the implied warranty of merchantability. B) Phil will likely win because Priscilla violated the implied warranty of fitness for a particular purpose. C) Phil will likely win because Priscilla violated the warranty of title. D) Priscilla will likely win because she had no knowledge of any previous patent. E) Priscilla will likely win because she had no knowledge of any previous patent and because the duty was on Phil to investigate whether any patents existed prior to his purchase of the presses.
108) Mary sells handmade earrings for a living. Susan is a new lawyer and a friend of Mary who gives legal advice to Mary in return for earrings. Susan tells Mary that under the MagnusonMoss Act she is required to provide all buyers with a written warranty setting forth their rights as consumers. Mary asks if there is not a way around that because she is tired of complaining customers who do not take care of their earrings and that she would love to find a way to provide no warranties whatsoever. Which of the following is true regarding Susan's advice and warranties on the earrings? A) Susan is wrong, and Mary is not required to offer anywarranties. B) Susan is partially correct, and Mary must provide a limited written warranty to comply with the Magnuson-Moss Act. C) Susan is correct, and Mary must provide a full written warranty to comply with the Magnuson-Moss Act. D) Susan is partially correct, and Mary must provide a limited written warranty under the Magnuson-Moss Act only if her average gross sales are over $5,000. E) Susan is partially correct, and Mary must provide a full written warranty under the Magnuson-Moss Act only if her average gross sales are over $10,000.
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109) New Furniture. Penny purchased $3,000 worth of furniture from Bob's furniture shop. Through an arrangement with Bob, Penny financed the purchase through a financing company called Let Us Help You. Twenty-nine days after the goods were delivered to her, Penny had a disagreement with Let Us Help You regarding the amount of interest she would be required to pay. She notified Bob on that day that she was rejecting the goods. Bob claimed that she did not properly reject the furniture and also that she acted in bad faith. Penny says that she properly rejected and denies that she acted in bad faith. She also says that, in any event, she cannot be sued for with both wrongful rejection and also bad faith because of double jeopardy. Which of the following is true regarding Bob's claim that Penny failed to properly reject the goods? A) Bob is incorrect because under the Uniform Commercial Code, Penny had 30 days within which to reject the goods. B) Bob is incorrect, but only if Penny can establish that Let Us Help You miscalculated the amount of interest she owed. C) Bob is incorrect, but only if Penny can show that the goods were overpriced. D) Bob is correct, but only if Bob can show that the goods were priced at reasonable market value. E) Bob is correct.
110) New Furniture. Penny purchased $3,000 worth of furniture from Bob's furniture shop. Through an arrangement with Bob, Penny financed the purchase through a financing company called Let Us Help You. Twenty-nine days after the goods were delivered to her, Penny had a disagreement with Let Us Help You regarding the amount of interest she would be required to pay. She notified Bob on that day that she was rejecting the goods. Bob claimed that she did not properly reject the furniture and also that she acted in bad faith. Penny says that she properly rejected and denies that she acted in bad faith. She also says that, in any event, she cannot be sued for both wrongful rejection and also bad faith because of double jeopardy. Which of the following is true regarding Bob’s claim that Penny failed to act in good faith? A) Bob is incorrect because under the Uniform Commercial Code, Penny had 30 days within which to reject the goods. B) Bob is incorrect, but only if Penny can establish that Let Us Help You miscalculated the amount of interest she owed. C) Bob is incorrect, but only if Penny can show that the goods were overpriced. D) Bob is correct, because Penny made no claim that the goods were nonconforming. E) Bob is correct, but only if Bob can show that the goods were priced at reasonable market value.
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111) New Furniture. Penny purchased $3,000 worth of furniture from Bob's furniture shop. Through an arrangement with Bob, Penny financed the purchase through a financing company called Let Us Help You. Twenty-nine days after the goods were delivered to her, Penny had a disagreement with Let Us Help You regarding the amount of interest she would be required to pay. She notified Bob on that day that she was rejecting the goods. Bob claimed that she did not properly reject the furniture and also that she acted in bad faith. Penny says that she properly rejected and denies that she acted in bad faith. She also says that, in any event, she cannot be sued for both wrongful rejection and also bad faith because of double jeopardy. Which of the following is true regarding the standard of good faith that would be applied to Penny? A) Good faith means honesty in fact. B) Good faith means both honesty in fact and reasonable commercial standards of fair dealing. C) Good faith means perfect tender. D) Good faith means commercial practicability. E) Good faith means both perfect tender and commercial practicability.
112) New Furniture. Penny purchased $3,000 worth of furniture from Bob's furniture shop. Through an arrangement with Bob, Penny financed the purchase through a financing company called Let Us Help You. Twenty-nine days after the goods were delivered to her, Penny had a disagreement with Let Us Help You regarding the amount of interest she would be required to pay. She notified Bob on that day that she was rejecting the goods. Bob claimed that she did not properly reject the furniture and also that she acted in bad faith. Penny says that she properly rejected and denies that she acted in bad faith. She also says that, in any event, she cannot be sued for both wrongful rejection and also bad faith because of double jeopardy. Which of the following is the correct analysis of Penny's claim that she cannot be sued for both a wrongful rejection and bad faith because of the constitutional prohibition against double jeopardy?
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A) Penny is correct. B) Penny is correct that she cannot be sued for both a wrongful rejection and bad faith; however, the Uniform Commercial Code requires that conclusion, not the constitutional prohibition against double jeopardy. C) Penny is correct that she cannot be sued for both a wrongful rejection and bad faith; however, the common law requires that conclusion, not the constitutional prohibition against double jeopardy. D) Penny is correct that she cannot be sued for both a wrongful rejection and bad faith; however, federal statutory law requires that conclusion, not the constitutional prohibition against double jeopardy. E) Penny is incorrect. She can be sued for both a wrongful rejection and bad faith.
113) Boat Tow. Donnie went to a new car dealership and told the salesperson (who was not the manager) that he needed a new car that would both get good gas mileage and pull his big boat. The salesperson encouraged him to buy a smaller car that the salesperson promised would pull the boat. Donnie bought the car and used it to pull the boat. Unfortunately, the heavy pull on the car did significant damage to the car's engine. Donnie complained to the salesperson, who denied any liability. Donnie, who had taken half-a-semester of business law, informed the salesperson that along with the sale of the car he also received an express warranty and an implied warranty of merchantability, and that he could recover under either of those theories. Is Donnie correct that the car was sold with an implied warranty of merchantability? A) No, because there was no writing guaranteeing that warranty signed by the salesperson B) No, because the salesperson only made an exaggeration C) No, because only a manager can make such a warranty D) No, both because nothing was in writing and also because only a manager can make such a warranty E) Yes
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114) Boat Tow. Donnie went to a new car dealership and told the salesperson (who was not the manager) that he needed a new car that would both get good gas mileage and pull his big boat. The salesperson encouraged him to buy a smaller car that the salesperson promised would pull the boat. Donnie bought the car and used it to pull the boat. Unfortunately, the heavy pull on the car did significant damage to the car's engine. Donnie complained to the salesperson, who denied any liability. Donnie, who had taken half-a-semester of business law, informed the salesperson that along with the sale of the car he also received an express warranty and an implied warranty of merchantability, and that he could recover under either of those theories. Will Donnie likely be able to recover damages based upon a breach of the implied warranty of merchantability? A) No, because the implied warranty of merchantability guaranteed that the car would be fit for the ordinary purposes for which it is used. Pulling a boat is not an ordinary purpose for a small car. B) Yes, because Donnie informed the salesperson about the need for the car to pull the boat C) Yes, because the salesperson told Donnie that the car would pull the boat D) No, because of the lack of an implied warranty of fitness for a particular purpose E) No, because there was no warranty of merchantability
115) Boat Tow. Donnie went to a new car dealership and told the salesperson (who was not the manager) that he needed a new car that would both get good gas mileage and pull his big boat. The salesperson encouraged him to buy a smaller car that the salesperson promised would pull the boat. Donnie bought the car and used it to pull the boat. Unfortunately, the heavy pull on the car did significant damage to the car's engine. Donnie complained to the salesperson, who denied any liability. Donnie, who had taken half-a-semester of business law, informed the salesperson that along with the sale of the car he also received an express warranty and an implied warranty of merchantability, and that he could recover under either of those theories. Will Donnie be able to recover damages based upon breach of the implied warranty of fitness for a particular purpose? A) Yes B) No, because there was no express warranty C) No, because Donnie's only right of recovery was for breach of the implied warranty of merchantability D) No, because Donnie's only right of recovery was for breach of an express warranty E) No, because Donnie as a reasonable person should have known that the car would not pull the boat, regardless of what the salesperson said
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116) Hot Toaster. Rebecca bought a toaster from Super Store and brought it home. A friend of hers, Greg, was at her house making toast. The toaster malfunctioned and shocked Greg, resulting in a small burn to his hand requiring medical attention. At a garage sale, Rebecca also purchased a blender from a friend, Samantha. When she paid for the blender, Rebecca said that it would be great for making smoothies. Samantha said nothing and just smiled while taking Rebecca's money. Unfortunately, the blender was not powerful enough to make smoothies. Based on the facts presented, what type of warranty did Super Store give Rebecca? A) An express warranty B) An implied warranty of merchantability C) An implied warranty of fitness for a particular purpose D) An express warranty, an implied warranty of merchantability, and an implied warranty of fitness for a particular purpose E) An implied warranty of merchantability and an implied warranty of fitness for a particular purpose, but not an express warranty
117) Hot Toaster. Rebecca bought a toaster from Super Store and brought it home. A friend of hers, Greg, was at her house making toast. The toaster malfunctioned and shocked Greg, resulting in a small burn to his hand requiring medical attention. At a garage sale, Rebecca also purchased a blender from a friend, Samantha. When she paid for the blender, Rebecca said that it would be great for making smoothies. Samantha said nothing and just smiled while taking Rebecca's money. Unfortunately, the blender was not powerful enough to make smoothies. Which of the following rights, if any, does Greg have against Super Store in most states? A) None, because he did not buy the toaster B) None, because he is not married to Rebecca C) None, because he is not married or otherwise related to Rebecca D) He may sue, but only if Rebecca joins him as a co-plaintiff in the lawsuit. E) He may sue Super Store for his injuries.
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118) Hot Toaster. Rebecca bought a toaster from Super Store and brought it home. A friend of hers, Greg, was at her house making toast. The toaster malfunctioned and shocked Greg, resulting in a small burn to his hand requiring medical attention. At a garage sale, Rebecca also purchased a blender from a friend, Samantha. When she paid for the blender, Rebecca said that it would be great for making smoothies. Samantha said nothing and just smiled while taking Rebecca's money. Unfortunately, the blender was not powerful enough to make smoothies. Which of the following is true regarding whether Samantha made an express warranty to Rebecca that the blender would make smoothies? A) Samantha made an express warranty by not speaking up regarding the performance limitations of the blender. B) Samantha made an express warranty by not speaking up regarding the performance limitations of the blender, but only if Rebecca can prove that Samantha knew about the problems. C) Samantha made an express warranty by not speaking up regarding the performance limitations of the blender, but only if Rebecca cannot prove that Samantha knew about the problems. D) Samantha made an express warranty by not speaking up regarding the performance limitations of the blender, but only if Samantha can prove that she did not know about the problems. E) Samantha did not make an express warranty.
119) Hot Toaster. Rebecca bought a toaster from Super Store and brought it home. A friend of hers, Greg, was at her house making toast. The toaster malfunctioned and shocked Greg, resulting in a small burn to his hand requiring medical attention. At a garage sale, Rebecca also purchased a blender from a friend, Samantha. When she paid for the blender, Rebecca said that it would be great for making smoothies. Samantha said nothing and just smiled while taking Rebecca's money. Unfortunately, the blender was not powerful enough to make smoothies. Which of the following is true regarding whether Samantha made an implied warranty of fitness for a particular purpose to Rebecca that the blender would make smoothies?
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A) Samantha did not make an implied warranty of fitness for a particular purpose because there is no proof that Rebecca was relying on Samantha to make the selection. B) Samantha did not make an implied warranty of fitness for a particular purpose because Samantha is not a merchant. C) Samantha did not make an implied warranty of fitness for a particular purpose because there is no proof that Rebecca was relying on Samantha to make the selection and since Samantha is not a merchant. D) Samantha made an implied warranty of fitness for a particular purpose to Rebecca that the blender would make smoothies because she had a duty to tell Samantha otherwise. E) Regardless of whether she said anything or not, Samantha made an implied warranty of fitness for a particular purpose to Rebecca that the blender would make smoothies because she sold the blender.
120) Refused Furniture. Selina arranges to sell furniture from her furniture store to Roland for $3,000. Roland was supposed to give Selina a $500 deposit on February 1 and pay the remainder in monthly installments. Selina was to deliver the furniture by February 7. Roland did not pay Selina as promised on February 1. He asked her to wait until March 1, but she refused. She also refused to deliver the furniture. Selina was able to sell the furniture for only $2,500 because of a downturn in the economy. Roland told Selina that she had no right to withhold or sell his furniture and that he was suing. Selina incurred $100 in additional amounts in advertising costs to advertise the furniture that Roland initially purchased. Selina saved $40 in delivery costs because the subsequent purchaser picked up her own furniture. Which of the following is true regarding Roland's claim that Selina had no right to withhold his furniture? A) Roland is correct. Selina was required to deliver the furniture, but she retained the right to sue him for any deficiency. B) Roland is correct, but only because of the special Uniform Commercial Code exception for consumer goods. C) Roland is incorrect. Selina had a right to withhold the furniture. D) Roland is incorrect, but only if Selina can prove that she had no reason to believe that he was a credit risk prior to signing the contract of sale. E) Roland is correct because of federal consumer protection laws.
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121) Refused Furniture. Selina arranges to sell furniture from her furniture store to Roland for $3,000. Roland was supposed to give Selina a $500 deposit on February 1 and pay the remainder in monthly installments. Selina was to deliver the furniture by February 7. Roland did not pay Selina as promised on February 1. He asked her to wait until March 1, but she refused. She also refused to deliver the furniture. Selina was able to sell the furniture for only $2,500 because of a downturn in the economy. Roland told Selina that she had no right to withhold or sell his furniture and that he was suing. Selina incurred $100 in additional amounts in advertising costs to advertise the furniture that Roland initially purchased. Selina saved $40 in delivery costs because the subsequent purchaser picked up her own furniture. Which of the following is true regarding Roland's claim that Selina had no right to sell the furniture he initially purchased? A) Roland is correct. Selina had no right to sell the furniture, but she retained the right to sue him for any deficiency. B) Roland is correct, but only because of the special Uniform Commercial Code exception for consumer goods. C) Roland is incorrect. Selina had a right to resell the furniture. D) Roland is incorrect, but only if Selina can prove that she had no reason to believe that he was a credit risk prior to signing the contract of sale. E) Roland is correct because of federal consumer protection laws.
122) Refused Furniture. Selina arranges to sell furniture from her furniture store to Roland for $3,000. Roland was supposed to give Selina a $500 deposit on February 1 and pay the remainder in monthly installments. Selina was to deliver the furniture by February 7. Roland did not pay Selina as promised on February 1. He asked her to wait until March 1, but she refused. She also refused to deliver the furniture. Selina was able to sell the furniture for only $2,500 because of a downturn in the economy. Roland told Selina that she had no right to withhold or sell his furniture and that he was suing. Selina incurred $100 in additional amounts in advertising costs to advertise the furniture that Roland initially purchased. Selina saved $40 in delivery costs because the subsequent purchaser picked up her own furniture. Which of the following is true regarding any right of Selina to recover the additional advertising fees she incurred from Roland?
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A) She is entitled to recover damages for the fees if she can establish that Roland agreed to pay for such damages in his contract with her. B) She is entitled to recover damages for the fees if she can establish that Roland orally agreed to pay for such damages. C) She is entitled to recover damages for the fees if she can establish that Roland has a history of breaching contracts of sale. D) She will be able to recover damages for the fees if they were reasonably incurred as a result of Roland's breach. E) She is not entitled to recover damages for the fees because she had no right to resell the furniture.
123) Refused Furniture. Selina arranges to sell furniture from her furniture store to Roland for $3,000. Roland was supposed to give Selina a $500 deposit on February 1 and pay the remainder in monthly installments. Selina was to deliver the furniture by February 7. Roland did not pay Selina as promised on February 1. He asked her to wait until March 1, but she refused. She also refused to deliver the furniture. Selina was able to sell the furniture for only $2,500 because of a downturn in the economy. Roland told Selina that she had no right to withhold or sell his furniture and that he was suing. Selina incurred $100 in additional amounts in advertising costs to advertise the furniture that Roland initially purchased. Selina saved $40 in delivery costs because the subsequent purchaser picked up her own furniture. Which of the following is true regarding any deduction in damages to which Roland is entitled? A) Roland is not entitled to any deduction because he was the breaching party. B) Roland is entitled to a deduction for the delivery expenses, but only if he can establish that Selina agreed in writing to deduct those in the event of a breach. C) Roland is entitled to a deduction for the delivery expenses, but only if he can establish that Selina agreed orally or in writing to deduct those in the event of a breach. D) Roland is entitled to a deduction for the delivery expenses because that was a savings to Selina. E) Roland is entitled to a deduction for the delivery expenses because Selina breached the contract by not delivering the furniture to him and then pursuing an action for damages.
124)
The UCC requires courts to consider _____ in a particular trade.
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A) norms B) the subjective beliefs of a seller C) global consumer trends D) the subjective opinions of a buyer E) past performance
125) Sellers and lessors can repair, adjust, or replace defective or nonconforming goods as long as they give _____ notice of the intent to cure and then cure within the contract time for performance. A) three (3) days’ B) seven (7) days’ C) written D) prompt E) industry-compliant
126) If the buyer relies on representations made by a salesperson, those representations become part of the contract in the form of a(n) _____. A) implied warranty of title B) good-faith warranty C) express warranty D) equitable warranty E) implied warranty against encumbrances
127)
Generally, if an implied warranty is to be disclaimed, the seller must do so _____.
A) in clear, unambiguous, and conspicuous language B) in writing, with the written disclaimer being received, acknowledged, and signed by the buyer C) through a written addendum incorporated by reference into the subject contract D) in compliance with the provisions of the Uniform Contracts Code E) in compliance with the provisions of the Restatement (Second) of Contracts
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128)
A buyer or lessee can recover consequential damages for lost profit if _____.
A) there is a clause identifying those damages in the subject contract B) there is an industry standard allowing for an award of such damages C) the damages are not too speculative D) a court makes a preliminary ruling on the propriety of punitive damages for the seller’s breach of contract E) the buyer or lessee proves the seller’s or lessor’s specific intent to breach the contract
129) When Herman and Heidi entered into their contract, neither was aware that a new federal rule would be implemented that would not allow Herman to satisfy his contractual obligations. This is an example of _____. A) substantial impairment B) temporary impossibility of performance C) commercial impracticability D) promissory estoppel E) eminent domain
130) At common law, a _____ mistake may still constitute a binding contract, while a _____ mistake will not. A) bilateral; unilateral B) unilateral; bilateral C) single; multilateral D) minimal; material E) material; minimal
131) According to the Magnuson-Moss Act, if a seller decides to issue a written warranty for a consumer good, the seller must indicate whether it is a(n) _____ or a(n) _____.
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A) conditional warranty; unconditional warranty B) warranty with reserve; warranty without reserve C) full warranty; limited warranty D) implied warranty; express warranty E) primary warranty; secondary warranty
132) Which of the following remedies requires the seller or lessor to deliver the particular goods identified in the contract? A) Perfect tender B) Specific performance C) Cover D) Promissory estoppel E) Substantial performance
ESSAY. Write your answer in the space provided or on a separate sheet of paper. 133) Sally, who has a candy shop, agreed to sell Ricky, a teacher, all the chocolate candy bears in her shop for treats for his class. Unfortunately, through no fault of hers, Sally's air conditioner went out and half of the bears partially melted. What are the rights and duties of the parties in relation to the contract?
134) In your reasoned opinion, should the perfect tender rule be rejected and replaced with the substantial performance doctrine? Why or why not?
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135) Define "course of dealing" and "course of performance" and how these concepts affect the perfect tender rule.
136) Explain what the Uniform Commercial Code requires in terms of good faith and the duty imposed on merchants and non-merchants with regard to fair dealing.
137)
List the exceptions to title warranties.
138) List and discuss what is required for goods to be merchantable under the Uniform Commercial Code.
139)
Describe when an implied warranty of fitness for a particular purpose arises.
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140) Coach Marge ordered for her soccer team t-shirts with the name of the school shown on the front. The seller requested that Marge come in to inspect the first t-shirt before the others were made. Marge refused because she was too busy, and told the seller to go ahead and print the shirts. On receipt of the shirts, Marge discovered that the school name was misspelled. Does Marge have any rights against the seller, and why or why not?
141) Discuss the damages a seller or lessor may recover when a buyer or lessee is in breach and the goods are sold or leased to another party.
142) List the eight (8) options discussed in the text that may be available to a buyer/lessee when the seller/lessor is in breach.
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Answer Key Test name: Chap 16_5_The Essentials_Kubasek 1) TRUE Under the Uniform Commercial Code (UCC), sellers and lessors are obligated to transfer and deliver conforming goods. Buyers and lessees are obligated to accept and pay for conforming goods in accordance with the contract. 2) TRUE Under the Uniform Commercial Code (UCC), sellers and lessors are obligated to transfer and deliver conforming goods, while buyers and lessees are obligated to accept and pay for conforming goods in accordance with the contract. Courts rely on UCC rules to clarify these obligations when the contract the parties agreed to is unclear. 3) FALSE The Uniform Commercial Code requires good faith in the performance and enforcement of every contract. 4) FALSE The Uniform Commercial Code requires sellers to tender conforming goods to buyers. Conforming goods are goods that conform to contract specifications. 5) TRUE A common law rule known as the perfect tender rule requires that the seller deliver goods in conformity with the terms of the contract, right down to the last detail. 6) FALSE The perfect tender rule is a common law rule. 7) TRUE
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Sometimes, language in the parties' agreement limits the rigidity of the perfect tender rule. As an example, parties may agree with a level of performance that is less than perfect. They could indicate, by agreement, the expectation regarding performance. 8) TRUE A common law rule known as the perfect tender rule requires the seller to deliver goods in conformity with the terms of the contract, right down to the last detail. Although the Uniform Commercial Code embraces the perfect tender rule, common law usually substitutes the perfect tender rule with the doctrine of substantial performance. Substantial performance occurs when all the material elements of a contract are satisfied, even if some non-material requirements may not be satisfied. The perfect tender rule would not recognize the distinction between material and immaterial contractual requirements. 9) TRUE Uniform Commercial Code Section 1-205(1) defines course of dealing as previous commercial transactions between the same parties. 10) FALSE Under Uniform Commercial Code Sections 2-508 and 2A-513, sellers and lessors have the right to fix problems with nonconforming goods. This is known as the right to cure. 11) TRUE Under Uniform Commercial Code Sections 2-613 and 2A-221, if goods are identified at the time the parties entered into a contract and the goods are destroyed through no fault of the parties before risk passes to the buyer or lessee, the parties are excused from performance. 12) FALSE Uniform Commercial Code Section 2-608 indicates that a buyer who has accepted goods may later revoke the acceptance only if the buyer can show that the defects substantially impair the value of the goods. Version 1
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13) TRUE Uniform Commercial Code Sections 2-612(2) and 2A-510(1) indicate that a buyer or lessee may reject an installment of a particular item only if the defects substantially impair the value of the goods and cannot be cured. 14) FALSE Uniform Commercial Code Sections 2-615(a) and 2A-405(a) state that a delay in delivery or nondelivery, in whole or in part, is not a breach in circumstances in which performance has been made impracticable because a contingency has occurred that was not contemplated when the parties reached an agreement. 15) FALSE Unless the parties have agreed otherwise, the buyer or lessee typically inspects the goods before paying for them. Under Uniform Commercial Code Sections 2-513(1) and 2A-515(1), the seller or lessor must provide the buyer or lessee an opportunity to inspect the goods before enforcing payment. 16) TRUE At common law, the obligations and responsibilities of the contractual parties are determined by the express terms of the contract. Uniform Commercial Code contracts are the same but with a major addition: implied warranties. 17) FALSE An implied warranty is automatically part of the contract. 18) FALSE There are three (3) basic categories of warranties: warranties of title, express warranties, and implied warranties. 19) FALSE
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An express warranty is any description of a good’s physical nature or its use, in either general or specific circumstances, that becomes part of the contract. Express warranties may be found in advertisements or brochures. 20) TRUE Although no warranties automatically arise under the common law, the Uniform Commercial Code assumes that the seller has good and valid title to goods. 21) TRUE Although no warranties automatically arise under the common law, the Uniform Commercial Code assumes that the seller has the right to transfer title free and clear of any liens, judgments, or infringements of intellectual property rights of which the buyer does not have knowledge. 22) TRUE To invoke the implied warranty of merchantability, the buyer or lessee must have purchased or leased the good from a merchant. Thus, a dirt bike purchased at a bicycle shop is covered by the implied warranty of merchantability, but a bike that is bought from a neighbor is not, unless the neighbor is a bicycle merchant. 23) FALSE An express warranty is any description of a good's physical nature or its use, in either general or specific circumstances, that becomes part of the contract. 24) TRUE An express warranty is any description of a good's physical nature or its use, in either general or specific circumstances, that becomes part of the contract. To use common law language, an express warranty is a material term of a sale or lease contract. 25) FALSE Most states have adopted the second option. Version 1
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In terms of third-party beneficiaries of warranties, the states are given the following three choices regarding third-party beneficiaries of warranties: 1. Seller's warranties extend to the buyer's household members and guests. 2. Seller's warranties extend to any reasonable and foreseeable user. 3. Seller's warranties extend to anyone injured by the good. 26) FALSE The implied warranty of fitness for a particular purpose comes about when a seller or lessor knows or has reason to know why the buyer or lessee is purchasing or leasing the goods in question, and that the buyer or lessee is relying on him or her to make the selection. Under this warranty, a seller or lessor does not have to be a merchant. 27) FALSE In order to disclaim the implied warranty of fitness for a particular purpose, the seller must disclaim the warranty in writing. 28) FALSE The 1975 federal law known as the Magnuson-Moss Act requires that if a seller decides to issue a written warranty for a consumer good (the seller is not required to do so), the seller must indicate whether that warranty is a full warranty or a limited warranty. If the written warranty is silent, it is presumed to be a full warranty. 29) TRUE Uniform Commercial Code Sections 2-703(f) and 2A-523(1)(a) allow a seller or lessor to cancel the contract if the buyer or lessee is in breach. 30) FALSE Sellers are allowed to resell or dispose of the goods when the buyer is in breach and the goods have not yet been delivered. The seller can then hold the buyer liable for any loss.
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31) FALSE “In transit” means that the seller has delivered the goods to a carrier or bailee, but the carrier or bailee has not yet turned them over to the buyer. 32) FALSE Under Uniform Commercial Code Sections 2-712 and 2A-518, buyers and lessees are allowed to cover, or substitute, goods for those due under the sales or lease agreement. The buyer must: a) demonstrate good faith in obtaining the substitute goods; b) pay a reasonable amount for the substitute goods; c) act without unreasonable delay in purchasing the substitute goods; and d) purchase goods that are reasonable substitutes. 33) TRUE Liquidated damages are damages identified before a breach of contract occurs. The parties are free to negotiate, as part of the contract, a liquidated-damage clause in which the parties agree in advance what the damages will be for each party if a breach occurs. 34) FALSE Uniform Commercial Code Sections 2-716(1) and 2A-521(1) allow buyers and sellers to seek the remedy of specific performance when either a) the goods are unique or b) a remedy at law is inadequate. 35) FALSE Specific performance usually requires the seller to deliver the particular goods identified in the contract to the buyer. 36) FALSE UCC Sections 2-608 and 2A-517 sometimes allow the buyer or lessee to revoke acceptance of nonconforming goods. 37) FALSE
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Under Uniform Commercial Code Sections 2-607, 2-715, and 2A-519, buyers or lessees are allowed to accept nonconforming goods and then seek monetary damages to give them the benefit of the bargain. The buyer or lessee must give the seller or lessor reasonable notice of the defect. 38) D The obligations of sellers/lessors and buyers/lessees are determined by: a) terms the parties outline in agreements; b) custom; and c) rules outlined by the Uniform Commercial Code. 39) E According to the Uniform Commercial Code, buyers and lessees are obligated to accept and pay for conforming goods in accordance with the contract. 40) E The courts rely on the Uniform Commercial Code to clarify the obligations of a seller and a buyer if their agreement is unclear. 41) C Uniform Commercial Code Section 1-304 requires good faith in the performance and enforcement of every contract, and good faith for nonmerchants means honesty in fact. 42) A Uniform Commercial Code Section 1-304 requires good faith in the performance and enforcement of every contract, and good faith for nonmerchants means honesty in fact. When the parties are merchants, the Code imposes an even higher standard, requiring not only honesty in fact but also reasonable commercial standards of fair dealing. 43) B
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Uniform Commercial Code Section 1-304 requires good faith in the performance and enforcement of every contract, and good faith for nonmerchants means honesty in fact. When the parties are merchants, the Code imposes an even higher standard, requiring not only honesty in fact but also reasonable commercial standards of fair dealing. This second requirement is often called commercial reasonableness. 44) C The Uniform Commercial Code requires lessors to tender conforming goods to lessees. 45) A Tender of delivery requires that the seller have and hold conforming goods at the disposal of the buyer and give the buyer reasonable notification to enable the buyer to take delivery. 46) A The Washington (state) Appellate Court applied the literal language of the Uniform Commercial Code, holding that the perfect tender rule applied and that Alaska Pacific Trading Company’s failure to deliver the logs was a breach of contract. 47) B A common law standard known as the perfect tender rule requires that the seller deliver goods in conformity with the terms of the contract, right down to the last detail. 48) A Uniform Commercial Code Sections 2-601 and 2A-509 indicate that if goods or tender of delivery fails in any respect to conform to the contract, the buyer or lesseehas the right to accept the goods, reject the entire shipment, or accept part and reject part. 49) C
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Uniform Commercial Code Section 1-205(2) defines usage of trade is any practice that members of an industry expect to be part of their dealings. 50) D Uniform Commercial Code Section 1-205(1) defines course of dealing as previous commercial transactions between the same parties. 51) E Under Uniform Commercial Code Section 2-208(1), course of performance refers to the history of dealings between the parties in the particular contract at issue. 52) D A seller’s right to provide conforming goods when nonconforming goods were initially delivered is known as cure. 53) A According to Uniform Commercial Code Sections 2-613 and 2A-221, if goods are identified at the time the parties entered into a contract and the goods are destroyed through no fault of the parties before risk passes to the buyer or lessee, the parties are excused from performance. 54) B According to the Uniform Commercial Code, if goods are only partially destroyed, the buyer can inspect the goods and decide whether to a) treat the contract as void or b) ask the seller for a reduction of the contract price and then accept the damaged goods. 55) B Uniform Commercial Code Section 2-608 indicates that a buyer who has accepted goods may later revoke the acceptance only if the buyer can show that the defects substantially impair the value of the goods. 56) D
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Uniform Commercial Code Sections 2-615(a) and 2A-405(a) state that a delay in delivery or non-delivery, in whole or in part, is not a breach in circumstances in which performance has been made impracticable because a contingency has occurred that was not contemplated when the parties reached an agreement. 57) A Uniform Commercial Code Sections 2-301 and 2A-516(1) require buyers and lessees to accept and pay for conforming goods in accordance with the contract. 58) C According to the Uniform Commercial Code, the seller or lessormust provide the buyer or lessee an opportunity for inspection before enforcing payment. 59) D According to the Uniform Commercial Code, a buyer may find goods acceptable even though they are nonconforming; Uniform Commercial Code Sections 2-602(1), 2-606(1), and 2A-515(1)(b) allow the seller or lessor to presume acceptance if the buyer or lessee fails to reject the goods within a reasonable period of time; and Uniform Commercial Code Sections 2-601(c) and 2A-509(1) allow the buyer or lessee to make a partial acceptance when the goods are nonconforming and the seller or lessor has failed to cure the defects. 60) E According to Uniform Commercial Code Section 1-203, good faith is required in the performance and enforcement of every contract. 61) B
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Uniform Commercial Code Sections 2-615(a) and 2A-405(a) state that a delay in delivery or non-delivery, in whole or in part, is not a breach in circumstances in which performance has been made impracticable because a contingency has occurred that was not contemplated when the parties reached an agreement. 62) B Warranties generally arise in conjunction with a sale or a lease. They impose certain duties on the seller or lessor, and if the seller or lessor fails to live up to these duties, he or she may be sued for breach of warranty. There are three basic categories of warranties: warranties of title, express warranties, and implied warranties. 63) B Implied warranties arise by operation of law under certain circumstances. "Implied" means that the warranty or guarantee is automatically a part of the contract; the parties do not negotiate for it. 64) D At common law, the only implied warranty in a contract is the implied warranty of assignability. 65) D According to the Uniform Commercial Code, there are three warranties of quality: the implied warranty of merchantability, the implied warranty of fitness for a particular purpose, and the implied warranty of trade usage. 66) E An express warranty is any description of a good's physical nature or its use, in either general or specific circumstances, that becomes part of the contract. 67) A
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Although the common law does not use the term express warranty, the concept and its application do exist in common law. It seems only fair and equitable that promises made by a seller to induce a buyer to execute a sales contract should be enforceable. An express warranty is any description of a good’s physical nature or its use, in either general or specific circumstances, that becomes part of the contract. To use common law language, an express warranty is a material term of the sale or lease contract. 68) D Express warranties may be found in advertisements or brochures, it may be a salesperson's oral promise concerning the good, and a sample or model may also provide an express warranty. 69) E According to the Supreme Judicial Court of Massachusetts, completely eliminating the possibility of bones in New England seafood chowder would require a cook to finely mince the seafood, thereby depriving the chowder of one of its hallmark characteristics, the richness of its thick, plump, delicious pieces of fish and shellfish. The court surmised that anyone eating proper New England seafood chowder would know or should know that fish bones are a distinct possibility. 70) E One important implied warranty recognized by the Uniform Commercial Code is the implied warranty of fitness for a particular purpose. The warranty of fitness for a particular purpose comes about when a seller knows or has reason to know a) why the buyer is purchasing the goods in question and b) that the buyer is relying on him or her to make the selection. 71) E
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Under the Uniform Commercial Code, goods must be merchantable, meaning that they must be able to pass without objection in the trade or market for similar goods; in the case of fungible goods, be of fair average quality within the description; be fit for the ordinary purposes for which such goods are used; be produced, within the variations permitted by the agreement, with even kind, quality, and quantity in each unit and among all units involved; be adequately contained, packaged, and labeled as the agreement may require; and conform to the promises or affirmations made on the container or label (if any). 72) A To invoke the implied warranty of merchantability, the buyer or lessee must have purchased or leased the good from a merchant. For example, a dirt bike purchased at a bicycle shop is covered by the implied warranty of merchantability, but a bike purchased from a residential neighbor at a garage sale is not. 73) E One important implied warranty recognized by the Uniform Commercial Code is the implied warranty of fitness for a particular purpose. The warranty of fitness for a particular purpose comes about when a seller knows or has reason to know a) why the buyer is purchasing the goods in question and b) that the buyer is relying on him or her to make the selection. Under this warranty, a seller or lessor does not have to be a merchant. 74) C
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The Uniform Commercial Code, always diligent in its goal to facilitate the flow and ease of commercial activity, recognizes that a wellaccepted course of dealing or trade usage may create implied warranties dependent on the circumstances. For example, if it is generally accepted in the trade that a certain product is always preassembled and shrinkwrapped, the failure of the seller to deliver the goods in that condition would be a breach of the implied warranty of trade usage. 75) D States are given the following three (3) choices regarding third-party beneficiaries of warranties: a) a seller's warranties extend to the buyer's household members and guests; b) a seller's warranties extend to any reasonable and foreseeable user; or c) a seller's warranties extend to anyone injured by the good. 76) A States are given the following three choices regarding third-party beneficiaries of warranties: a) a seller's warranties extend to the buyer's household members and guests; b) a seller's warranties extend to any reasonable and foreseeable user; or c) a seller's warranties extend to anyone injured by the good. Most states have adopted the first option, holding that a seller’s warranty extends to the buyer's household members and guests. 77) E The seller may disclaim the warranty of merchantability either orally or in writing; however, some states require the term merchantability to be used in the disclaimer. 78) E The buyer may waive both implied and express warranties. 79) C
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A buyer may waive express and implied warranties by either a) failing to examine goods for which an express warranty was created by a sample or model or b) failing to comply with the seller's request to inspect the goods. 80) A A buyer may waive his or her warranty rights under the contract by failing to comply with the statute of limitations. 81) C According to the Uniform Commercial Code, a buyer must bring a lawsuit on a breached contract within four years of when the breach occurred or when the buyer became aware of it. 82) D According to the Uniform Commercial Code, a seller must bring a lawsuit on a breached contract within four years of when the breach occurred or when the seller became aware of it. 83) C According to the Uniform Commercial Code, the buyer and seller are free to negotiate contractually a shorter time periodto sue for breach of contract than the four-year statute of limitations ordinarily recognized by the Uniform Commercial Code,so long asthe contractually-agreed-upon time period is not for less than one year.They are not free to negotiate a longer time period than four years. 84) B The 1975 federal law known as the Magnuson-Moss Act requires that if a seller decides to issue a written warranty for a consumer good (the seller is not required to do so), the seller must indicate whether that warranty is a full warranty or a limited warranty. 85) A
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The 1975 federal law known as the Magnuson-Moss Act requires that with regard to a seller’s warranty, the seller must indicate whether the warranty is a full warranty or a limited warranty. 86) E The 1975 federal law known as the Magnuson-Moss Act requires that if a seller decides to issue a written warranty for a consumer good (the seller is not required to do so), the seller must indicate whether that warranty is a full warranty or a limited warranty. 87) E Under the Magnuson-Moss Act, if a written warranty is silent, it is presumed to be a full warranty. 88) A A full warranty under the Magnuson-Moss Act means that if the good fails or is defective, the good or its defective part will be replaced. If replacement cannot be timely effected, the buyer has the right to a refund or a full replacement. 89) E The obligations of sellers and buyers are determined by: a) terms the parties outline in agreements; b) custom; and c) rules outlined by the Uniform Commercial Code. 90) A Sellers are allowed to resell or dispose of the goods when the buyer is in breach and the goods have not yet been delivered. The seller then holds the buyer liable for any loss. Uniform Commercial Code Section 2-706 allows the seller to recover the difference between the resale price and contract price, plus incidental damages and minus expenses saved. 91) B
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Liquidated damages are damages identified before the breach occurs. Buyers and sellers are free to negotiate, as part of the contract, a liquidated-damage clause in which the parties agree in advance what the damages will be for each party if a breach occurs. 92) D Liquidated-damage are damages identified before the breach occurs. Buyers and sellers are free to negotiate, as part of the contract, a liquidated-damage clause in which the parties agree in advance what the damages will be for each party if a breach occurs. Generally speaking, a court will enforce a liquidated-damage clause as long as it is not so far out of reasonable range as to be punitive in nature. Liquidated-damage clauses that are deemed punitive in nature are not enforceable. 93) A The Uniform Commercial Code (UCC) provides for liquidated damages if the parties have not expressly negotiated a liquidated-damage clause. Uniform Commercial Code Section 2-718 pertains to liquidated damages and allows the nonbreaching seller to claim against a breaching buyer 20 percent of the purchase price or $500, whichever is less, as liquidated damages. 94) B In transit means that the seller has delivered the goods to a carrier, but the carrier has not yet turned them over to the buyer. 95) A If the buyer is insolvent, the carrier can stop delivery regardless of the quantity shipped. 96) C Under Uniform Commercial Code Sections 2-712 and 2A-518, buyers and lesseesare allowed to cover, or substitute, goods for those due under the sales agreement. 97) E Version 1
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When seeking to cover, the buyer must: a) demonstrate good faith in obtaining the substitute goods; b) pay a reasonable amount for the substitute goods; c) act without unreasonable delay in purchasing the substitute goods; and d) purchase goods that are reasonable substitutes. 98) B Consequential damages include damages for lost profits, as long as such damages are not too speculative. 99) B Uniform Commercial Code Sections 2-502 and 2A-522 allow buyers or lessees to recover the goods identified in the contract if the seller or lessor becomes insolvent within ten days after receiving the first payment due under the agreement. Buyers and lessees are obligated to pay the remaining balance according to the terms of the agreement. 100) C Specific performance usually requires that the seller or lessor deliver the particular goods identified in the contract. 101) E Uniform Commercial Code Sections 2-716(1) and 2A-521(1) allow buyers and lesseesto seek the remedy of specific performance when either a) the goods are unique or b) a remedy at law is inadequate. 102) A Under Uniform Commercial Code Sections 2-607, 2-715, and 2A-519, buyers or lessees are allowed to accept nonconforming goods and then seek monetary damages to give them the benefit of the bargain. The buyer or lessee must give the seller or lessor reasonable notice of the defect. 103) E Courts uphold modifications or limitations to remedies unless the remedies fail in their essential purpose. 104) A Version 1
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The court ruled that the contract was binding on the parties. The court stated, "A contract need not be read to be effective; people who accept take the risk that the unread terms may in retrospect prove unwelcome." 105) A It is a common practice for parties to any contract to indicate in the very contract itself which laws will govern the transaction if a dispute arises. 106) D As indicated in the Webster v. Blue Ship Tea Room, Inc. case in the textbook addressing the implied warranty of merchantability, in cases where the buyer should expect a problem, the buyer must be prepared to accept the situation. 107) C The Uniform Commercial Code assumes that the seller has good and valid title to the good and has the right to transfer title free and clear of any liens, judgments, or infringements of intellectual property rights of which the buyer does not have knowledge. 108) A The 1975 federal law known as the Magnuson-Moss Act requires that if a seller decides to issue a written warranty for a consumer good (the seller is not required to do so), the seller must indicate whether that warranty is a full warranty or a limited warranty. 109) E As in the case referenced in the textbook, Y&N Furniture Inc. v. Nwabuoku, there was no claim of nonconforming goods. 110) D As in the case referenced in the textbook, Y&N Furniture Inc. v. Nwabuoku, a rejection that does not even purport to rest on an honest assessment of conformity of the goods is in bad faith. 111) A
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Uniform Commercial Code Section 1-304 requires good faith in the performance and enforcement of every contract. Good faith means honesty in fact when a non-merchant is involved. 112) E As in the case referenced in the textbook, Y&N Furniture Inc. v. Nwabuoku, a rejection may be both wrongful and in bad faith. 113) E The implied warranty of merchantability is an assurance, inferred in every sale or lease from a merchant unless clearly disclaimed, that merchantable goods will conform to a reasonable performance expectation. 114) A According to the Uniform Commercial Code, in order to be merchantable, goods must be fit for the ordinary purposes for which such goods are used. 115) A The implied warranty of fitness for a particular purpose arises when a seller knows or has reason to know a) why the buyer is purchasing the goods in question and b) that the buyer is relying on the seller to make the selection. 116) B The implied warranty of merchantability is an assurance, inferred in every sale by a merchant unless clearly disclaimed, that merchantable goods will conform to a reasonable performance expectation. 117) E Most states have adopted the option under theUniform Commercial Code providing that the seller's warranties extend to any reasonable and foreseeable userwho is injured by the good. 118) E
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Samantha made no description of the blender's physical nature or its use, in either general or specific circumstances, which became part of the contract of sale. 119) A The warranty of fitness for a particular purpose requires that the seller knows or has reason to know that the buyer is relying on him or her to make the selection. 120) C Uniform Commercial Code Sections 2-703(a) and 2A-523(1)(c) allow sellers or lessors to withhold delivery of goods when the buyer or lessee is in breach. 121) C Sellers are allowed to resell or dispose of the goods when the buyer is in breach and the goods have not yet been delivered. 122) D A seller is entitled to recover incidental damages resulting from the buyer’s breach of contract. 123) D Sellers are allowed to resell or dispose of the goods when the buyer is in breach and the goods have not yet been delivered. The seller then holds the buyer liable for any loss. Uniform Commercial Code Section 2-706 allows the seller to recover the difference between the resale price and contract price, plus incidental damages and minus expenses saved. 124) A When the buyer alleges that goods failed to conform to contract specifications, the buyer does not automatically have the right to reject the goods. The UCC requires courts to consider norms in a particular trade. 125) D
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Sellers and lessors can repair, adjust, or replace defective or nonconforming goods as long as they give prompt notice of the intent to cure and then cure within the contract time for performance. 126) C If the buyer relies on representations, those representations become part of the contract in the form of express warranties. 127) A Generally speaking, if an implied warranty is to be disclaimed, the seller must do so in clear, unambiguous, conspicuous language. 128) C Consequential damages include damages for lost profits as long as these damages are not too speculative. These monetary damages give the injured buyer or lessee the benefit of the bargain. 129) C UCC Sections 2-615(a) and 2A-405(a) state that a delay in delivery or non-delivery, in whole or in part, is not a breach in circumstances in which performance has been made impracticable because a contingency has occurred that was not contemplated when the parties reached an agreement. 130) B At common law, a unilateral mistake may still constitute a binding contract, whereas a bilateral mistake will not. 131) C The 1975 federal law known as the Magnuson-Moss Act requires that if a seller decides to issue a written warranty for a consumer good (the seller is not required to do so), the seller must indicate whether that warranty is a full warranty or a limited warranty. 132) B Specific performance usually requires the seller or lessor to deliver the particular goods identified in the contract. Version 1
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133) Under the Uniform Commercial Code, if goods are identified at the time the parties entered into a contract and those goods are partially destroyed through no fault of the parties before risk passes to the buyer, the buyer can inspect the goods and decide whether to a) treat the contract as void or b) ask the seller for a reduction of the contract price and then accept the damaged goods. 134) Student responses will vary. In favor of the perfect tender rule, nothing in the Uniform Commercial Code prohibits the parties from negotiating a substantial performance definition in the performance of the contract. The substantial performance rule, however, gives the trier of fact flexibility in determining the impact of nonperformance in the overall scheme of the contractual relationship. 135) Uniform Commercial Code Section 1-205(1) defines course of dealing as previous commercial transactions between the same parties. Under Uniform Commercial Code Section 2-208(1), course of performance refers to the history of dealings between the parties in the particular contract at issue. When the buyer alleges that goods failed to conform to contract specifications, the Uniform Commercial Code requires that courts consider the ideas of course of dealing and course of performance in resolving any dispute. 136) The Uniform Commercial Code (UCC) requires good faith in the performance and enforcement of every contract. Good faith means honesty in fact. When the parties are merchants, the UCC imposes a higher standard. Between merchants, the UCC imposes a duty of not only honesty in fact but also reasonable commercial standards of fair dealing. 137) The only exceptions to title warranties occur if they are disclaimed or modified by specific language in the contract or if the seller is obviously unable to guarantee title, such as at a sheriff's sale of seized goods. Version 1
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138) For goods to be merchantable under the Uniform Commercial Code, they must: a) be able to pass without objection in the trade or market for similar goods; b) in the case of fungible goods, be of fair average quality within the description; c) be fit for the ordinary purposes for which such goods are used; d) be produced, within the variations permitted by the agreement, of even kind, quality, and quantity within each unit and among all units involved; e) be adequately contained, packaged, and labeled as the agreement may require; and f) conform to the promises or affirmations made on the container or label, if any. 139) The implied warranty of fitness for a particular purpose arises when a seller or lessor knows or has reason to know: a) why the buyer or lessee is purchasing or leasing the goods in question and b) that the buyer or lessee is relying on him or her to make the selection. 140) Marge has no rights against the seller because she refused to inspect the goods. By refusing to inspect the goods, she waived both implied and express warranties. 141) The seller may recover the difference between the resale price and the contract price, plus incidental damages and minus expenses saved. The seller gets to keep any profits it makes on the resale. The lessor is allowed to lease the goods to another party and recover unpaid lease payments and any deficiency between the lease payments due under the original lease contract, and those due under the new contract. The lessor also can seek incidental damages. 142) When the seller/lessor is in breach, the buyer/lessee can: a) cancel the contract and seek remedies giving them the benefit of the bargain; b) obtain cover; c) sue to recover damages; d) recover the goods; e) obtain specific performance; f) reject nonconforming goods; g) revoke acceptance of nonconforming goods; or h) accept the nonconforming goods and seek damages.
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CHAPTER 17 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) A negotiable instrument is a written document containing the signature of the creator who makes an unconditional promise to pay a sum certain. ⊚ true ⊚ false
2) Uniform Commercial Code (UCC) Article 3 designates commercial paper as negotiable instruments. ⊚ true ⊚ false
3)
A note is a promise by the maker of the note to pay a drawee. ⊚ true ⊚ false
4)
A draft is an order by a maker to a drawee to pay a payee. ⊚ true ⊚ false
5) With a demand instrument, payment can be made only at a specific time designated in the future. ⊚ true ⊚ false
6) A time instrument is a draft that specifies a date range during which the payee may collect payment. ⊚ true ⊚ false
7)
If an instrument fails to qualify as negotiable, it is also unenforceable as a contract. ⊚ true ⊚ false
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8) The Uniform Commercial Code defines a negotiable instrument as a written document that is signed by the maker or drawer with an unconditional promise or order to pay a sum certain in money on demand or at a time certain to bearer or to order. ⊚ true ⊚ false
9)
To be negotiable, an instrument must be in writing. ⊚ true ⊚ false
10) To satisfy the Uniform Commercial Code’s (UCC’s) writing requirement for a negotiable instrument, a document must have two characteristics: relative permanence and movability. ⊚ true ⊚ false
11) If an instrument is silent as to the time of payment, the Uniform Commercial Code (UCC) presumes it is a demand instrument. ⊚ true ⊚ false
12) For an instrument to be negotiable, its promise or order to pay must be specific and not implied. ⊚ true ⊚ false
13) The Uniform Commercial Code (UCC) recognizes an oral negotiable instrument if the facts demonstrate the intent of the maker or drawer to create a negotiable instrument through spoken words alone. ⊚ true ⊚ false
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14) An automated signature satisfies the Uniform Commercial Code’s (UCC’s) signature requirement for negotiable instruments. ⊚ true ⊚ false
15) A promise to pay in shares of stock satisfies the “sum certain” requirement for a negotiable instrument. ⊚ true ⊚ false
16)
Instruments payable to “cash” are considered bearer instruments. ⊚ true ⊚ false
17) Negotiation is the transfer of possession to a third party, who becomes the holder of the negotiable instrument. ⊚ true ⊚ false
18)
An order instrument is payable to a specific, named payee. ⊚ true ⊚ false
19)
Order paper must be endorsed, as well as delivered, to be successfully negotiated. ⊚ true ⊚ false
20) The person creating the endorsement is the delegator, and the person receiving the endorsement is the delegatee. ⊚ true ⊚ false
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21) An accord is an additional piece of paper with endorsements that is firmly attached to a negotiable instrument. ⊚ true ⊚ false
22)
According to the Uniform Commercial Code (UCC), a check is a special kind of note. ⊚ true ⊚ false
23) note.
The Uniform Commercial Code (UCC) considers a money order as a type of promissory ⊚ ⊚
true false
24) The Uniform Commercial Code(UCC) requires a bank to certify a check if the customer has sufficient funds in his or her account. ⊚ true ⊚ false
25)
In the check collection process, the depositary bank cannot also be the payor bank. ⊚ true ⊚ false
26) When a depositary bank receives a check, it must present the check at the payor bank; it cannot send the check through intermediary banks to the payor bank. ⊚ true ⊚ false
27) Check 21 allows banks to forgo sending original checks as part of the collection or return process and instead send a truncated version. ⊚ true ⊚ false
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28)
The Uniform Commercial Code (UCC) prohibits bank customers from postdating checks. ⊚ true ⊚ false
29) A customer issues a stop-payment order when she has issued a check that has not yet been accepted and she wants the check to be accepted. ⊚ true ⊚ false
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 30) A(n) _____ is a substitute for cash. A) accord and satisfaction B) promissory note C) negotiable instrument D) novation E) bilateral contract
31)
Buyers can make payments through _____ in a sales contract. A) cash and checks only B) credit arrangements only C) cash and credit arrangements only D) cash, credit arrangements, and negotiable instruments E) negotiable instruments and credit arrangements only
32) A written document that contains the signature of the creator, who promises unconditionally to pay a sum certain in money at either a time certain or on demand, is known as a(n) _____.
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A) negotiated instrument B) non-negotiable instrument C) accord and satisfaction D) novation E) negotiable instrument
33)
What are the four (4) specific types of negotiable instruments? A) Futures contracts, notes, drafts, and checks B) Notes, drafts, checks, and novations C) Futures contracts, certificates of deposits, notes, and drafts D) Bilateral contracts, certificates of deposits, notes, and checks E) Notes, certificates of deposits, drafts, and checks
34)
Which of the following is false regarding the requirements for a negotiable instrument?
A) The instrument must be a written document. B) The instrument must be payable at a fixed future time, not on demand. C) The instrument must have an unconditional promise or order to pay. D) The amount to be paid in the instrument must be a sum certain in money. E) The document must contain either the words of negotiability—“to the order of”—or words indicating that it is a bearer instrument.
35)
A(n) _____ is an order made by a drawer to a drawee to pay a payee. A) contractual directive B) check C) accord and satisfaction D) draft E) novation
36) Which of the following is a draft in which the drawer and drawee are the same bank or branches of the same bank? Version 1
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A) An inter-institutional conditional draft B) An intra-institutional automatic draft C) A due-via-transfer draft D) A cashier’s check E) A traveler’s check
37) When an instrument is payable only at a specific time designated in the future, this is known as a(n) _____. A) time instrument B) antedated note C) pre-dated draft D) certified check E) demand instrument
38)
An instrument "payable on demand" is one that _____.
A) states that it is payable on demand or at sight, or otherwise indicates that it is payable at the will of the holder B) does not state any time of payment C) is payable within five (5) business days after presentment D) states that it is payable on demand or at sight, or otherwise indicates that it is payable at the will of the holder; or does not state any time of payment E) states that it is payable on demand or at sight, or otherwise indicates that it is payable at the will of the holder; does not state any time of payment; or is payable within five (5) business days after presentment
39) Which of the following is a promise made by a bank to pay a payee a certain amount of money at a stated future time?
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A) A promissory note B) A draft C) A traveler’s check D) A check E) A certificate of deposit
40)
A certificate of deposit is a _____ of the bank. A) note B) draft C) novation D) check E) non-negotiable instrument
41) Pablo is paying his electric bill. He writes a draft from his personal bank account payable to the power company. This draft is known as a(n) _____. A) certified check B) accord and satisfaction C) promissory note D) check E) non-negotiable instrument
42) Which of the following is a draft in which the drawer and drawee are the same bank or branches of the same bank? A) A cashier's check B) A traveler's check C) A certified check D) A cashier's check, a traveler's check, or a certified check E) A cashier's check or a traveler's check, but not a certified check
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43) Which of the following was the result on appeal in New Wave Technologies Inc. v. Legacy Bank of Texas, the case in the textbook involving whether endorsements of both payees were required in order for the bank involved to properly release funds on a check made out to "Maxim Solutions Group/New Wave Technologies" and providing on the back that "Each Payee Must Endorse Exactly As Drawn"? A) Under the Uniform Commercial Code (UCC), the slash meant "and," resulting in the endorsements of both payees being required before the bank could properly release funds on the check. B) The slash was ambiguous and would therefore be interpreted to mean "and," resulting in the endorsements of both payees being required before the bank could properly release funds on the check. C) The slash was ambiguous and would therefore be interpreted to mean "or," resulting in the endorsement of only one payee being required before the bank could properly release funds on the check. D) The slash was ambiguous, resulting in the check being non-negotiable regardless of how many signatures were on it. E) While the check would normally be interpreted to require only one payee, the statement on the back that "Each Payee Must Endorse Exactly As Drawn" resulted in the signature of both payees being required before the bank could properly release funds.
44) Which of the following characteristics are required to satisfy the writing requirement for a negotiable instrument? A) The signatures of both parties and the amount B) The signature of either party and movability C) Relative permanence and movability D) Movability and the signatures of both parties E) The signatures of both parties and the specific demand date
45) Which of the following refers to the quality of a negotiable instrument that ensures its longevity?
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A) Negotiability B) Grade C) Relative permanence D) Market worthiness E) Conversion rating
46) The quality of a negotiable instrument that ensures the instrument’s mobility and availability is its _____. A) relative permanence B) movability C) "go" rate D) conversion rate E) market grade
47) Which of the following is false regarding the Uniform Commercial Code's (UCC’s) signature requirement for a negotiable instrument? A) An "X" will suffice if the party intended that the mark be placed on the instrument and uses that mark to identify himself. B) A signature may be made by means of a device or machine. C) A signature may be made manually. D) The signature of an agent on behalf of the principal binds the principal and satisfies the signature requirement. E) The Uniform Commercial Code (UCC) is strict in its interpretation of what constitutes a signature.
48)
A common IOU is not a promise or an order to pay and therefore _____.
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A) cannot be a negotiable instrument B) constitutes a negotiable draft C) constitutes a negotiable promissory note D) cannot be enforced as a contract unless it is in writing E) can be enforced as a contract, but only with the attestation of at least two (2) disinterested witnesses
49) If a customer does not have enough funds to cover a check, the bank will _____ and the customer becomes liable for the check amount. A) accept the check B) dishonor the check C) disaffirm the check D) affirm the check E) hold the check for three (3) business days
50) Monty writes a check to Piper. He later discovers that Piper is the wrong payee for the check. Piper has not yet cashed the check, so Monty can issue a _____ to his bank. A) cease-and-desist order B) stop-payment order C) temporary injunction D) permanent injunction E) waiver of liability
51) Which of the following is true regarding whether an agent's signature may satisfy the signature requirement for negotiability?
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A) An agent's signature on behalf of his or her principal binds the principal and satisfies the signature requirement for negotiability. B) An agent's signature on behalf of his or her principal cannot bind the principal and does not satisfy the signature requirement for negotiability. C) An agent's signature on behalf of his or her principal binds the principal and satisfies the signature requirement for negotiability, but only if specific written authorization from the principal allowing the agent to act on the subject transaction is attached to the document. D) An agent's signature on behalf of his or her principal binds the principal and satisfies the signature requirement for negotiability, but only if the instrument is for an amount over $1,000. E) An agent's signature on behalf of his or her principal binds the principal and satisfies the signature requirement for negotiability, but only if the instrument is for an amount of $1,000 or less.
52) Which of the following does not satisfy the Uniform Commercial Code’s (UCC’s) national currency requirement for a negotiable instrument? A) United States dollars B) English pounds C) Gold D) Japanese yen E) Euros (since they are the sole currency of nineteen European Union member states)
53)
A demand instrument, such as a check, is payable _____. A) within two (2) business days of its issuance B) within three (3) business days of its issuance C) as soon as the drawee bank certifies it D) as soon as the drawer certifies it E) as soon as it is issued
54) If an instrument is silent as to the time of payment, the Uniform Commercial Code (UCC) presumes it is a _____ instrument.
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A) demand B) time C) void D) voidable E) non-negotiable
55) An instrument must indicate that it was created for the purpose of being _____ before it can be considered negotiable. A) paid B) certified C) convertible D) deposited E) transferred
56) Paul is named as the payee on an instrument. This type of instrument is known as a(n) _____ instrument. A) payee B) bearer C) drawee D) order E) non-negotiable
57) If a negotiable instrument is payable to any party in possession of it, it is a(n) _____ instrument. A) demand B) order C) certified D) bearer E) unqualified
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58) The transfer of possession of a negotiable instrument to a third party who becomes its holder is known as _____. A) certification B) negotiation C) transference D) a bailment E) consignment
59) A party who possesses a negotiable instrument payable to that party or to the bearer of the instrument is a(n) _____ of the instrument. A) holder B) assignee C) delegatee D) drawee E) bailee
60) Which of the following types of commercial paper requires only the payee’s delivery of the instrument to the holder? A) A bearer instrument B) An unqualified instrument C) An order instrument D) An unconditional instrument E) A certified instrument
61) Which of the following types of paper requires the payee’s delivery and endorsement for proper negotiation? A) A bearer instrument B) A certified check C) An order instrument D) A cashier's check E) A payable-on-demand instrument
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62)
A person who creates an endorsement is called a(n) _____. A) assignor B) transferor C) transferee D) endorser E) endorsee
63)
A(n) _____ is a person receiving an endorsement. A) bailor B) transferor C) transferee D) endorser E) endorsee
64)
What can be attached to an instrument if there is no room for an endorsement? A) An allonge B) A secondary endorsement page C) An accord and satisfaction D) A novation E) An amendments page
65)
Which of the following are types of unqualified endorsements? A) Blank and special B) Conditional and special C) Restrictive and blank D) Conditional and blank E) Restrictive and special
66)
Which of the following is the payee's or last endorsee's signature and nothing else?
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A) A special endorsement B) An allonge C) A blank endorsement D) A qualified endorsement E) A restricted endorsement
67)
The effect of an unqualified blank endorsement is that it turns order paper into _____. A) bearer paper B) order paper C) a special endorsement D) a bearer endorsement E) a certified endorsement
68) Fong’s name is misspelled on a negotiable instrument. How can Fong endorse this instrument? A) He cannot; instead, he must return the instrument to the originator to correct it. B) He must endorse the instrument with his correct name only. C) He must endorse the instrument with his misspelled name only. D) He can endorse the instrument with his actual name or the misspelled name, or both. E) He must seek the services of a notary public to notarize the proper spelling of his name before it can be endorsed.
69)
Who may endorse an instrument made payable to a legal entity such as a partnership? A) The president B) The chief executive officer C) The chief financial officer D) The treasurer E) Any authorized representative
70)
An instrument that reads "Pay to the order of Jones or Green" is payable to _____ payees.
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A) joint B) concurrent C) consecutive D) alternative E) mutually exclusive
71)
An instrument that reads "Pay to the order of Jones and Green" establishes _____ payees. A) joint B) concurrent C) consecutive D) alternative E) alternate
72) Instruments bearing joint payees require the endorsement of _____ before the instrument may be negotiated. A) any one of the listed payees B) a majority of the listed payees C) the most senior (i.e., the oldest) payee D) all listed payees E) the drawee bank
73)
The party giving the order to pay on a draft is the _____. A) drawer B) drawee C) payee D) assignor E) assignee
74)
The party ordered to pay on a draft is the _____.
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A) drawer B) drawee C) payee D) assignor E) assignee
75)
The party receiving the money from the draft is the _____. A) drawer B) drawee C) payee D) assignor E) assignee
76) When you write a check at the grocery store, you are the _____, your bank is the _____, and the grocery store is the _____. A) payee; drawer; drawee B) drawee; drawer; payee C) drawer; drawee; payee D) payee; drawee; drawer E) drawee; payee; drawer
77) In the United States, of all the negotiable instruments regulated by the Uniform Commercial Code (UCC), which are the most common type used? A) Money orders B) Certificates of deposit C) Notes D) Promissory notes E) Checks
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78) According to the Uniform Commercial Code (UCC), which of the following are considered banks? A) Savings and loans B) Credit unions C) Trust companies D) Savings and loans, trust companies, and credit unions E) Savings and loans and credit unions, but not trust companies
79) Which of the following is a check for which both the drawer and the drawee are the same bank, and the payee of the check is a specific person? A) Certified B) Unqualified C) Qualified D) Cashier's E) Third-party
80)
A(n) _____ check is a check that is accepted at the bank at which it is drawn. A) cashier's B) certified C) qualified D) unqualified E) third-party
81)
Which of the following is false regarding certified checks?
A) If a bank refuses to certify a check, the check is considered dishonored. B) Once a check is certified, funds of the customer are removed from his or her account and placed in the bank's certified check account. C) If a bank certifies a check, the drawer of the check is no longer liable for the amount of the check. D) If a bank certifies a check, the bank has become primarily liable for the check. E) A certified check is a check that is accepted at the bank at which it is drawn.
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82) According to Uniform Commercial Code (UCC) Section 3-312, a certified check or a cashier's check is fully recoverable if the check is _____. A) lost B) stolen C) lost or stolen D) destroyed or stolen E) lost, stolen, or destroyed
83) In the check collection process, the first bank that receives the check for payment is the _____ bank. A) payor B) payee C) depositary D) certifying E) acceptor
84)
The bank upon which a check is drawn is the _____ bank. A) payor B) payee C) depositary D) certifying E) acceptor
85) A(n) _____ bank is a bank other than the first bank and the last bank in the check collection process that receives a transferred check. A) depositary B) certifying C) wholesale D) intermediary E) on-us
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86) When the depositary bank is the same bank as the payor bank, the check is referred to as a(n) _____ item. A) on-us B) joint C) condensed D) accelerated E) due-on-sale
87)
A bank may determine that _____ or later is the cutoff hour for handling checks. A) noon B) 1:00 p.m. C) 2:00 p.m. D) 12:30 p.m. E) 10:00 a.m.
88) The first _____ of any amount deposited in a bank must be available to the depositor on the business day following the day of deposit. A) $100 B) $200 C) $300 D) $500 E) $1,000
89) If a check is not presented to a bank within _____ of its date, the check is considered a stale check.
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A) thirty (30) days B) ninety (90) days C) six (6) months D) nine (9) months E) None of these, because according to the Uniform Commercial Code (UCC), a bank cannot consider a check to be stale
90) In the case of multiple forgeries by the same wrongdoer, if a customer examines a bank statement and does not notify the bank of the first forgery within the time required by the Uniform Commercial Code (UCC), what is the effect on subsequent forgeries assuming the bank is not negligent? A) There is no effect, because each forgery stands on its own. B) The customer is barred from recovering on the subsequent forgeries. C) Despite the default time limitation imposed by the UCC, the customer may recover on the subsequent forgeries if they are reported to the bank within 60 days after the customer receives the bank statement showing the first forgery. D) Despite the default time limitation imposed by the UCC, the customer may recover on the subsequent forgeries if they are reported to the bank within 90 days after the customer receives the bank statement showing the first forgery. E) Despite the default time limitation imposed by the UCC, the customer may recover on the subsequent forgeries if they are reported to the bank within 180 days after the customer receives the bank statement showing the first forgery.
91) Generally, assuming no negligence on the part of the victim, when an endorsement on a check has been forged and properly reported to the bank, which party is the party ultimately liable for the loss? A) The drawer B) The first party to accept the forged instrument C) The first legitimate endorser of the instrument D) The bank of the first party to accept the forged instrument E) The bank of the drawer, even if proper notice was given of the forgery
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92) According to the Uniform Commercial Code (UCC), what is a change, without consent, that modifies the obligation of a party to the instrument? A) An alteration B) An accord C) An accord and satisfaction D) A unilateral modification E) A reformation
93)
Which of the following governs consumer fund transactions? A) The Electronic Fund Transfer Act of 1978 B) The Automated Transfer Act of 1990 C) The Electronic Banking Act of 2000 D) The Automated Fund Transfer Regulation of 2002 E) The Uniform Commercial Monetary Services Act of 1990
94) If a customer's ATM card is lost or stolen, the customer must notify the bank within _____ days; if that is done, the customer is then liable for only the first _____ stolen. A) 5; $50 B) 3; $100 C) 2; $50 D) 7; $200 E) 1; $500
95) Which of the following is money stored electronically on microchips, magnetic strips, or other computer media that would allow for the elimination of physical currency? A) Electronic funds B) Quasi-currency C) Digital cash D) Cyber-cash E) Bitcoins
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96) A plastic card containing a magnetic strip with data regarding the value of the card is typically known as a(n) _____ card. A) stored-value B) smart C) intel D) transfer E) electronic
97)
Which of the following is true regarding the 2008 Kenya Communications Act?
A) The Act excludes the creation, but not the execution, of a will from being upheld as a legal negotiable instrument in court. B) The Act excludes the execution, but not the creation, of a will from being upheld as a legal negotiable instrument in court. C) The Act does not address the creation or execution of a will because wills cannot be negotiable instruments. D) The Act excludes the creation or execution of a will from being upheld as a legal negotiable instrument in court. E) The Act does not address the creation or execution of a will because Kenyan probate law presumptively considers wills to be negotiable instruments.
98) Which law controls how financial institutions handle customer information, ultimately providing greater privacy protections to financial institution customers? A) The Gramm-Leach-Bliley Act B) The Gorham-Bell Act C) The Customer Privacy Protection Act D) The Gramm-Rudman-Hollings Act E) The Knight-Beecher Act
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99) Susie Smith signed a note agreeing to pay "Annie Greene, Mary Hodge" $1,000. The payment was for painting her house. An issue with the note was that it spelled Annie's last name "Greene," whereas Annie spells it simply "Green." Annie and Mary had a disagreement regarding how to split up the funds for painting the house. Annie proceeded to sign the note on the back "Annie Green" and presented it to Bill Brown to satisfy a debt that she owed him. Bill Brown endorsed the note on the back and took it to the bank for payment. Mary is unhappy because she did not obtain any of the funds and stated that Annie could not legally endorse the instrument because it misspelled her name and because Mary did not sign it. Which of the following is true regarding Mary's claim that the endorsement by Annie was illegal because the note misspelled Annie's name? A) Mary is correct. B) Mary is correct, but only because Annie signed the note "Green" instead of "Greene" as indicated on the note. C) Mary is correct, but only because two payees are listed. D) Mary is incorrect. E) Mary is incorrect, unless she can prove that Susie intentionally and purposefully spelled the name wrong to prevent negotiation.
100) Susie Smith signed a note agreeing to pay "Annie Greene, Mary Hodge" $1,000. The payment was for painting her house. An issue with the note was that it spelled Annie's last name "Greene," whereas Annie spells it simply "Green." Annie and Mary had a disagreement regarding how to split up the funds for painting the house. Annie proceeded to sign the note on the back "Annie Green" and presented it to Bill Brown to satisfy a debt that she owed him. Bill Brown endorsed the note on the back and took it to the bank for payment. Mary is unhappy because she did not obtain any of the funds and stated that Annie could not legally endorse the instrument because it misspelled her name and because Mary did not sign it. Which of the following is true regarding the complaint of Mary that she did not also endorse the instrument?
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A) She is correct because both names are required in order to provide legal endorsement. B) She is correct in that her name was needed for legal endorsement, but that is only the case because of the misspelling of Annie's name. C) She is correct because regardless of whether the payees are listed with no designation as to whether they are alternate or joint, or whether the words "or" or "and" are used to designate payees, any listed payee must endorse a note in order for it to be properly payable. D) She is incorrect because Annie properly endorsed the note, and only her signature was needed. E) She is incorrect, but only if it can be established that Bill Brown lacked knowledge that she had not given her consent to the form of the endorsement.
101) Book Payment. Molly and Pat signed a contract providing that "Pat will furnish the correct used business law book for use in Molly's business law class; and in return, on August 15, 2019, Molly promises to pay Pat $50 for the book." Molly took the book and planned to pay Pat. Meanwhile, Pat properly assigned the contract Molly had signed to Jack. When Molly went to class, however, she discovered that the book was the incorrect book. When Jack asked Molly for payment, Molly refused. Molly told Jack that the book was useless to her and that she was not paying either him or Pat anything for it. Jack told Molly that he had an enforceable assignment in the form of a negotiable instrument and that he could collect regardless of whether the book was useless. Molly did not believe him. Continuing with her attempt to save money on books, Molly agreed to buy Tim's United States history book for $40. She had an oral agreement with Tim that he would give her the book and that she would pay him in three days. This time Molly got the right book. Tim, in writing, properly assigned the right to the $40 payment to Richard. Richard asked Molly for the money. Molly admitted her agreement with Tim but told Richard that she was not going to pay him because he did not have a negotiable instrument. Molly also purchased a communications book from Sam promising in writing to give him in return the next day, to his order, a used DVD player she owned. Which of the following is true regarding Jack's claim that he had a negotiable instrument and could collect from Molly? A) Jack is correct. B) The document is not negotiable because it does not contain words of negotiability or words indicating it is a bearer instrument. C) The document is not negotiable because the book was the wrong book. D) The document is not negotiable because Jack was not a party to the original contract. E) The document is not negotiable because it does not contain words of negotiability or words indicating it is a bearer instrument, and because Molly received the wrong book.
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102) Book Payment. Molly and Pat signed a contract providing that "Pat will furnish the correct used business law book for use in Molly's business law class; and in return, on August 15, 2019, Molly promises to pay Pat $50 for the book." Molly took the book and planned to pay Pat. Meanwhile, Pat properly assigned the contract Molly had signed to Jack. When Molly went to class, however, she discovered that the book was the incorrect book. When Jack asked Molly for payment, Molly refused. Molly told Jack that the book was useless to her and that she was not paying either him or Pat anything for it. Jack told Molly that he had an enforceable assignment in the form of a negotiable instrument and that he could collect regardless of whether the book was useless. Molly did not believe him. Continuing with her attempt to save money on books, Molly agreed to buy Tim's United States history book for $40. She had an oral agreement with Tim that he would give her the book and that she would pay him in three days. This time Molly got the right book. Tim, in writing, properly assigned the right to the $40 payment to Richard. Richard asked Molly for the money. Molly admitted her agreement with Tim but told Richard that she was not going to pay him because he did not have a negotiable instrument. Molly also purchased a communications book from Sam promising in writing to give him in return the next day, to his order, a used DVD player she owned. Which of the following is true regarding Molly's assertion that Richard did not have a negotiable instrument? A) Molly is incorrect, and the document by which Tim assigned the right to Richard is a negotiable instrument with regard to her duty to pay. B) Molly is correct because her agreement with Tim was not in a writing containing words of negotiability or words indicating the existence of a bearer instrument. C) Molly is correct because Richard was not a party to the original contract. D) Molly is incorrect because her admission establishes the existence of a negotiable instrument between her and Tim that could be assigned to Richard. E) Molly is correct because she did not immediately transfer funds to Tim, and because her agreement with Tim was not in a writing containing words of negotiability or words indicating the existence of a bearer instrument.
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103) Book Payment. Molly and Pat signed a contract providing that "Pat will furnish the correct used business law book for use in Molly's business law class; and in return, on August 15, 2019, Molly promises to pay Pat $50 for the book." Molly took the book and planned to pay Pat. Meanwhile, Pat properly assigned the contract Molly had signed to Jack. When Molly went to class, however, she discovered that the book was the incorrect book. When Jack asked Molly for payment, Molly refused. Molly told Jack that the book was useless to her and that she was not paying either him or Pat anything for it. Jack told Molly that he had an enforceable assignment in the form of a negotiable instrument and that he could collect regardless of whether the book was useless. Molly did not believe him. Continuing with her attempt to save money on books, Molly agreed to buy Tim's United States history book for $40. She had an oral agreement with Tim that he would give her the book and that she would pay him in three days. This time Molly got the right book. Tim, in writing, properly assigned the right to the $40 payment to Richard. Richard asked Molly for the money. Molly admitted her agreement with Tim but told Richard that she was not going to pay him because he did not have a negotiable instrument. Molly also purchased a communications book from Sam promising in writing to give him in return the next day, to his order, a used DVD player she owned. What is the effect of Molly agreeing to give Sam a DVD in return for the book? A) Molly and Sam have an enforceable contract, and Molly has also satisfied the negotiability condition regarding the form of payment. B) Because payment is not for a sum certain in money, Molly and Sam do not have an enforceable contract nor does the agreement satisfy the negotiability requirement. C) Molly and Sam have an enforceable contract, but the agreement fails to satisfy the negotiability requirement that payment be for a sum certain in money. D) Because payment is not for a sum certain for money, Molly and Sam do not have an enforceable contract; but the requirement of negotiability regarding the form of payment has been satisfied. E) Unless Sam acknowledges in writing that the fair market value of the DVD is equivalent to the value of the book he provided to Molly, the contract is notenforceable nor is the agreement negotiable.
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104) Yard Mowing. Paula agreed to mow John's yard once a week for $50 per week throughout the summer. Paula, however, was having trouble getting her money from John. On one occasion, he gave her a handwrittenIOU stating "I, John Jones, owe Paula Smith $50" which he signed at the end. A couple of weeks later, John did not have the money with which to pay Paula for additional mowing, and he handwrote the following on a piece of paper and gave it to her: "I, John Jones, promise to pay Paula Smith or to bearer, the sum of $100 on Monday, July 22, 2019." Paula quit mowing John's yard, and disgusted with John, Paula assigned both documents to Vince. When Vince presented the documents to John, John refused to pay on the basis that after inspecting the yard, he decided that Paula was doing a poor job. Vince told him the documents constituted negotiable instruments, but John disagreed. Which of the following is true regarding the effect on negotiability of John's determination that Paula did a poor job mowing the yard? A) Paula's performance prevents the instruments from being negotiable, but only if John meets the burden of proof of establishing by a preponderance of the evidence that Paula did a poor job mowing the yard. B) Paula's performance prevents the instruments from being negotiable, but only if Paula meets the burden of proof of establishing by a preponderance of the evidence that she did an acceptable job mowing the yard. C) Paula's performance prevents the instruments from being negotiable, but only if John meets the burden of proof of establishing by a preponderance of the evidence that Paula did a poor job mowing the yard, and if Paula signed a document agreeing that the instrument would lack negotiability unless she properly performed. D) Paula's performance prevents the instruments from being negotiable, but only if Paula meets the burden of proof of establishing by a preponderance of the evidence that she did an acceptable job mowing the yard and that she did not sign any document agreeing that the instrument would lack negotiability upon John's objection. E) Manner of performance is not one of the listed elements for negotiability.
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105) Yard Mowing. Paula agreed to mow John's yard once a week for $50 per week throughout the summer. Paula, however, was having trouble getting her money from John. On one occasion, he gave her a handwritten IOU stating "I, John Jones, owe Paula Smith $50" which he signed at the end. A couple of weeks later, John did not have the money with which to pay Paula for additional mowing, and he handwrote the following on a piece of paper and gave it to her: "I, John Jones, promise to pay Paula Smith or to bearer, the sum of $100 on Monday, July 22, 2019." Paula quit mowing John's yard, and disgusted with John, Paula assigned both documents to Vince. When Vince presented the documents to John, John refused to pay on the basis that after inspecting the yard, he decided that Paula was doing a poor job. Vince told him the documents constituted negotiable instruments, but John disagreed. What is the effect of the instruments being written by hand? A) Handwriting does not prevent the instruments from being considered negotiable, but only because neither Paula nor John would be considered merchants in the transactions at issue. B) Handwriting does not prevent the instruments from being considered negotiable, but only because John would not be considered a merchant in the transaction at issue and Paula's status as a merchant is irrelevant. C) Handwriting does not prevent the instrument from being considered negotiable, but only because Paula would not be considered a merchant in the transaction at issue and John's status as a merchant is irrelevant. D) Handwriting does not prevent the IOU instrument from being negotiable, but it does prevent the other instrument from being negotiable. E) The issue of the instruments being handwritten does not prevent either from being considered negotiable.
106) Yard Mowing. Paula agreed to mow John's yard once a week for $50 per week throughout the summer. Paula, however, was having trouble getting her money from John. On one occasion, he gave her a handwritten IOU stating "I, John Jones, owe Paula Smith $50" which he signed at the end. A couple of weeks later, John did not have the money with which to pay Paula for additional mowing, and he handwrote the following on a piece of paper and gave it to her: "I, John Jones, promise to pay Paula Smith or to bearer, the sum of $100 on Monday, July 22, 2019." Paula quit mowing John's yard, and disgusted with John, Paula assigned both documents to Vince. When Vince presented the documents to John, John refused to pay on the basis that after inspecting the yard, he decided that Paula was doing a poor job. Vince told him the documents constituted negotiable instruments, but John disagreed. Disregarding the issue of whether Paula properly performed, is the statement "I, John Jones, promise to pay Paula Smith or to bearer, the sum of $100 on Monday, July 22, 2019," without a signature anywhere else on the document, sufficient to satisfy negotiability requirements?
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A) Yes, because it is in handwriting. B) Yes, it is sufficient regardless of whether or not it is in handwriting because it contains an unconditional promise to pay. C) No, because it was not signed at the bottom. D) Yes, but only if John later signed another document confirming that he meant the handwritten statement to constitute his signature. E) No, because it was not signed at the bottom or anywhere else on the document.
107) Yard Mowing. Paula agreed to mow John's yard once a week for $50 per week throughout the summer. Paula, however, was having trouble getting her money from John. On one occasion, he gave her a handwrittenIOU stating "I, John Jones, owe Paula Smith $50" which he signed at the end. A couple of weeks later, John did not have the money with which to pay Paula for additional mowing, and he handwrote the following on a piece of paper and gave it to her: "I, John Jones, promise to pay Paula Smith or to bearer, the sum of $100 on Monday, July 22, 2019." Paula quit mowing John's yard, and disgusted with John, Paula assigned both documents to Vince. When Vince presented the documents to John, John refused to pay on the basis that after inspecting the yard, he decided that Paula was doing a poor job. Vince told him the documents constituted negotiable instruments, but John disagreed. Which of the following is true regarding whether the handwritten statement "I, John Jones, owe Paula Smith $50" coupled with the signature of John Jones is sufficient to constitute a negotiable instrument? A) The instrument is negotiable, because John Jones signed following the statement of debt. B) The instrument is negotiable, regardless of whether the debt obligation was expressed as an IOU. C) The instrument is negotiable, but only if Paula Smith does not attempt to transfer the document to another person. D) The instrument is not negotiable, because the amount owed Paula was overdue when the IOU was made. E) Acknowledging a debt through an IOU does not create an unconditional promise or order to pay.
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108) Used Car Commission. William promised to sell Helen's car for her, but he wanted a commission of 10%. Helen signed an instrument promising to pay William a 10% commission if he sold her car. William assigned the agreement to Phil. Helen's car was sold and the buyer paid Helen. A dispute ensued between Helen and William regarding whether William found the buyer or the buyer found Helen. When Phil asked Helen for payment on the instrument, Helen refused. William, Helen, and Phil settled their dispute without going to court, and Helen wrote Phil a check for $3,000. Phil endorsed the check on the back, planning to take it to the bank the next day. Unfortunately, Phil lost the check and it was found by Barry, who cashed it at the local bank. Barry then left town. Which of the following is true regarding the instrument signed by Helen promising to pay William a 10% commission if he sold her car? A) The instrument is negotiable. B) The instrument is not negotiable, but only because it is based on a condition. C) The instrument is not negotiable, but only because Helen is not a merchant. D) The instrument is not negotiable, but only because it is not for a sum certain. E) The instrument is not negotiable because it is based on a condition and also because it is not for a sum certain.
109) Used Car Commission. William promised to sell Helen's car for her, but he wanted a commission of 10%. Helen signed an instrument promising to pay William a 10% commission if he sold her car. William assigned the agreement to Phil. Helen's car was sold and the buyer paid Helen. A dispute ensued between Helen and William regarding whether William found the buyer or the buyer found Helen. When Phil asked Helen for payment on the instrument, Helen refused. William, Helen, and Phil settled their dispute without going to court, and Helen wrote Phil a check for $3,000. Phil endorsed the check on the back, planning to take it to the bank the next day. Unfortunately, Phil lost the check and it was found by Barry, who cashed it at the local bank. Barry then left town. Before Phil endorsed the check, it was a(n) _____ instrument, and after he endorsed it, the check was a(n) _____ instrument. A) order; order B) order; conditional C) order; bearer D) primary; bearer E) primary, order
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110) Used Car Commission. William promised to sell Helen's car for her, but he wanted a commission of 10%. Helen signed an instrument promising to pay William a 10% commission if he sold her car. William assigned the agreement to Phil. Helen's car was sold and the buyer paid Helen. A dispute ensued between Helen and William regarding whether William found the buyer or the buyer found Helen. When Phil asked Helen for payment on the instrument, Helen refused. William, Helen, and Phil settled their dispute without going to court, and Helen wrote Phil a check for $3,000. Phil endorsed the check on the back, planning to take it to the bank the next day. Unfortunately, Phil lost the check and it was found by Barry, who cashed it at the local bank. Barry then left town. Which of the following is the most likely result if Phil attempts to compel the bank to reimburse him for the value of the check cashed by Barry? A) The check was an order instrument, and the bank must absorb the loss because it should have only provided funds to Phil. B) Because the check was an order instrument, the bank was within its rights to pay Barry because he presented the check. Phil has no rights against the bank. C) Because the check was a bearer instrument, the bank must absorb the loss because it should only have provided the funds to Phil. D) Because the check was a bearer instrument, the bank was authorized to pay Barry. Phil has no rights against the bank. E) Regardless of what type of instrument the check was, the bank had no right to cash the check when it was presented by Barry unless the bank can establish by a preponderance of the evidence that Barry misrepresented himself as Phil’s agent.
111) Stolen Purses. Sandra and Mary were having lunch at their favorite restaurant. Unfortunately, a thief stole their purses containing their ATM cards. Mary notified her bank the next day of the theft of the ATM card. Unfortunately, the card had already been used to fraudulently obtain over $1,000. Sandra thought back to her business law class and did not call her bank, however, because she believed that she would not be liable for any charges on the ATM card because of the rules involving forgeries. Nevertheless, a week or so later when Sandra was in the bank, she casually mentioned to the teller that she needed a new card because hers had been lost. She was shocked when a bank representative attempted to hold her responsible for hundreds of dollars of goods purchased with the ATM card. Sandra told the bank representative that she refused to cover the amounts, that she was moving her account, and that she wanted all preauthorized payments and EFTs stopped immediately. For how much can the bank hold Mary responsible based on the fraudulent use of the card?
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A) Nothing B) $50 C) $100 D) $500 E) For everything charged prior to the time she gave notice
112) Stolen Purses. Sandra and Mary were having lunch at their favorite restaurant. Unfortunately, a thief stole their purses containing their ATM cards. Mary notified her bank the next day of the theft of the ATM card. Unfortunately, the card had already been used to fraudulently obtain over $1,000. Sandra thought back to her business law class and did not call her bank, however, because she believed that she would not be liable for any charges on the ATM card because of the rules involving forgeries. Nevertheless, a week or so later when Sandra was in the bank, she casually mentioned to the teller that she needed a new card because hers had been lost. She was shocked when a bank representative attempted to hold her responsible for hundreds of dollars of goods purchased with the ATM card. Sandra told the bank representative that she refused to cover the amounts, that she was moving her account, and that she wanted all preauthorized payments and EFTs stopped immediately. For how much can the bank hold Sandra responsible based on the fraudulent use of the card? A) Nothing B) $50 C) $100 D) $500 E) For everything charged prior to the time she gave notice
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113) Stolen Purses. Sandra and Mary were having lunch at their favorite restaurant. Unfortunately, a thief stole their purses containing their ATM cards. Mary notified her bank the next day of the theft of the ATM card. Unfortunately, the card had already been used to fraudulently obtain over $1,000. Sandra thought back to her business law class and did not call her bank, however, because she believed that she would not be liable for any charges on the ATM card because of the rules involving forgeries. Nevertheless, a week or so later when Sandra was in the bank, she casually mentioned to the teller that she needed a new card because hers had been lost. She was shocked when a bank representative attempted to hold her responsible for hundreds of dollars of goods purchased with the ATM card. Sandra told the bank representative that she refused to cover the amounts, that she was moving her account, and that she wanted all preauthorized payments and EFTs stopped immediately. Which of the following is true regarding the bank's obligation to end preauthorized payments? A) The bank must immediately end preauthorized payments on the same day requested if the request is made during regular business hours. B) The bank must end preauthorized payments on the same day requested if the request is made by 2 p.m. C) The customer must notify the bank to stop the payment at least three days before the preauthorized payment is scheduled. D) The customer must notify the bank to stop the payment at least five days before the preauthorized payment is scheduled. E) The customer must notify the bank to stop the payment at least ten days before the preauthorized payment is scheduled.
114) Stolen Purses. Sandra and Mary were having lunch at their favorite restaurant. Unfortunately, a thief stole their purses containing their ATM cards. Mary notified her bank the next day of the theft of the ATM card. Unfortunately, the card had already been used to fraudulently obtain over $1,000. Sandra thought back to her business law class and did not call her bank, however, because she believed that she would not be liable for any charges on the ATM card because of the rules involving forgeries. Nevertheless, a week or so later when Sandra was in the bank, she casually mentioned to the teller that she needed a new card because hers had been lost. She was shocked when a bank representative attempted to hold her responsible for hundreds of dollars of goods purchased with the ATM card. Sandra told the bank representative that she refused to cover the amounts, that she was moving her account, and that she wanted all preauthorized payments and EFTs stopped immediately. Which of the following is true regarding the bank's obligation to stop EFT transfers?
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A) The bank must immediately end any EFTs on the same day requested if the request is made during regular business hours. B) The bank must end any EFT payments on the same day requested if the request is made by 2 p.m. C) The bank is not required to stop payments on EFTsbecause such transfers occur instantaneously. D) The bank must stop any EFT payments if the request is made within five days of the EFT authorization. E) The bank must stop any EFT payments if the request is made within 48 hours of the EFT authorization.
115)
The phrase _____ is necessary to create a negotiable instrument. A) payment certified B) to the order of C) payment warranted D) commercial paper E) negotiable instrument
116)
Which Article of the Uniform Commercial Code (UCC) controls commercial paper? A) Article 2 B) Article 2A C) Article 3 D) Article 3A E) Article 4
117)
A note is a promise by the maker of the note to pay a _____. A) debtor B) drawer C) payor D) payee E) drawee
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118) According to the Uniform Commercial Code (UCC), what constitutes a proper signature on an instrument? A) The entire name of the person must be written out in cursive handwriting. B) The entire name of the person can either be printed or handwritten in cursive. C) At a minimum, the person’s last name must be a part of the signature. D) At a minimum, the person’s first initial and last name must be a part of the signature. E) Anyone’s affirmative mark from a complete signature to an “X” will suffice, provided the party intended the mark to be placed on the instrument and uses that mark to identify himself.
119) When a person buys a traveler’s check, who can cash the traveler’s check or use it to make a purchase? A) Anyone the purchaser authorizes B) The person who purchased and signed for it C) The issuing bank or any of its accountholders D) Anyone in the purchaser’s immediate family, but only if he or she presents proper identification E) A designated third-party beneficiary
120)
To help facilitate electronic presentment, the United States Congress passed the _____. A) Check Clearing for the 21st Century Act of 2004 B) Check Clearing for the New Millennium Act of 2004 C) Check Presentment Act of 2002 D) Check Clearing Clarification Act of 2002 E) Acceptable Check Clearing Practices Act of 2003
121) Which of the following would the Uniform Commercial Code (UCC) not consider a bank?
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A) A trust company B) A savings bank C) A savings and loan D) A credit union E) A commercial check-cashing facility
122) Stored-value cards are typically plastic cards that contain _____ that contain data regarding the value of the card. A) magnetic strips B) plastic inserts C) taped strips D) authorization links E) authorization strips
ESSAY. Write your answer in the space provided or on a separate sheet of paper. 123) What is the difference between a demand negotiable instrument and a time negotiable instrument?
124)
What is a traveler’s check?
125)
List the six (6) requirements for an instrument to be negotiable.
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126) Anne orally promises Judy that in return for Judy washing Anne's dog, Anne unconditionally promises to pay Judy $50 the following Wednesday. Has a contract been formed, and if so, is it negotiable?
127) What information does the Truth-in-Savings Act require a depositary institution to disclose to a customer before he or she opens a deposit account?
128)
List the requirements generally required for a check to be considered properly payable.
129) What is the difference between a cashier's check and a certified check? Can a bank refuse to certify a check? Can a bank refuse to honor a cashier’s check?
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Answer Key Test name: Chap 17_5_The Essentials_Kubasek 1) TRUE A substitute for cash, or a negotiable instrument, is a written document containing the signature of the creator, who makes an unconditional promise or order to pay a sum certain in money either at a time certain or on demand. 2) TRUE Under Article 3 of the Uniform Commercial Code (UCC), documents of payment generically called commercial paper are specifically labeled negotiable instruments. 3) FALSE According to Uniform Commercial Code Section 3-103(a)(9), a note is a promise by the maker of the note to pay a payee. 4) FALSE According to UCC 3-103(a)(6), a draft is an order by a drawer to a drawee to pay a payee. 5) FALSE With a demand instrument, the payee (or subsequent holder) can demand actual payment at any time. 6) FALSE A time instrument is a draft that allows the payee to collect payment only at a specific time in the future. The Uniform Commercial Code (UCC) requires an "instrument payable at a definite time" to have a time easily determined from the document itself. 7) FALSE
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For an instrument to be negotiable, specific requirements of negotiability must be met. However, if an instrument fails to qualify as a negotiable instrument, that does not mean that the instrument fails to be a perfectly good, perfectly enforceable contract. All it means is that the special rules regarding negotiable instruments do not apply. 8) TRUE The Uniform Commercial Code requires that for an instrument to be negotiable, the instrument must satisfy the six requirements in the following definition: A negotiable instrument is a written document that is signed by the maker or drawer with an unconditional promise or order to pay a sum certain in money on demand or at a time certain to bearer or to order. 9) TRUE A negotiable instrument must be in writing to be enforceable. 10) TRUE According to the Uniform Commercial Code, in order to satisfy the writing requirement for a negotiable instrument, the written document must have two characteristics: relative permanence and movability. 11) TRUE If an instrument is silent as to the time of payment, the Uniform Commercial Code (UCC) presumes that it is a demand instrument; thus, it retains its negotiable status. 12) TRUE The promise or order to pay must be specific and not implied in order for an instrument to be negotiable. The language must be affirmative in nature. For example, simply acknowledging a debt does not create language for payment; therefore, a common IOU is not a promise or order to pay and thus cannot be a negotiable instrument. 13) FALSE
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Clearly, the law does not permit an oral negotiable instrument. According to the Uniform Commercial Code (UCC), a negotiable instrument must be a written document. 14) TRUE Automated signatures, either by stamp or machine, satisfy the Uniform Commercial Code (UCC) signature requirement for negotiable instruments. 15) FALSE Negotiable instruments must promise or order payment to be made in a national currency. Although a promise to pay in shares of stock may form a perfectly enforceable contract, the resulting instrument is not a negotiable instrument. 16) TRUE Instruments payable to no one, to “X,” or to “cash” are considered bearer instruments. 17) TRUE According to Uniform Commercial Code Section 3-201, negotiation is the transfer of possession to a third party, who becomes the holder of the negotiable instrument. 18) TRUE An order instrument is payable to a specific, named payee, while a bearer instrument is payable to whomever is in possession of the instrument. 19) TRUE To be successfully negotiated, order paper must be endorsed as well as delivered. 20) FALSE Order paper must be endorsed as well as delivered to be negotiated. The person creating the endorsement is the endorser, and the person receiving the endorsement is the endorsee. Version 1
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21) FALSE Normally, there is a place on the negotiable instrument for endorsements, such as on the back of a check. If there is no room on the instrument or if all the room has been taken by previous endorsements, an allonge must attached. An allonge is simply an additional piece of paper with the endorsements. It must be firmly attached (for example, stapled) to the negotiable instrument. 22) FALSE According to the Uniform Commercial Code (UCC), a check is a special kind of draft. A draft is an instrument that is an order. 23) FALSE According to Uniform Commercial Code (UCC) Section 3-104, money orders, particularly personal money orders, are usually in the same form as personal checks and are considered checks. A check is a special kind of draft. A draft is an instrument that is an order. 24) FALSE According to Uniform Commercial Code(UCC) Section 3-409(d), banks are not required to certify checks. If a bank refuses to certify a check, the check is not considered dishonored; it merely lacks the extra protection of certification. 25) FALSE In the check collection process, sometimes the depositary bank is the same bank as the payor bank. When this is the case, the check is referred to as an “on-us” item. 26) FALSE When a depositary bank receives a check, it must present the check at the payor bank or send it through intermediary banks to reach the payor bank. 27) TRUE
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To help facilitate electronic presentment, in 2004 the United States Congress passed the Check Clearing for the 21st Century Act (also known as Check 21 or the Check Truncation Act). Check 21 allows banks to forgo sending original checks as part of the collection or return process and instead send a truncated version. In place of the original paper check, a bank may send: a) a substitute check; or b) by agreement, an electronic image of the check along with data from the magnetic ink character recognition (MICR) line on the original check. 28) FALSE According to Uniform Commercial Code (UCC) Section 4-401(c), customers can postdate checks but they must give the bank notice of the postdated check. Therefore, a bank can assume that it can pay all checks on presentment unless the bank has received notice to the contrary. 29) FALSE A customer can issue a stop-payment order, an order by a drawer that instructs the drawee bank not to pay a check that has been drawn on the customer’s account. A customer issues a stop-payment order when she has issued a check that has not yet been accepted and she wants the check not to be accepted. 30) C A negotiable instrument is a substitute for cash. 31) D In a sales contract, the buyer can make payment through cash, credit arrangements, and negotiable instruments. 32) E A negotiable instrument is a written document containing the signature of the creator who makes an unconditional promise or order to pay a sum certain in money at either a time certain or on demand. 33) E
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Uniform Commercial Code (UCC) Section 3-104 recognizes four specific types of negotiable instruments: notes, certificates of deposits (a highly specialized type of note), drafts, and checks (a highly specialized type of draft). 34) B According to Section 3-104(a) of the Uniform Commercial Code (UCC), in order for an instrument to be negotiable, payment is to be made either on demand or at a fixed future time (a time certain). 35) D According to Uniform Commercial Code (UCC) Section 3-103(a)(6), a draft is an order by a drawer to a drawee to pay a payee. 36) D A cashier’s check: “[A] draft with respect to which the drawer and drawee are the same bank or branches of the same bank”. 37) A With a time instrument, payment can be made only at a specific time designated in the future. 38) D According to Uniform Commercial Code (UCC) Section 3-108(a), an instrument that is "payable on demand" is one that "(i) states that it is payable on demand or at sight, or otherwise indicates that it is payable at the will of the holder; or (ii) does not state any time of payment." 39) E A certificate of deposit is a promise made by a bank to pay a payee a certain amount of money at a future time. 40) A According to Uniform Commercial Code (UCC) Section 3-104(j), a certificate of deposit is a note of the bank. 41) D
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According to Uniform Commercial Code (UCC) Section 3-104(f), a check is a specific draft, drawn by the owner of a checking account, ordering the bank to pay the payee from that drawer's account. 42) A According to Uniform Commercial Code (UCC) Section 3-104(g), a cashier's check is “a draft with respect to which the drawer and drawee are the same bank or branches of the same bank.” 43) C According to the Texas Court of Appeals, due to an ambiguity caused by the slash marks, the endorsement of only one payee was required in order for the bank to properly release funds on the check. 44) C In order to satisfy the writing requirement for a negotiable instrument, the written document must have two characteristics: relative permanence and movability. 45) C The quality of a negotiable instrument that ensures its longevity is known as relative permanence. 46) B The quality of a negotiable instrument that ensures it is mobile and available is called movability. 47) E
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The Uniform Commercial Code (UCC) and cases interpreting the signature requirement are fairly liberal in interpreting what constitutes a signature. For example, according to Uniform Commercial Code Section 1-201(39), an “X” will suffice provided the party intended that the mark be placed on the instrument and uses that mark to identify himself. Further, under Uniform Commercial Code Section 3-401(b), the signature may be made manually or by means of a device or machine; and an agent's signature on behalf of her principal binds the principal and satisfies the signature requirement. 48) A According to Uniform Commercial Code (UCC) Section 3-103(a)(9), in order for an instrument to be negotiable, it must contain a promise or order to pay that is specific and not implied. The language must be affirmative in nature. For example, simply acknowledging a debt does not create language for payment; therefore, a common IOU is not a promise or an order to pay and thus cannot be a negotiable instrument. 49) B If the customer does not have enough funds to cover a check, the bank will dishonor the check and the customer becomes liable for the amount of the check. 50) B A customer can issue a stop-payment order, an order by a drawer that instructs the drawee bank not to pay a check that has been drawn on the customer’s account (UCC 4-403). 51) A According to Uniform Commercial Code Section 3-401(b), an agent's signature on behalf of her principal binds the principal and satisfies the signature requirement. 52) C
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According to Uniform Commercial Code (UCC) Section 3-104(a), negotiable instruments must promise or order payment to be made in a national currency. For example, U.S. dollars, English pounds, euros, and Japanese yen all satisfy the currency requirement. Gold is not currency, and although a promise to pay in gold may form a perfectly enforceable contract, the resulting instrument is not a negotiable instrument. 53) E Demand instruments, such as checks, are payable as soon as they are issued. 54) A According to Uniform Commercial Code (UCC) Section 3-108(a), if an instrument is silent as to the time of payment, it is presumed to be a demand instrument; therefore, it retains its negotiable status. 55) E For an instrument to be negotiable, the instrument must indicate that it was created for the purpose of being transferred. 56) D According to Uniform Commercial Code (UCC) Section 3-109(b), when a specific payee is named in an instrument, this is known as an order instrument. 57) D According to Uniform Commercial Code (UCC) Section 3-109(a), negotiable instruments payable to whomever is bearing them are known as bearer instruments. 58) B
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One important characteristic of negotiable instruments is the ease associated with transferring the instrument to a third party. Once a negotiable instrument is created, it can be transferred to another party through negotiation. According to Uniform Commercial Code (UCC) Section 3-201, negotiation is the transfer of possession to a third party who becomes the holder of the negotiable instrument. 59) A According to Uniform Commercial Code (UCC) Section 1-201(b)(21), a party who possesses a negotiable instrument payable to that party or to the bearer of the instrument is a holder of the instrument. 60) A A bearer instrument is an instrument payable to cash or to whomever is in possession of the instrument. Bearer paper requires only a delivery of the instrument to the holder by the payee. 61) C An order instrument is an instrument payable to a specific, named payee. While bearer paper requires only a delivery of the instrument to the holder by the payee, order paper requires delivery and an endorsement. 62) D The person creating the endorsement is the endorser. 63) E The person receiving the endorsement is the endorsee. 64) A If there is no room on an instrument for an endorsement, or if all the room has been taken by previous endorsements, an allonge may be attached. 65) A Blank and special are the two (2) kinds of unqualified endorsements. 66) C
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According to Uniform Commercial Code Section 3-205(b), a blank endorsement is simply the payee's or last endorsee's signature and nothing else. 67) A The effect of an unqualified blank endorsement is that it turns order paper into bearer paper. 68) D One problem with endorsements occurs when a negotiable instrument contains a misspelled name. In the event of a misspelled name, the holder may endorse the document with the misspelled name, the holder's actual name, or both. The typical practice is for the holder to endorse the instrument with the misspelled name followed by the holder’s actual name, spelled properly. 69) E One complication regarding endorsements involves instruments made payable to a legal entity. If the legal entity is an estate, organization, partnership, or the like, the instrument may be endorsed by any authorized representative of the entity. 70) D When the instrument reads, "Pay to the order of Jones or Smith," the instrument contains alternative payees. 71) A Joint payees exist when an instrument lists more than one person as a payee and the instrument is to be payable to all the listed payees, typically indicated by the word and. In the event of joint payees, the instrument would read, "Pay to the order of Smith and Jones." 72) D
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Joint payees exist when an instrument lists more than one person as a payee and the instrument is to be payable to all the listed payees, typically indicated by the word and. In the event of joint payees, the instrument would read, "Pay to the order of Smith and Jones." Instruments bearing joint payees require the endorsement of all listed payees before the instrument may be negotiated. 73) A A draft is an instrument that is an order. The drawer is the party that gives the order. 74) B A draft is an instrument that is an order. The drawer is the party that gives the order while the drawee is the party that must obey the order. 75) C A draft is an instrument that is an order. Three parties are related to this order. First, the drawer is the party that gives the order. Second, the drawee is the party that must obey the order. Finally, the payee is the party that receives the benefit of the order. 76) C According to the Uniform Commercial Code, a check is a special kind of draft. A draft is an instrument that is an order. Three parties are related to this order. First, the drawer is the party that gives the order. Second, the drawee is the party that must obey the order. Finally, the payee is the party that receives the benefit of the order. Thus, when you write a check at the grocery store, you are the drawer ordering the drawee (your bank) to make a payment to the payee (the grocery store). 77) E
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Although the number of checks written in the United States each year is rapidly declining, checks remain an important part of the bank-customer relationship. In fact, of all the negotiable instruments regulated by the Uniform Commercial Code (UCC), checks are the most common type used. 78) D Uniform Commercial Code (UCC) Section 4-105(1) defines a bank as "any business engaged in the business of banking." Consequently, savings banks, savings and loans, credit unions, and trust companies are all considered banks. 79) D Uniform Commercial Code Section 3-104(g) defines a cashier’s check as a check for which both the drawer and the drawee are the same bank. The payee of the check is a specific person. In other words, the bank is drawing on itself and thus assumes the responsibility for paying the check to that specific person. 80) B Uniform Commercial Code Section 3-409(d) defines a certified check as a check that is accepted at the bank at which it is drawn. 81) A According to Uniform Commercial Code Section 3-409(d), banks are not required to certify checks. If a bank refuses to certify a check, the check is not considered dishonored; it merely lacks the extra protection of certification. 82) E
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In the event a cashier’s check or certified check is lost, stolen, or destroyed, the Uniform Commercial Code (UCC) allows for recovery. According to UCC Section 3-312, the remitter (the party who purchased the check) or the payee may request a refund because the check was lost, stolen, or destroyed. With proper identification, the party should be able to obtain a full refund for the amount on the check. 83) C When a customer deposits a check at his or her bank, that bank is the depositary bank. 84) A According to Uniform Commercial Code (UCC) Section 4-302, when a check reaches the payor bank in the check collection process, the payor bank must respond to the check by dishonoring it or becoming liable for the face amount of the check. The bank upon which the check is drawn is the payor bank. 85) D When a depositary bank (the first bank in the check collection process) receives a check, it must present the check at the payor bank (the last bank in the check collection process) or send it through intermediary banks to reach the payor bank. 86) A Sometimes the depositary bank is the same bank as the payor bank. When this is the case, the check is referred to as an "on-us” item. 87) C According to Uniform Commercial Code (UCC) Section 4-108, a bank may determine that 2:00 p.m. or later is the cutoff hour for handling checks. If the bank receives a check after this deadline, the bank will defer posting this check to its customer’s account until the next day. 88) A
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Because customers were frustrated with extended holds on checks, the United States Congress enacted the Expedited Funds Availability Act of 1987. This act created explicit timelines that mandate when banks must make deposited funds available to customers. If the risk of dishonor is low, the funds must be made available very quickly. For example, according to 12 C.F.R. Section 229.10(a)-(c), the first $100 of any amount deposited must be available to the depositor on the business day following the day of deposit. The availability of the rest of the funds depends on whether the check is local, what the amount of the check is, and how the depositor wants to withdraw the funds. 89) C If a check is not presented to a bank within six months of its date, the check is considered a stale check. Banks are not required to honor stale checks. 90) B If a customer examines a bank statement and does not notify the bank of the first forgery within 30 days, the customer will be liable for future forgeries on the customer's account by the same wrongdoer. 91) B According to Uniform Commercial Code Section 4-207(a)(2), generally, when an endorsement has been forged, the first party to accept the forged instrument is ultimately liable for the loss because a forged endorsement does not legally transfer title. 92) A The Uniform Commercial Code (UCC) defines an alteration as a change (without consent) that modifies the obligation of a party to the instrument. 93) A
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Consumer fund transactions are governed by the Electronic Fund Transfer Act (EFTA) of 1978. This act sets out the rights and liabilities of the parties involved in electronic fund transfers (EFTs). 94) C If a customer's ATM card is lost or stolen, the customer must notify the bank within two (2) days. The customer is then liable for only the first $50 stolen. 95) C Digital cash, money stored electronically on microchips, magnetic strips, or other computer media, would allow for the elimination of physical currency. 96) A Stored-value cards are typically plastic cards that contain magnetic strips, similar to those on credit cards or ATM cards, containing data regarding the value of the card. 97) D Electronic negotiable instruments are often favorable to traditional negotiable instruments because electronic forms foster more efficient business practices by reducing the amount of time a document must wait to be processed. That being said, the very nature of electronically sent information means that certain types of negotiable instruments should not be in a virtual format. An excellent illustration of this concept is found within the 2008 Kenya Communications Act, which outlines exclusions for electronic negotiable instruments. For example, the Act excludes the creation or execution of a will from being upheld as a legal negotiable instrument in court. Considering the ease with which a person could falsify an online signature, it is impractical to allow important documents such as wills to be completed in an electronic format. 98) A
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The Gramm-Leach-Bliley Act (12 U.S.C. Sections 24a, 248b, 1820a, 1828b) controls how financial institutions handle customer information, thereby ultimately providing greater privacy protections to financial institution customers. 99) D In the event of a misspelled name, the holder may endorse the document with the misspelled name, the holder's actual name, or both. 100) D When an instrument does not specify whether the payees are joint or alternative, the endorsement of only one listed payee is required to negotiate the instrument. 101) B In order to qualify as a negotiable instrument, a document must contain either the words of negotiability—"to the order of"—or words indicating that it is a bearer instrument. 102) B In order to qualify as a negotiable instrument, a document must be in writing and must contain either the words of negotiability—"to the order of"—or words indicating that it is a bearer instrument. 103) C A requirement for negotiability is that an instrument be for a sum certain in money; however, an important concept that many people miss is that if an instrument fails to qualify as a negotiable instrument, that does not mean that the instrument fails to be a perfectly valid and enforceable contract. 104) E According to Uniform Commercial Code (UCC) Section 3-104(a), a negotiable instrument is a written document that is signed by the maker or drawer with an unconditional promise or order to pay a sum certain in money on demand or at a time certain to the order of bearer. Version 1
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105) E To satisfy negotiability requirements, a written document must have two characteristics: relative permanence and movability. 106) A The handwritten statement "I, John Smith, promise to pay Paula Smith or to bearer, the sum of $100 on Monday, July 22, 2019" would satisfy the signature requirement because the handwriting affirms the maker's intent, and in that handwritten promise, the maker wrote his own name, John Smith. 107) E Simply acknowledging a debt does not create language for payment; therefore, a common IOU is not a promise or an order to pay and thus cannot be a negotiable instrument. 108) E In order to satisfy requirements for negotiability, an instrument must contain an unconditional promise or order to pay a sum certain in money. 109) C According to Uniform Commercial Code (UCC) Section 3-109(b), when a specific payee is named, this is known as an order instrument. In contrast, UCC Section 3-109(a) states that negotiable instruments payable to whomever is bearing them are known as bearer instruments. 110) D Bearer instruments are treated like cash. One who comes into possession of a bearer instrument by any means, including theft, may claim the payment due on the instrument. 111) B If a customer's ATM card is lost or stolen, the customer must notify the bank within two days, and the customer is then liable for only the first $50 stolen. Version 1
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112) D If a customer's ATM card is lost or stolen, the customer must notify the bank within two days; otherwise, the customer will be held liable for up to $500 that is stolen. 113) C The customer may stop a preauthorized payment by notifying the bank at any time up to three days before the preauthorized payment is scheduled. 114) C A customer may not stop payment on an EFT because such transfers occur instantaneously. 115) B The phrase to the order of is then necessary to create a negotiable instrument. Wordings such as “Pay to bearer,” “Pay to Jim Smith or bearer,” “Pay to cash,” and “Pay to the order of cash [or bearer]” would all result in the paper being negotiable. 116) C These documents of payment are generically called commercial paper, and under Article 3 of the Uniform Commercial Code (UCC), they are specifically labeled negotiable instruments. 117) D A note is a promise by the maker of the note to pay a payee [UCC 3103(a)(9)]. 118) E The Uniform Commercial Code (UCC) and cases interpreting the signature requirement are fairly liberal in interpreting what constitutes a signature. Anyone’s affirmative mark, from a full-blown signature to an X, will suffice, provided the party intended the mark to be placed on the instrument and uses that mark to identify himself [UCC 1-201(39)]. 119) B Version 1
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The person who signs the traveler’s check must sign it when she buys the checks; then, when she is ready to use the traveler’s check to make some kind of payment, the same person must sign the traveler’s check again, in the presence of the acceptor. 120) A To help facilitate electronic presentment, in 2004, the United States Congress passed the Check Clearing for the 21st Century Act (also known as Check 21 or the Check Truncation Act). 121) E The Uniform Commercial Code (UCC) defines a bank as “any business engaged in the business of banking” [4-105(1)]. Consequently, savings banks, savings and loans, credit unions, and trust companies are all considered banks. 122) A The most common example of e-money is stored-value cards. Storedvalue cards are typically plastic cards that contain magnetic strips. The magnetic strips, similar to those on credit cards or ATM cards, contain data regarding the value of the card. 123) Notes and drafts can either be demand instruments or time instruments. With a demand instrument, the payee (or subsequent holder) can demand actual payment at any time. Uniform Commercial Code Section 3-108(a) defines an instrument that is payable on demand as one that “(i) states that it is payable on demand or at sight, or otherwise indicates that it is payable at the will of the holder, or (ii) does not state any time of payment. With a time instrument, payment can be made only at a specific time designated in the future. Uniform Commercial Code Section 3-108(b) requires an “instrument payable at a definite time” to have a time easily determined from the document itself.
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124) According to Uniform Commercial Code Section 3-104(i), a traveler's check is an instrument that: (i) is payable on demand, (ii) is drawn on or payable at or through a bank, (iii) is designated by the term "traveler's check" or by a substantially similar term, and (iv) requires, as a condition to payment, a countersignature by a person whose signature appears on the instrument. 125) According to the Uniform Commercial Code, the six requirements for an instrument to be negotiable are as follows: (1) The instrument is a written document; (2) It is signed by the creator of the instrument; (3) The instrument has an unconditional promise or order to pay; (4) The amount to be paid is a sum certain in money; (5) Payment is to be made either on demand or at a fixed future time (a time certain); and (6) The document must contain either the words of negotiability—“to the order of”—or words indicating that it is a bearer instrument. 126) Based on the facts presented, a contract has been formed because the basic elements of contract formation—offer, acceptance, and an exchange of consideration are present. Negotiability is absent, however, because the agreement is not in writing (and therefore is not signed), and it does not contain words indicating negotiability or words indicating that it is a bearer instrument.
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127) In an effort to allow consumers to be better informed, the United States Congress passed the Truth-in-Savings Act (TISA) in 1991. The TISA requires depositary institutions to disclose, in great detail, the terms and conditions of their accounts. Depositary institutions include commercial banks, savings banks, credit unions, and savings and loan institutions. The TISA requires every bank to inform its customers of a number of specific pieces of information relevant to the bank’s accounts. This information is to be handed to the customer as a pamphlet, brochure, or handout before the customer opens a deposit account. The information that must be given to the customer includes: (1) The minimum balance required to open an account and to be paid interest; (2) The manner in which the balance of the account will be calculated; (3) The annual percentage yield of interest for the account; (4) The way interest on the account will be calculated; (5) Notification of any fees, charges, and penalties the account may be assessed and how they are calculated; and (6) Notification of any limitations on withdrawals or deposits. 128) Under the properly payable rule, a bank has a duty to pay checks from its customer’s account as long as the checks are “properly payable.” In other words, a check must be authorized by the drawer and must not violate an agreement between the bank and the customer. Generally, for a check to be considered properly payable, it must: (1) Have the drawer's authorized signature on the check; (2) Be paid to a person entitled to enforce the check; (3) Not have been altered; (4) Not have been completed by addition of unauthorized terms if the check was incomplete; (5) Be paid on or after the date of the check; and (6) Not be subject to a stop payment from the drawer. Version 1
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129) According to Uniform Commercial Code Section 3-104(g), a cashier's check is a check for which both the drawer and the drawee are the same bank, and the payee of the check is a specific person. Per Uniform Commercial Code Section 3-409(d), a certified check is a check that is accepted at the bank at which it is drawn. Banks are not required to certify checks. If a bank refuses to certify a check, the check is not considered dishonored; it merely lacks the extra protection of certification. In contrast, a bank cannot refuse to honor a properly issued and properly presented cashier’s check. With a cashier’s check, the bank is drawing on itself and thus assumes the responsibility for paying the check to the specific person designated as the payee. Customers often purchase cashier’s checks to give to creditors who want to be sure the funds represented by the check are available. Cashier’s checks are useful because they are considered by many in the business community to be the near equivalent of cash.
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CHAPTER 18 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) The purpose of holder-in-due-course status is to impose liability on financial intermediaries for transaction risks. ⊚ true ⊚ false
2)
A holder in due course must take a negotiable instrument in good faith. ⊚ true ⊚ false
3)
A payee cannot be considered a holder in due course. ⊚ true ⊚ false
4) According to the Uniform Commercial Code (UCC), a party may be a holder in due course of a non-negotiable instrument. ⊚ true ⊚ false
5) If a demand instrument is a check, the Uniform Commercial Code (UCC) deems the check overdue thirty (30) days after its date. ⊚ true ⊚ false
6) When a party receives a negotiable instrument as a gift, the party will be a holder instead of a holder in due course. ⊚ true ⊚ false
7) The "for value" requirement for holder-in-due-course status is the same as taking something for consideration.
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⊚ ⊚
true false
8) A holder can take an instrument for value if the holder acquires a security interest or some other lien in the instrument. ⊚ true ⊚ false
9) The Uniform Commercial Code (UCC) defines good faith as honesty in fact and the observation of reasonable commercial standards of fair dealing. ⊚ true ⊚ false
10)
A time instrument becomes overdue sixty (60) days after it is executed. ⊚ true ⊚ false
11) A holder in due course is free from the defenses of fraud in the inducement in the underlying contract; the unauthorized completion or material alteration of the instrument; and the unauthorized acquisition of the instrument. ⊚ true ⊚ false
12) According to the shelter principle, if a holder cannot attain holder-in-due course status, the holder cannot acquire the rights and privileges of a holder in due course even if the item is being transferred from a holder in due course. ⊚ true ⊚ false
13) Allowing parties to achieve the rights of a holder in due course through the shelter principle encourages financial interactions. ⊚ true ⊚ false
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14) The Uniform Commercial Code (UCC) imposes liability if the party or the party's agent signs the instrument. ⊚ true ⊚ false
15) Uniform Commercial Code (UCC) Section 3-401(b) defines a signature as any name, word, mark, or symbol used by a party to authenticate a writing. ⊚ true ⊚ false
16) A party who is conditionally liable on an instrument must pay the stated amount when it is presented for payment and make the payment without resorting to any other party. ⊚ true ⊚ false
17) Even if a holder is aware that an instrument he or she is taking has been dishonored, the holder can still become a holder in due course by paying value for the instrument. ⊚ true ⊚ false
18) A party who signs an instrument to provide credit for another party who has also signed the instrument is known as an acclimation party. ⊚ true ⊚ false
19) Regardless of whether a transfer is through an endorsement, transfer warranties apply to any future holders. ⊚ true ⊚ false
20) When a party signs a negotiable instrument without knowing that it is in fact a negotiable instrument, the party can claim fraud in the pretense.
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true false
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 21) To be considered a holder in due course, four (4) requirements must be met. Which of the following is not one of those requirements? A) The holder’s financial solvency B) The holder’s good faith C) A complete and authentic negotiable instrument D) The holder took the negotiable instrument for value E) The holder took the negotiable instrument without notice of any defect
22) Which of the following sections of the Uniform Commercial Code (UCC) establishes the four (4) requirements for becoming a holder in due course? A) 1-202 B) 2-302 C) 2A-302 D) 3-302 E) 4-202
23)
Which of the following is not a requirement for becoming a holder in due course? A) The party must be a holder of a complete and authentic negotiable instrument. B) The holder must take the instrument for value. C) The holder must take the instrument in good faith. D) The holder must take the instrument without notice of defects. E) The holder must either pay for the instrument or receive it as a gift.
24) A party who is _____ of an instrument that is payable to the party or to the bearer of the instrument is known as a holder.
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A) aware B) in possession C) a third-party beneficiary D) an incidental beneficiary E) a contingent beneficiary
25) If Adam Brewer possesses a check that states “Payable to Adam Brewer,” Adam is a(n) _____. A) assignee B) holder C) holder in due course D) delegatee E) incidental beneficiary
26) In terms of the requirements for becoming a holder in due course, which requirement is related to, but more stringent than, consideration? A) For value B) In good faith C) Without notice of defects D) A complete and authentic instrument E) Negotiation
27) Bart received a check for his birthday as a present from his grandmother. Bart is a(n) _____ of the check. A) holder in due course B) assignor C) assignee D) drawer E) holder
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28) According to the Uniform Commercial Code (UCC), _____ is defined as "honesty in fact and the observance of reasonable commercial standards of fair dealing." A) merchantability B) subjective reasonableness C) objective reasonableness D) good faith E) commercial practicability
29)
Which of the following would prevent a holder from becoming a holder in due course? A) The holder is aware the instrument will soon be due. B) The holder is aware the instrument contains more than two (2) authorized signatures. C) The holder is aware there is no third-party claim to the instrument. D) The holder is aware the instrument will be honored. E) The holder is aware another party has a claim in recoupment to the instrument.
30) fact?
According to the Uniform Commercial Code (UCC), when does a person have notice of a
A) When the person has actual knowledge of the fact B) When the facts and circumstances known to the person at the time in question give the person reason to know that the fact exists C) When the person receives notice or notification of the facts D) When the person has actual notice of the fact, when the facts and circumstances known to the person at the time in question give the person reason to know that the fact exists, or when the person receives notice or notification of the facts E) When the person has actual knowledge of the fact or the facts and circumstances known to the person at the time in question give the person reason to know that the fact exists, but not when the person receives notice or notification of the fact
31) Riley received a check for cutting his neighbor’s yard and placed it in his desk drawer. Six (6) months later, he found it. When is the check considered overdue?
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A) When it has been rescinded B) After thirty (30) days C) After sixty (60) days D) After ninety (90) days E) Never, since an issued check is valid indefinitely
32)
A holder in due course is free from which of the following personal defenses?
A) Lack or failure of consideration and breach of contract B) Fraud in the inducement in the underlying contract and breach of contract C) Lack or failure of consideration and fraud in the inducement in the underlying contract D) Lack or failure of consideration, breach of contract, and fraud in the inducement in the underlying contract E) Fraud in the essence, discharge of the party liable through bankruptcy, and material alteration of a completed instrument
33) Which of the following propositions states that if an item is transferred from one person to another, the transferee acquires all the rights that the transferor had in the item? A) The shelter principle B) The parol evidence rule C) The substantial performance doctrine D) The commercial impracticability doctrine E) The promissory estoppel doctrine
34) In England, the doctrine of _____ declares that contracts are exclusive to those who created them. A) promissory estoppel B) commercial impracticability C) privity of contract D) substantial performance E) quasi-contract
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35)
Which section of the Uniform Commercial Code (UCC) recognizes signature liability? A) Section 2-301 B) Section 2A-301 C) Section 3-401 D) Section 3A-401 E) Section 4-501
36) The two (2) main types of warranties that a party may be liable for on an instrument because of breach of warranty include _____ and _____ warranties. A) transfer; inverse B) inverse; signature C) transfer; presentment D) primary; presentment E) transfer; secondary
37) Gloria signs a promissory note assuring that if her daughter Juliana does not make payments in satisfaction of her car loan, Gloria will pay. Gloria is _____ liable. A) permanently B) custodially C) statutorily D) primarily E) secondarily
38)
Which of the following is true regarding liability on negotiable instruments?
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A) Makers and acceptors are primarily liable for a negotiable instrument, while drawers and endorsers are secondarily liable. B) Drawers and endorsers are primarily liable for a negotiable instrument, while makers and acceptors are secondarily liable. C) Makers and drawers are primarily liable for a negotiable instrument, while acceptors and endorsers are secondarily liable. D) Acceptors and endorsers are primarily liable for a negotiable instrument, while makers and drawers are secondarily liable. E) Makers, acceptors, drawers, and endorsers are all secondarily liable for a negotiable instrument.
39) When does the liability begin on an instrument if a person is primarily liable for the instrument? A) Twenty-four (24) hours after the instrument is issued B) Forty-eight (48) hours after the instrument is issued C) Immediately upon issuance of the instrument D) Either twenty-four (24) or forty-eight (48) hours after the instrument is issued, depending on the type of instrument E) When a default occurs
40) According to the Uniform Commercial Code (UCC), a party who signs as an issuer of an instrument is liable for the amount of the instrument _____. A) as soon as it is issued B) three (3) business days after the instrument is executed C) three (3) calendar days after the instrument is presented for payment D) three (3) business days after the instrument is presented for payment E) three (3) calendar days after the instrument is executed
41) According to Uniform Commercial Code (UCC) Section 3-413(a), who is a drawee of a draft that accepts and signs the draft and agrees to pay the draft when it is presented for payment?
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A) The endorser B) The acceptor C) The holder D) The holder in due course E) The drawer
42)
Which of the following is the person who orders the drawee to pay? A) The maker B) The acceptor C) The drawer D) The endorser E) The promisor
43) A(n) _____ is a party who signs an instrument to restrict payment of it, negotiate it, or incur liability with respect to it. A) acceptor B) endorser C) draftee D) payor E) agent
44)
Which of the following must occur for a drawer to become liable on an instrument?
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A) The holder of the instrument must present the instrument in a proper and timely fashion. B) The instrument must be dishonored. C) Notice of the dishonor must be given to the drawer. D) The holder of the instrument must present the instrument in a proper and timely fashion, the instrument must be dishonored, and notice of the dishonor must be given to the drawer. E) The holder of the instrument must present the instrument in a proper and timely fashion and the instrument must be dishonored, but no notice of dishonor is required becausethe party adversely affected by the dishonor may proceed directly to court.
45) According to the Uniform Commercial Code (UCC), how can a proper presentment occur? A) By any commercially reasonable means B) Through a clearinghouse procedure C) At a place designated in the instrument D) By any commercially reasonable means, through a clearinghouse procedure, or at a place designated in the instrument E) Through a clearinghouse procedure or at the place designated in the instrument, but not by any commercially reasonable means
46) Marion presents for payment at his local bank his payroll check from Industrial Widget Supply, Incorporated. The bank refuses to cash or accept the payroll check. In this case, the bank has _____ the check. A) rescinded B) nullified C) dishonored D) revoked E) abdicated
47) If the party that dishonors an instrument is a collection bank, when must the collecting bank give notice of the dishonor to a secondarily liable party?
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A) Before midnight on the next banking day B) Before 2:00 p.m. on the next banking day C) Before 5:00 p.m. on the next banking day D) Before 6:00 p.m. on the next banking day E) Before the end of the business week (more specifically, 5:00 p.m. on Friday) in which the collecting bank dishonored the instrument
48) After initially receiving notice of dishonor, when must parties other than a collection bank give notice of dishonor to a secondarily liable party? A) Before midnight on the next banking day B) Before 2:00 p.m. on the next banking day C) Within three (3) days of the day on which the party receives notice of dishonor D) Within five (5) days of the day on which the party receives notice of dishonor E) Within thirty (30) days of the day on which the party receives notice of dishonor
49) Lauren receives notice that her bank has dishonored her commercial check. The notice came via email. Lauren disputes that this is a proper way to notify her that her check has been dishonored. Is she correct? A) Yes, since the Uniform Commercial Code (UCC) mandates that dishonor must occur either over the telephone or in person B) Yes, since the UCC mandates that dishonor must occur by registered mail C) Yes, since the UCC mandates that dishonor must first occur orally, followed by a registered letter of dishonor D) No, since the UCC states that dishonor can occur orally, in writing, or electronically E) No, since the state in which she resides might have not yet adopted UCC Section 3
50)
Which of the following is true if an instrument contains more than one endorsement?
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A) Each endorser is liable for the full amount to any subsequent endorser or to any holder. B) Only the last endorser is liable to the holder, and no prior endorsers are liable to a subsequent endorser. C) Each endorser is liable for the full amount to the subsequent endorser, but only the last endorser is liable to any holder. D) The last endorser is liable to the holder, whereas subsequent endorsers are responsible for reimbursing previous endorsers in proportion to the number of endorsers that exist. E) Each endorser is liable to the holder in proportion to the number of endorsers.
51) Which of the following is a party who signs an instrument to provide credit for another party that has also signed on the instrument? A) A primary party B) An accommodation party C) A benefactor D) An intermediary E) An acclimation party
52)
Which of the following is true regarding the liability of an accommodation party?
A) As a maker, an accommodation party has primary liability, but as an endorser, the accommodation party has secondary liability. B) An accommodation party has primary liability both as a maker and as an endorser. C) An accommodation party has secondary liability both as a maker and as an endorser. D) An accommodation party has primary liability as either a maker or endorser, but only if all other parties to the instrument have filed for and received bankruptcy protection. E) An accommodation party has primary liability as a maker only if all other parties to the instrument have filed for and received bankruptcy protection, and secondary liability in any other case regardless of whether the accommodation party is a maker or an endorser.
53) Which of the following is not one of the ways an accommodation party may sign on an instrument?
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A) As a maker B) As an acceptor C) As a drawer D) As an endorser E) As a holder
54) If a principal decides to ratify an unauthorized agent's signature, the principal will become liable for the instrument, while the agent _____. A) will remain fully responsible as well B) will only remain partially responsible C) will have liability according to a statutorily designated percentage, depending on the state in which ratification occurs D) will escape personal liability E) will escape liability to the third party but must indemnify the principal via wage or salary garnishment
55) What was the result in the Rakestraw v. Rodriguez case referenced in the textbook, a case in which a husband had forged his wife’s signature to obtain a loan to start a grocery store? A) The court affirmed the criminal liability of the husband, but remanded the case for further findings regarding the propriety of the husband’s prison sentence for forgery. B) The court remanded the case for further findings regarding whether the wife gave her husband express authority to sign her name. C) The court ruled that the wife’s actions in sharing in profits and in helping run the business effectively voided her signature. D) The court ruled that the wife’s actions in sharing in profits and in helping run the business effectively ratified her signature. E) The court ruled that the wife’s actions in sharing in profits and in helping run the business effectively rescinded her signature.
56) When will a party's negligence not permit the party to escape liability for an unauthorized signature?
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A) Any type of negligence will result in a party being unable to escape liability for an unauthorized signature. B) The issue of negligence is irrelevant as to whether a party may escape liability for an unauthorized signature, because a party is always liable for an unauthorized signature. C) A party who is negligent may not escape liability for an unauthorized signature if the party whose signature was forged behaved so negligently as to substantially contribute to the making of the forgery. D) A party's negligence will not permit the party to escape liability for an unauthorized signature, but only if the negligence amounts to a finding of recklessness. E) A party's negligence will not permit the party to escape liability for an unauthorized signature, but only if the negligence involved a certified check.
57) Carl, without Eddie's knowledge, impersonates Eddie and thereby convinces Connie, who has never seen Eddie, to write a check to Eddie. Carl forges Eddie's name on the check and deposits it into his, Carl's, account. Which of the following is true regarding whether Connie will be liable for the amount of the check? A) Under the forgery rule, Connie will be held liable. B) Under the transferor rule, Connie will be held liable. C) Under the payee rule, Connie will be held liable. D) Under the imposter rule, Connie will be held liable. E) Under the fictitious payee rule, Connie will not be held liable.
58) Zachary, who has been authorized to write a check from a company account to pay employees, draws bonus checks from the company account for five imaginary employees; he then endorses the checks in their names and deposits the checks into his own bank account. Which of the following is true regarding whether the company will be required to take the loss on the checks?
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A) Under the fictitious payee rule, the company will be required to take the loss on the checks unless the company can obtain the funds from Zachary. B) Under the imposter rule, the company will be required to take the loss on the checks unless the company can obtain the funds from Zachary. C) Under the transferor rule, the company will be required to take the loss on the checks unless the company can obtain the funds from Zachary. D) Under the employee-liability rule, the company will be able to recover from any bank that cashed the check in addition to Zachary. E) Under the Banking Liability Enhancement Act of 2009, the company will be able to recover from any bank that cashed the check in addition to Zachary.
59)
Which of the following are types of warranties regarding instruments?
A) Transfer and acknowledgement B) Presentment and acknowledgement C) The implied warranty of merchantability and the implied warranty of title, but not the implied warranty of fitness for a particular purpose D) Transfer, presentment, the implied warranty of merchantability, the implied warranty of title, and the implied warranty of fitness for a particular purpose E) Transfer and presentment
60) If an instrument is not an unaccepted draft presented to a drawee, which of the following presentment warranties is applicable? A) That the warrantor of the instrument is or was entitled to payment or authorized to obtain payment B) That the instrument has not been altered C) That the warrantor has no knowledge that the drawer's signature or the draft is unauthorized D) That the warrantor of the instrument is entitled to enforce the instrument, that the instrument has not been altered, and that the warrantor has no knowledge that the drawer's signature or the draft is unauthorized E) That the warrantor of the instrument is entitled to enforce the instrument and that the warrantor has no knowledge that the drawer's signature or the draft is unauthorized, but not that the instrument has not been altered
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61)
Real defenses, also called _____ defenses, apply to all parties. A) personal B) universal C) impersonal D) qualified E) strict liability
62) Tony takes a piece of paper to his grandmother to sign. He tells her that the paper is a waiver and release to allow him to pick up her prescription medicine. It is in fact a promissory note. To avoid liability, Tony’s grandmother could claim _____. A) fraud in the inducement B) negligence C) malice aforethought D) fraud in the factum E) fraud in the factum and fraud in the inducement
63)
Personal defenses to the payment of an instrument include _____. A) breach of contract or warranty B) fraud in the inducement C) illegality D) breach of contract or warranty, fraud in the inducement, and illegality E) illegality and lack or failure of consideration, but not breach of contract or warranty
64) When a party's liability for a negotiable instrument is terminated, this party's liability has been _____. A) remanded B) annulled C) discharged D) ratified E) absconded
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65) When reacquisition occurs, anyone who endorsed the instrument between the initial acquisition and the reacquisition by the holder has his or her endorsement _____. A) nullified B) dishonored C) ratified D) renewed E) canceled
66) When can a transferee bring suit against a transferor for a breach of warranty regarding a negotiable instrument? A) As soon as the transferee discovers that a breach of warranty has occurred, he or she can sue the transferor. B) The transferee must wait at least three (3) business days after he or she discovers that a breach of warranty has occurred before suing the transferor. C) The transferee must wait at least five (5) calendar days after he or she discovers that a breach of warranty has occurred before suing the transferor. D) The transferee must wait at least ten (10) business days after he or she discovers that a breach of warranty has occurred before suing the transferor. E) The transferee must wait at least thirty (30) calendar days after he or she discovers that a breach of warranty has occurred before suing the transferor.
67) According to Uniform Commercial Code (UCC) Article 3, which of the following is a personal defense to liability on a negotiable instrument? A) The non-issuance of an instrument B) The modification of an obligation by a separate agreement C) The non-delivery of an instrument D) The non-issuance of an instrument, the modification of an obligation by a separate agreement, or the non-delivery of an instrument E) The non-delivery of an instrument or the non-issuance of an instrument, but not the modification of an obligation by separate agreement
68)
Which of the following is true regarding discharge by impairment of the collateral?
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A) Discharge cannot occur through impairment of the collateral. B) If a party posts collateral to ensure his or her performance of the negotiable instrument and the holder of the collateral impairs its value, the party to the instrument is discharged from the instrument to the extent of the damage to the collateral. C) If a party posts collateral to ensure his or her performance of the negotiable instrument and the holder of the collateral impairs its value, the party to the instrument is totally discharged from the instrument regardless of the extent of the damage to the collateral. D) If a party posts collateral to ensure his or her performance of the negotiable instrument and the holder of the collateral impairs its value, the party to the instrument is totally discharged from the instrument only if the instrument is for less than $500; otherwise, the party to the instrument is discharged from the instrument to the extent of the damage to the collateral. E) If a party posts collateral to ensure his or her performance of the negotiable instrument and the holder of the collateral impairs its value, the party to the instrument is totally discharged from the instrument only if the instrument is for less than $1,000; otherwise, the party to the instrument is discharged from the instrument to the extent of the damage to the collateral.
69)
The right to _____ is the ability of a party to seek reimbursement. A) rescission B) recourse C) renunciation D) revocation E) recusal
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70) Check Cashing Business. Susan owns and operates a check cashing business. A customer, Bob, claiming to be Sam, came in and cashed a $2,000 check issued by ABC Trucking to Sam. The day after Susan cashed the check, she received a notice from ABC Trucking that some checks had been stolen. It was later discovered that the customer had forged Sam's name on the check issued by ABC Trucking. At the time she took the ABC Trucking check, Susan was very busy with several customers in line. She simply glanced at the check and cashed it. A reasonable examination would have revealed that the check had been materially altered and changed from the amount of $200 to $2,000. Susan decided that she needed to hire some people to help her because she also had a problem with another check. On the same day that she took the ABC Trucking check, she took a check from another customer, Maurice. It was later discovered that the check from Maurice, which was four months old, was the subject of a dispute between Maurice and the issuer of the check for whom Maurice had done some work. The issuer claimed that the work was improperly done. Both ABC Trucking and the issuer of the check to Maurice stopped payment on the checks. Susan claims that she was entitled to the status of a holder in due course and was entitled to payment on both checks. What is the effect of Susan receiving notice the day after she cashed the check for Bob that the check had been stolen? A) The notice has no effect on her status as a holder in due course, because it was provided after she cashed the check. B) The notice prevents her from being a holder in due course. C) The notice prevents her from being a holder in due course, but only if Bob had been convicted of check-cashing offenses in the past, because she would have discovered his history had she checked. D) The notice prevents her from being a holder in due course, but only if she subjectively knew that Bob had been charged criminally with check-cashing violations in the past. E) The notice prevents her from being a holder in due course because it was presented to a business; only individuals can avoid the effect of notice of theft by cashing a check prior to receiving notice.
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71) Check Cashing Business. Susan owns and operates a check cashing business. A customer, Bob, claiming to be Sam, came in and cashed a $2,000 check issued by ABC Trucking to Sam. The day after Susan cashed the check, she received a notice from ABC Trucking that some checks had been stolen. It was later discovered that the customer had forged Sam's name on the check issued by ABC Trucking. At the time she took the ABC Trucking check, Susan was very busy with several customers in line. She simply glanced at the check and cashed it. A reasonable examination would have revealed that the check had been materially altered and changed from the amount of $200 to $2,000. Susan decided that she needed to hire some people to help her because she also had a problem with another check. On the same day that she took the ABC Trucking check, she took a check from another customer, Maurice. It was later discovered that the check from Maurice, which was four months old, was the subject of a dispute between Maurice and the issuer of the check for whom Maurice had done some work. The issuer claimed that the work was improperly done. Both ABC Trucking and the issuer of the check to Maurice stopped payment on the checks. Susan claims that she was entitled to the status of a holder in due course and was entitled to payment on both checks. What is the effect of the alteration of the check on Susan's status as a holder in due course? A) The alteration has no effect because a holder is not charged with examining an instrument presented for payment. B) The alteration will likely prohibit her from being a holder in due course. C) The alteration will affect her status as a holder in due course, but only if she had been put on notice of prior criminal behavior on the part of Bob. D) The alteration will affect her status as a holder in due course, but only if the issuer can establish that it was not negligent in allowing a thief to gain access resulting in the alteration. E) The alteration will affect her status as a holder in due course because it involved over $500; otherwise, based on the purpose of the law to protect holders, the alteration would have had no effect.
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72) Check Cashing Business. Susan owns and operates a check cashing business. A customer, Bob, claiming to be Sam, came in and cashed a $2,000 check issued by ABC Trucking to Sam. The day after Susan cashed the check, she received a notice from ABC Trucking that some checks had been stolen. It was later discovered that the customer had forged Sam's name on the check issued by ABC Trucking. At the time she took the ABC Trucking check, Susan was very busy with several customers in line. She simply glanced at the check and cashed it. A reasonable examination would have revealed that the check had been materially altered and changed from the amount of $200 to $2,000. Susan decided that she needed to hire some people to help her because she also had a problem with another check. On the same day that she took the ABC Trucking check, she took a check from another customer, Maurice. It was later discovered that the check from Maurice, which was four months old, was the subject of a dispute between Maurice and the issuer of the check for whom Maurice had done some work. The issuer claimed that the work was improperly done. Both ABC Trucking and the issuer of the check to Maurice stopped payment on the checks. Susan claims that she was entitled to the status of a holder in due course and was entitled to payment on both checks. What is the effect on Susan's status as a holder in due course in taking the check from the customer that was four months old? A) There is no effect on her status as a holder in due course, because an instrument is only considered overdue if it is outstanding for 120 days. B) There is no effect on her status as a holder in due course, because an instrument is only considered overdue if it is outstanding for 180 days. C) There is no effect on her status as a holder in due course, because an instrument is only considered overdue if it is outstanding for one year. D) She would not be considered a holder in due course, because a check is considered overdue 90 days after its date. E) It has no effect, because a check is never considered overdue.
73) Hot Dress. Doreen writes a check for a dress to Hot Dresses, Inc., a small specialty shop owned primarily by Betty. Betty was getting ready to go on an extended European vacation and temporarily closed the shop the day after the dress sale to Doreen. When Betty returned, she had a number of other things to do and did not take Doreen's check and some other checks to the bank for three months. Betty was independently wealthy and only ran the shop as a hobby, so she had not been in need of funds. When Betty finally took Doreen's check to the bank, Betty requested that her bank, ABC Bank, deposit the check into her account. However, when ABC Bank requested payment from Doreen's bank, XYZ Bank, the check was dishonored because of insufficient funds in Doreen's account. Although Betty did not particularly need the funds, she did not like to feel as if she had been cheated; therefore, she demanded that Doreen make the check good. Which of the following parties would be considered the drawer of the check Doreen presented to Betty at Hot Dresses, Inc.? Version 1
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A) Doreen B) Hot Dresses, Inc. C) Betty, because she owns Hot Dresses, Inc. D) Doreen's bank E) Betty's bank
74) Hot Dress. Doreen writes a check for a dress to Hot Dresses, Inc., a small specialty shop owned primarily by Betty. Betty was getting ready to go on an extended European vacation and temporarily closed the shop the day after the dress sale to Doreen. When Betty returned, she had a number of other things to do and did not take Doreen's check and some other checks to the bank for three months. Betty was independently wealthy and only ran the shop as a hobby, so she had not been in need of funds. When Betty finally took Doreen's check to the bank, Betty requested that her bank, ABC Bank, deposit the check into her account. When ABC Bank, however, requested payment from Doreen's bank, XYZ Bank, the check was dishonored because of insufficient funds in Doreen's account. Although Betty did not particularly need the funds, she did not like to feel as if she had been cheated; therefore, she demanded that Doreen make the check good. Which of the following parties is the drawee of the check Doreen presented to Hot Dresses, Inc.? A) Doreen B) Hot Dresses, Inc. C) Betty, because she owns Hot Dresses, Inc. D) Doreen's bank E) Betty's bank
75) Hot Dress. Doreen writes a check for a dress to Hot Dresses, Inc., a small specialty shop owned primarily by Betty. Betty was getting ready to go on an extended European vacation and temporarily closed the shop the day after the dress sale to Doreen. When Betty returned, she had a number of other things to do and did not take Doreen's check and some other checks to the bank for three months. Betty was independently wealthy and only ran the shop as a hobby, so she had not been in need of funds. When Betty finally took Doreen's check to the bank, Betty requested that her bank, ABC Bank, deposit the check into her account. When ABC Bank, however, requested payment from Doreen's bank, XYZ Bank, the check was dishonored because of insufficient funds in Doreen's account. Although Betty did not particularly need the funds, she did not like to feel as if she had been cheated; therefore, she demanded that Doreen make the check good. Which of the following parties is the holder of the check?
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A) Doreen B) Hot Dresses, Inc. C) Doreen's bank D) Betty's bank E) The intermediary bank that will ultimately negotiate the check from Betty’s bank to Doreen’s bank
76) Hot Dress. Doreen writes a check for a dress to Hot Dresses, Inc., a small specialty shop owned primarily by Betty. Betty was getting ready to go on an extended European vacation and temporarily closed down the shop the day after the dress sale to Doreen. When Betty returned, she had a number of other things to do and did not take Doreen's check and some other checks to the bank for three months. Betty was independently wealthy and only ran the shop as a hobby, so she had not been in need of funds. When Betty finally took Doreen's check to the bank, Betty requested that her bank, ABC Bank, deposit the check into her account. When ABC Bank, however, requested payment from Doreen's bank, XYZ Bank, the check was dishonored because of insufficient funds in Doreen's account. Although Betty did not particularly need the funds, she did not like to feel as if she had been cheated; therefore, she demanded that Doreen make the check good. As defined by the Uniform Commercial Code (UCC), which of the following actions constituted presentment? A) When Doreen issued the check to Hot Dresses, Inc. B) When Betty took the check to ABC Bank C) When ABC Bank requested payment from XYZ Bank D) When XYZ Bank notified Betty that it would not pay due to insufficient funds E) When Betty requested that Doreen to make good on the check
77) Run Around. Millie issues a note to Bob. Bob endorses the note and transfers it to Anne. Anne endorses the note and transfers it to Henry. In a timely fashion, Henry endorses the note and presents it to Millie for payment. When Henry presents the note to Millie, she asks him for reasonable identification. He did not have any identification with him and told her that she had no right to dishonor the instrument. Millie, however, refused to provide him the funds until he returned with proper identification. Nevertheless, when he returned with proper identification, Millie refused to pay the note, claiming that she lacked the funds with which to do so. Henry proceeded immediately to request that Anne pay the note, but she told him that he would have to get his money from Bob, who cannot be found. Which of the following is true regarding when, or if, the note was dishonored? Version 1
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A) The note was never dishonored by Millie, because she eventually acknowledged his entitlement to payment and only refused to pay because she lacked funds with which to do so. B) Millie dishonored the instrument when she asked for proper identification. C) Millie dishonored the instrument when she refused to pay it because she lacked the funds to do so, but Anne did not dishonor the instrument. D) Anne dishonored the instrument when she told Henry that he would have to seek recovery from Bob, but Millie did not dishonor the instrument. E) Millie dishonored the instrument when she told Henry that she could not pay him because she lacked the funds, and Anne dishonored the instrument when she told Henry that he would have to seek payment from Bob.
78) Run Around. Millie issues a note to Bob. Bob endorses the note and transfers it to Anne. Anne endorses the note and transfers it to Henry. In a timely fashion, Henry endorses the note and presents it to Millie for payment. When Henry presents the note to Millie, she asks him for reasonable identification. He did not have any identification with him and told her that she had no right to dishonor the instrument. Millie, however, refused to provide him the funds until he returned with proper identification. Nevertheless, when he returned with proper identification, Millie refused to pay the note, claiming that she lacked the funds with which to do so. Henry proceeded immediately to request that Anne pay the note, but she told him that he would have to get his money from Bob, who cannot be found. Which of the following is true regarding Henry's entitlement to payment from Millie? A) Henry is only entitled to payment from Millie because Anne dishonored the payment. B) Henry is not entitled to payment from Millie unless Bob, in addition to Anne, dishonors the instrument. C) Henry is never entitled to payment from Millie because he must seek recovery only from Anne. D) Henry is entitled to recover on the note from Millie. E) Henry is entitled to recover on the note from Millie, but only if both Anne and Bob have filed bankruptcy or cannot be found.
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79) Run Around. Millie issues a note to Bob. Bob endorses the note and transfers it to Anne. Anne endorses the note and transfers it to Henry. In a timely fashion, Henry endorses the note and presents it to Millie for payment. When Henry presents the note to Millie, she asks him for reasonable identification. He did not have any identification with him and told her that she had no right to dishonor the instrument. Millie, however, refused to provide him the funds until he returned with proper identification. Nevertheless, when he returned with proper identification, Millie refused to pay the note, claiming that she lacked the funds with which to do so. Henry proceeded immediately to request that Anne pay the note, but she told him that he would have to get his money from Bob, who cannot be found. Which of the following is true regarding Anne's statement to Henry that he must seek recovery from Bob? A) Anne is correct. B) Anne is correct, but only if Bob is able to pay and has not filed for bankruptcy. C) Anne is correct that Henry should seek recovery from Bob, but only if Millie has filed for bankruptcy; otherwise, Henry should be seeking primary payment from Millie. D) Anne is correct unless the notice is for over $10,000, in which case Henry can seek recovery from her without resorting to recovery from Bob or Millie. E) Anne is incorrect. Henry may seek recovery from her without first seeking recovery from Bob or Millie.
80) Run Around. Millie issues a note to Bob. Bob endorses the note and transfers it to Anne. Anne endorses the note and transfers it to Henry. In a timely fashion, Henry endorses the note and presents it to Millie for payment. When Henry presents the note to Millie, she asks him for reasonable identification. He did not have any identification with him and told her that she had no right to dishonor the instrument. Millie, however, refused to provide him the funds until he returned with proper identification. Nevertheless, when he returned with proper identification, Millie refused to pay the note, claiming that she lacked the funds with which to do so. Henry proceeded immediately to request that Anne pay the note, but she told him that he would have to get his money from Bob, who cannot be found. Which of the following is the likely result if Henry sues Anne, Bob, and Millie? A) The judge is likely to rule that Henry can recover from Anne, Bob, or Millie. B) The judge is likely to rule that Henry's only option of recovery is against Millie. C) The judge is likely to rule that Henry's only option of recovery is against Anne. D) The judge is likely to rule that Henry can recover against Bob and that Bob may recover against Millie, but Henry cannot recover directly from Anne. E) The judge is likely to rule that Henry's only option for recovery is against Bob.
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81) Banking Problems. Constance and Blair are both loan officers at ABC Bank. Constance, being somewhat dishonest, tells Henry, a customer of the bank who is wealthy and rarely checks the status of outstanding loans and balances, that she is collecting money for a local animal shelter. She asks him to sign a pledge that he will contribute $50 to the animal shelter. In fact, she had him sign a promissory note made out to her for $5,000, which she later endorsed to Richard. Henry proceeds back to one of his businesses, a used car dealership. Taylor comes in to purchase a used car. He and Henry agree that Taylor will purchase a used car for $3,000. Martha also comes in, and she and Henry agree that she will purchase a used car for $4,000. Both Taylor and Martha make out promissory notes payable to Henry. At the end of the day, Henry is looking through the notes and decides that Taylor's was mistakenly made out for $3,000. Henry mistakenly, but honestly, believed that the deal was for $3,500. Therefore, he changes the note to reflect that Taylor owed $3,500. Henry, on the other hand, simply did not like Martha. He decided that $4,000 was not enough for the car. Accordingly, he changed the note to $4,500. Which of the following is the most likely result if Henry refuses payment on the promissory note that was endorsed to Richard claiming that he never signed it? A) He will be liable, because an official banking document was involved. B) He will not be liable, because a party is never liable when the party signed a negotiable instrument without knowing that it is, in fact, a negotiable instrument. C) He will be liable without further inquiry, unless he can establish that the note had not been endorsed to a holder in due course. D) He can claim fraud in the factum, and whether he is liable or not will depend upon whether a court determines that he should have known what he was signing. E) He can claim fraud in the inducement.
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82) Banking Problems. Constance and Blair are both loan officers at ABC Bank. Constance, being somewhat dishonest, tells Henry, a customer of the bank who is wealthy and rarely checks the status of outstanding loans and balances, that she is collecting money for a local animal shelter. She asks him to sign a pledge that he will contribute $50 to the animal shelter. In fact, she had him sign a promissory note made out to her for $5,000, which she later endorsed to Richard. Henry proceeds back to one of his businesses, a used car dealership. Taylor comes in to purchase a used car. He and Henry agree that Taylor will purchase a used car for $3,000. Martha also comes in, and she and Henry agree that she will purchase a used car for $4,000. Both Taylor and Martha make out promissory notes payable to Henry. At the end of the day, Henry is looking through the notes and decides that Taylor's was mistakenly made out for $3,000. Henry mistakenly, but honestly, believed that the deal was for $3,500. Therefore, he changes the note to reflect that Taylor owed $3,500. Henry, on the other hand, simply did not like Martha. He decided that $4,000 was not enough for the car. Accordingly, he changed the note to $4,500. Which of the following is true regarding Taylor's liability to Henry? A) Because of the alteration, Taylor is not liable to Henry for any amounts under the promissory note. B) Taylor's obligation will be enforced only in the amount of $3,000. C) Taylor's obligation will be enforced in the amount of $3,500 unless Taylor has a writing signed by Henry to the effect that the deal was for $3,000. No other evidence would be allowed. D) Unless Taylor has a written document from Henry to the effect that the agreement was for $3,000 only, Taylor and Henry will be legally required to split the remainder with Taylor being held responsible for $3,250. E) Unless Taylor either has a written document from Henry showing that the agreement was for $3,000 or unless he can get Henry to admit that the agreement was for $3,000, then Taylor will be required to pay $3,500 because the obligation was upon Taylor to obtain confirmation of the terms of the original agreement.
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83) Banking Problems. Constance and Blair are both loan officers at ABC Bank. Constance, being somewhat dishonest, tells Henry, a customer of the bank who is wealthy and rarely checks the status of outstanding loans and balances, that she is collecting money for a local animal shelter. She asks him to sign a pledge that he will contribute $50 to the animal shelter. In fact, she had him sign a promissory note made out to her for $5,000, which she later endorsed to Richard. Henry proceeds back to one of his businesses, a used car dealership. Taylor comes in to purchase a used car. He and Henry agree that Taylor will purchase a used car for $3,000. Martha also comes in, and she and Henry agree that she will purchase a used car for $4,000. Both Taylor and Martha make out promissory notes payable to Henry. At the end of the day, Henry is looking through the notes and decides that Taylor's was mistakenly made out for $3,000. Henry mistakenly, but honestly, believed that the deal was for $3,500. Therefore, he changes the note to reflect that Taylor owed $3,500. Henry, on the other hand, simply did not like Martha. He decided that $4,000 was not enough for the car. Accordingly, he changed the note to $4,500. Which of the following is true regarding Martha's liability to Henry? A) Because of the fraudulent alteration, Martha is not liable to Henry for any amounts under the promissory note although she may be liable under some other theory. B) Martha's obligation will be enforced only in the amount of $4,000. C) Martha's obligation will be enforced in the amount of $4,500 unless she has a writing signed by Henry to the effect that the deal was for $4,000. No other evidence would be allowed. D) Unless Martha has a written document from Henry to the effect that the agreement was for $4,000 only, Martha and Henry will be legally required to split the remainder with Martha being held responsible for $4,250. E) Unless Martha either has a written document from Henry showing that the agreement was for $4,000 or unless she can get Henry to admit that the agreement was for $4,000, then Martha will be required to pay $4,500 because the obligation was upon Martha to obtain confirmation of the terms of the original agreement.
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84) Angry employee. Martin is in charge of payroll and other expenses for ABC, Inc. He becomes very angry with his boss Adam because Adam started dating Martin's girlfriend Stacy. Martin decided to quit but not before he got some extra money from ABC, Inc. Martin wrote five checks from the account of ABC, Inc. to pay off the five credit card companies that Martin owed money. The credit card companies took the checks without reason to be suspicious as to the source of payment. The checks to the credit card companies in total amounted to $30,000, and each check was in an amount under $10,000. Martin also made out ten checks on the account of ABC to twenty alleged employees who did not really exist. Each of these checks was in the amount of $5,000. Martin took the checks, endorsed and cashed the checks in the names of the various fake employees, and kept the cash. Finally, Martin discovers through office gossip that Adam has been looking for another job with XYZ, Inc. located in a neighboring state and that Adam is supposed to go there for an in-person interview in a few weeks. Martin sets up an interview with XYZ, Inc. pretends to be Adam, and induces XYZ, Inc. to give him, posing as Adam, a check for $5,000 as a signing bonus. Martin immediately endorses the check pretending to be Adam and pockets the cash. Finally, Martin leaves town heading for the Caribbean. Is ABC, Inc. entitled to a refund from its bank for the five checks used to pay Martin's credit card companies? A) Yes, ABC, Inc. is entitled to a refund because the credit card companies cannot be considered payees. B) Yes, ABC, Inc. is entitled to a refund because the credit card companies cannot be considered holders in due course. C) Yes, ABC, Inc. is entitled to a refund because the credit card companies can reverse the credits. D) No, ABC, Inc. is not entitled to a refund because none of the checks were in an amount over $10,000. E) No, ABC, Inc. is not entitled to a refund because the credit card companies are holders in due course entitled to the funds.
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85) Angry employee. Martin is in charge of payroll and other expenses for ABC, Inc. He becomes very angry with his boss Adam because Adam started dating Martin's girlfriend Stacy. Martin decided to quit but not before he got some extra money from ABC, Inc. Martin wrote five checks from the account of ABC, Inc. to pay off the five credit card companies that Martin owed money. The credit card companies took the checks without reason to be suspicious as to the source of payment. The checks to the credit card companies in total amounted to $30,000, and each check was in an amount under $10,000. Martin also made out ten checks on the account of ABC to twenty alleged employees who did not really exist. Each of these checks was in the amount of $5,000. Martin took the checks, endorsed and cashed the checks in the names of the various fake employees, and kept the cash. Finally, Martin discovers through office gossip that Adam has been looking for another job with XYZ, Inc. located in a neighboring state and that Adam is supposed to go there for an in-person interview in a few weeks. Martin sets up an interview with XYZ, Inc. pretends to be Adam, and induces XYZ, Inc. to give him, posing as Adam, a check for $5,000 as a signing bonus. Martin immediately endorses the check pretending to be Adam and pockets the cash. Finally, Martin leaves town heading for the Caribbean. Is ABC, Inc. entitled to a refund from its bank for the checks the bank paid written to fake employees? A) Yes, because Martin forged the names of the employees B) Yes, because Martin posed as an imposter with regard to the employees C) Yes, because the bank has a cause of action against Martin and can likely get a default judgment D) No, because of the imposter rule E) No, because of the fictitious-payee rule
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86) Angry employee. Martin is in charge of payroll and other expenses for ABC, Inc. He becomes very angry with his boss Adam because Adam started dating Martin's girlfriend Stacy. Martin decided to quit but not before he got some extra money from ABC, Inc. Martin wrote five checks from the account of ABC, Inc. to pay off the five credit card companies that Martin owed money. The credit card companies took the checks without reason to be suspicious as to the source of payment. The checks to the credit card companies in total amounted to $30,000, and each check was in an amount under $10,000. Martin also made out ten checks on the account of ABC to twenty alleged employees who did not really exist. Each of these checks was in the amount of $5,000. Martin took the checks, endorsed and cashed the checks in the names of the various fake employees, and kept the cash. Finally, Martin discovers through office gossip that Adam has been looking for another job with XYZ, Inc. located in a neighboring state and that Adam is supposed to go there for an in person interview in a few weeks. Martin sets up an interview with XYZ, Inc. pretends to be Adam, and induces XYZ, Inc. to give him, posing as Adam, a check for $5,000 as a signing bonus. Martin immediately endorses the check pretending to be Adam and pockets the cash. Finally, Martin leaves town heading for the Caribbean. Is XYZ, Inc. entitled to a refund from its bank for the check the bank paid to Martin posing as Adam? A) Yes, because Martin forged Adam's name B) Yes, because Martin posed as an imposter with regard to Adam C) Yes, because the XYZ, Inc. has a cause of action against Martin and can likely get a default judgment D) No, because of the imposter rule E) No, because of the fictitious-payee rule
87)
The purpose of holder-in-due-course status is to protect _____. A) all holders of commercial paper B) the federal and state governments C) financial intermediaries D) lenders and other financial institutions E) borrowers and other consumers
88) To be a holder in due course, the party taking the instrument must be a _____, a party who is in possession of an instrument that is payable to the party or to the bearer of the instrument.
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A) holder B) lender C) drawee D) payee E) financial intermediary
89) According to the shelter principle, even if a holder cannot attain holder-in-due-course (HDC) status, the holder can acquire the rights and privileges of an HDC ifthe item is being transferred _____. A) from a holder-in-due-course B) through electronic means and via interstate commerce C) within thirty (30) days of the original date of the instrument D) through a third party and via electronic means E) is in the amount of $10,000 or more
90) Many banking companies have policies that deem the _____ responsible for the charge if the payment made is fraudulent. A) merchant rather than the buyer B) buyer rather than the merchant C) fraudulent party only D) fraudulent party and the merchant E) fraudulent party and the buyer
91) A party who transfers a negotiable instrument to another party in good faith for consideration creates _____. A) title warranties B) endorsement warranties C) transfer warranties D) merchantability warranties E) no warranty liability
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92)
Which of the following defenses do not apply to holders in due course? A) Personal defenses B) Universal defenses C) Fraud in the factum D) Discharge through bankruptcy E) Real defenses
ESSAY. Write your answer in the space provided or on a separate sheet of paper. 93) Should the law recognize holder in due course status and its protections?Explain your response.
94)
List the requirements a party must meet to be considered a holder in due course.
95) Describe the conditions under which a holder may take an instrument for value and therefore satisfy the value requirement for becoming a holder in due course.
96) In the context of holder-in-due-course status, explain what a personal defense is, and list the personal defenses. Also, explain what a real defense is, and list the real defenses.
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97)
What are the conditions for a drawer or an endorser to become liable for an instrument?
98) List the five (5) warranties a party makes when he or she transfers an instrument for consideration.
99) Bruce, who works for Laura's used car dealership, forges Laura's name to two checks, cashes the checks, and deposits the funds into his own bank account. Later, Bruce's conscience starts to bother him and he confesses to Laura. Bruce promises to repay her if she will only give him some time. Laura wants to keep Bruce as an employee because he is great with sales, so she agrees to give him some time in which to repay her. Ten months later, Bruce gets angry with Laura because he thinks she cheated him on a commission and leaves town without ever reimbursing her for the checks. Laura tells the bank that she wants her account credited. The bank asks for your advice. What would you tell the bank, and why?
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Answer Key Test name: Chap 18_5_The Essentials_Kubasek 1) FALSE The purpose of holder-in-due-course status is to protect a financial intermediary, which is the party who processes a payment. 2) TRUE According to Uniform Commercial Code (UCC) Section 3-302(a)(2)(ii), a holder in due course must take the negotiable instrument in good faith. UCC Section 3-103(a)(4)defines good faith as “honesty in fact and the observance of reasonable commercial standards of fair dealing.” Therefore, to act in good faith, a holder must not deviate from the reasonable commercial standards of fair dealing. The UCC drafters were most concerned with the fairness of the dealing. 3) FALSE As recognized in the Watson Coatings, Inc. v. American Express Travel Services, Inc. case referenced in the textbook, a payee can be considered a holder in due course. 4) FALSE Uniform Commercial Code (UCC) Section 3-302 requires that in order to be a holder in due course, the party must be the holder of a complete and authentic negotiable instrument. 5) FALSE According to Uniform Commercial Code (UCC) Section 3-304(a)(2), if a demand instrument is a check, the check is overdue (90) days after its date. 6) TRUE
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A holder in due course must take the negotiable instrument “for value.” In other words, the party must suffer an out-of-pocket loss. Therefore, when a party receives a negotiable instrument as a gift, the party will be a holder instead of a holder in due course 7) FALSE In other areas of the law, taking something for value usually means taking something with consideration, a bargained-for promise. However, the "for value" requirement for holder-in-due course status is more stringent than consideration. The party must take the instrument in exchange for a promise that has already been performed. The Uniform Commercial Code explicitly excludes from “value” any promises that have not yet been performed. In other words, the party must suffer an out-of-pocket loss. 8) TRUE A holder in due course must take the negotiable instrument “for value.” A holder can take an instrument for value if the holder acquires a security interest or other lien in the instrument. 9) TRUE The Uniform Commercial Code's (UCC’s) definition of good faith is somewhere between a subjective standard and an objective standard. UCC Section 3-103(a)(4) defines good faith as "honesty in fact and the observation of reasonable commercial standards of fair dealing." Therefore, to act in good faith, a holder must not deviate from the reasonable commercial standards of fair dealing. 10) FALSE A time instrument, an instrument payable at a definite time, becomes overdue at any time after the expressed due date on the instrument. 11) TRUE
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A holder in due course is generally free from personal defenses. Personal defenses include fraud in the inducement in the underlying contract, unauthorized completion or material alteration of the instrument, and unauthorized acquisition of the instrument. 12) FALSE According to the shelter principle, if a holder cannot attain holder-in-due course status, the holder can acquire the rights and privileges of a holder in due course if the item is being transferred from a holder in due course. 13) TRUE The purpose of the shelter principle is to encourage the marketability of instruments. The greater protection offered to a holder in due course is very appealing; thus, allowing parties to achieve the rights of a holder in due course through the shelter principle encourages financial interactions. 14) TRUE Uniform Commercial Code (UCC) Section 3-401(a) imposes liability if the party, or the party's agent, signs the instrument. If a party does not sign, the party cannot be held liable. 15) TRUE According to Uniform Commercial Code (UCC) Section 3-401(b), a signature can be any name, word, mark, or symbol used by a party to authenticate a writing. 16) FALSE A party who is primarily liable on an instrument must pay the stated amount when it is presented for payment and make the payment without resorting to any other party. This liability for the stated amount begins as soon as the instrument is issued. 17) FALSE If a holder is aware that an instrument he or she is taking has been dishonored, the holder cannot become a holder in due course. Version 1
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18) FALSE According to Uniform Commercial Code (UCC) Section 3-419(a), a party who signs an instrument to provide credit for another party who has also signed the instrument is an accommodation party. 19) FALSE If a transfer is through endorsement, transfer warranties apply to any future holders. However, if the transfer does not occur through endorsement, the warranties apply only to the transferee. 20) FALSE When a party signs a negotiable instrument without knowing that it is in fact a negotiable instrument, the party can claim fraud in the factum (also known as fraud in the execution and fraud in the essence). 21) A To be considered a holder in due course, a party must meet four (4) requirements set forth in the Uniform Commercial Code (UCC). The party must be a holder of a complete and authentic negotiable instrument,and the holder must have taken the instrument for value, in good faith and without notice of any defect. 22) D To be considered a holder in due course (HDC), a party must meet four (4) requirements regarding the taking of the instrument. These requirements are established in Uniform Commercial Code (UCC) Section 3-302. 23) E In order to be considered a holder in due course, a party must take an instrument for value; therefore, when a party receives a negotiable instrument as a gift or acquires it through mistake, the party will be a holder instead of a holder in due course. 24) B
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According to Uniform Commercial Code (UCC) Section 1-201(20), a holder is a party who is in possession of an instrument that is payable to the party or to the bearer of the instrument. 25) B According to Uniform Commercial Code (UCC) Section 1-201(20), a holder is a party who is in possession of an instrument that is payable to the party or to the bearer of the instrument. If Adam Brewer possesses a check that states "Payable to Adam Brewer," Adam is a holder. 26) A The holder in due course must take the negotiable instrument "for value." In other areas of law, taking something for value usually means taking something with consideration, a bargained-for promise. However, the for-value requirement is more stringent than consideration. The party must take the instrument in exchange for a promise that has already been performed. The Uniform Commercial Code (UCC) explicitly excludes from "value" any promises that have not yet been performed. 27) E A holder in due course must take the negotiable instrument “for value.” In other words, the party must suffer an out-of-pocket loss. When a party receives a negotiable instrument as a gift or acquires it through mistake, the party will become a holder instead of a holder in due course. 28) D Uniform Commercial Code (UCC) Section 3-103(a)(4) defines good faith as "honesty in fact and the observance of reasonable commercial standards of fair dealing." 29) E
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According to Uniform Commercial Code (UCC) Section 3-302(a), if a holder has notice or is aware of any of the following defects, the holder cannot be a holder in due course: The instrument is overdue, the instrument has been dishonored, the instrument was issued as part of a series that is in default, the instrument has been altered or contains an unauthorized signature, there is a claim to the instrument, or another party has a defense or claim in recoupment to the instrument. 30) D According to Uniform Commercial Code (UCC) Section 1-201(25), a person has notice of a fact when the person has actual knowledge of the fact, the person receives notice or notification of it, or when the facts and circumstances known to the person at the time in question give the person reason to know that the fact exists. 31) D A demand instrument, an instrument payable on demand, becomes overdue if it has been outstanding for an unreasonably long period of time after its date. According to Uniform Commercial Code (UCC) Section 3-304(a)(2), if a demand instrument is a check, the check is overdue ninety (90) days after its date. 32) D A holder in due course is generally free from personal defenses. Personal defenses include lack or failure of consideration, breach of contract, and fraud in the inducement in the underlying contract. 33) A Uniform Commercial Code (UCC) Section 3-203(b) sets forth the shelter principle, which holds that if an item is transferred from one person to another, the transferee acquires all the rights that the transferor had in the item. 34) C
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In England, the doctrine of privity of contract declares that contracts are exclusive to those who created them. However, this doctrine often limits and complicates business transactions. The problems created by privity of contract in England can be countered by using a negotiable instrument. Unlike contracts, in England bills of exchange, promissory notes, and checks can be negotiated between parties. 35) C Uniform Commercial Code (UCC) Section 3-401(a) imposes liability if a party, or the party’s agent, signs the instrument. This is known as signature liability. 36) C A party may be liable for an instrument because of a breach of warranty. The two relevant types of warranties are transfer warranties and presentment warranties. 37) E A party who is secondarily liable for an instrument must pay the amount on the instrument if the primarily liable party defaults. 38) A The Uniform Commercial Code (UCC) establishes that certain parties— makers and acceptors—are primarily liable for a negotiable instrument, while drawers and endorsers are only secondarily liable. 39) C A party who is primarily liable for an instrument must pay the stated amount on the instrument when it is presented for payment. This liability for the stated amount begins as soon as the instrument is issued. Moreover, the primarily liable party must pay without resorting to any other party. 40) A
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Uniform Commercial Code (UCC) Section 3-412 states that a party who signs as an issuer of an instrument is liable for the amount of the instrument as soon as it is issued. For example, a bank that issues a cashier’s check is primarily liable for the amount of the check as soon as the cashier’s check is created. 41) B According to Uniform Commercial Code (UCC) Section 3-413(a), an acceptor is a drawee of a draft who accepts and signs the draft to agree to pay the draft when it is presented. 42) C According to Uniform Commercial Code (UCC) Section 3-103(a)(5), a drawer is a person who signs as a party ordering payment. 43) B According to Uniform Commercial Code (UCC) Section 3-204(b), an endorser is a party who signs an instrument to restrict payment of it, negotiate it, or incur liability. 44) D Three conditions must be met for a drawer or endorser to become liable on an instrument. First, the holder of the instrument must present the instrument in a proper and timely fashion. Second, the instrument must be dishonored. Third, notice of the dishonor must be given to the drawer. 45) D Uniform Commercial Code (UCC) Section 3-501(b) states that an instrument can be presented: a) by any commercially reasonable means; b) through a clearinghouse procedure; or c) at the place designated in the instrument. 46) C When a holder presents an instrument within a timely and proper manner but acceptance or payment is refused, the instrument has been dishonored. Version 1
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47) A Uniform Commercial Code (UCC) Section 3-503(c) states that if the party that dishonors an instrument is a collection bank, it must give notice of the dishonor to a secondarily liable party before midnight of the next banking day. 48) E If the party that dishonors an instrument is not a collection bank, it must give notice of the dishonor within thirty (30) days of the day on which the party receives notice of dishonor. 49) D Uniform Commercial Code (UCC) Section 3-503(b) states that notice of dishonor can be given in any commercially reasonable manner, including oral, written, or electronic communication. 50) A If an instrument contains more than one endorsement, each endorser is liable for the full amount to any subsequent endorser or to any holder. The secondary liability established through endorsement requires an endorser to pay anyone who endorses the instrument after him or her. 51) B According to Uniform Commercial Code (UCC) Section 3-419(a), an accommodation party is a party who signs an instrument to provide credit for another party who has also signed the instrument. 52) A As a maker, an accommodation party has primary liability, but as an endorser, the accommodation party has secondary liability. 53) E Accommodation parties may be primarily or secondarily liable for an instrument and can sign as makers, drawers, acceptors, or endorsers. However, accommodation parties more frequently sign as makers or endorsers. Version 1
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54) D According to Uniform Commercial Code (UCC) Section 3-403(a), if the principal decides to ratify, or approve of, the unauthorized agent's signature, the principal will then become liable for the instrument while the agent will escape personal liability. 55) D If the principal accepts the benefits associated with an unauthorized signature, the principal in effect ratifies the signature by his or her conduct. For example, in Rakestraw v. Rodriguez, a husband had forged his wife’s signature to obtain a loan to start a grocery store. A few days later, the wife discovered the forgery, but she did nothing to correct it and even participated in the business over the next few years. Part of running the business included sharing in the profits from the grocery store. When the business failed, the wife tried to avoid liability, claiming her husband forged her signature. The court ruled that her actions in sharing in profits and in helping run the business effectively ratified her signature. 56) C According to Uniform Commercial Code Section 3-406, if the party whose signature was forged behaved so negligently as to "substantially contribute to . . . the making of a forged signature," the party might not escape liability. 57) D Uniform Commercial Code Section 3-404(a) states that if a maker or drawer issues a negotiable instrument to an imposter, the imposter's endorsement will be effective. 58) A
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The Uniform Commercial Code’s “fictitious-payee” rule governs the liability of companies and their endorsed checks. Pursuant to the rule, any check made out to a fictitious payee and endorsed must be honored and is not considered a forgery. 59) E A party may be liable for an instrument because of a breach of warranty. The two relevant types of warranties here are transfer warranties and presentment warranties. 60) A According to Uniform Commercial Code (UCC) Section 3-417(d)(1), if the instrument is not an unaccepted draft presented to a drawee, only one presentment warranty applies: The party presenting the instrument guarantees that the warrantor is or was entitled to payment or authorized to obtain payment. 61) B Real defenses, also called universal defenses, apply to all parties. Personal defenses do not apply to holders in due course. 62) D When a party signs a negotiable instrument without knowing that it is, in fact, a negotiable instrument, the party can claim fraud in the factum (also called fraud in the execution and fraud in the essence) as a defense. For example, suppose Michael Jordan believes he is signing an autograph for a fan, but he is actually signing a promissory note. Because he did not intend to sign a negotiable instrument, he will not be held liable for the instrument. 63) D Personal defenses to the payment of an instrument include breach of contract or warranty, fraud in the inducement, and illegality. 64) C
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When a party's liability for a negotiable instrument is terminated, the party's liability has been discharged. In other words, the party is released from liability. 65) E Reacquisition occurs when a former holder of an instrument has the instrument transferred back to him or her by negotiation or other means. When reacquisition occurs, anyone who endorsed the instrument in between the initial acquisition and the reacquisition by the holder has his or her endorsement canceled. When an endorsement is canceled, discharge occurs. The holder who reacquired the instrument can further negotiate the instrument, but the intermediate endorsers will not be held liable. 66) A As soon as a transferee discovers that a breach of warranty regarding a negotiable instrument has occurred, he or she can bring suit against the transferor. 67) D Article 3 of the Uniform Commercial Code (UCC) lists specific personal defenses to liability on a negotiable instrument, including the nonissuance of an instrument, the modification of an obligation by a separate agreement, and the non-delivery of an instrument. 68) B Uniform Commercial Code (UCC) Section 3-605(d) states that if a party posts collateral to ensure his or her performance of the negotiable instrument and the holder of the collateral impairs its value, the party to the instrument is discharged from the instrument to the extent of the damage to the collateral. 69) B
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A right to recourse is the ability of a party to seek reimbursement. Typically, when a holder presents an instrument to an endorser, the endorser can seek recourse from prior endorsers, the maker, the drawer, or accommodating parties. However, if the holder has in some way impaired the endorser’s ability to seek recourse from any of these parties, the endorser is not liable on the instrument. 70) A Uniform Commercial Code Section 3-302(f) states that "to be effective, notice must be received at a time and in a manner that gives a reasonable opportunity to act on it.” 71) B The very existence of such irregularities means that the holder cannot be a holder in due course, regardless of whether they were recognized by the person taking the instrument. 72) D If the demand instrument is a check, Uniform Commercial Code Section 3-304(a)(2) states that the check is overdue 90 days after its date. 73) A According to Uniform Commercial Code Section 3-103(a)(5), a drawer is a person who signs as a party ordering payment. 74) D A drawer is a person who signs as a party ordering the payment of an instrument, while a drawee is the party the drawer orders to pay the instrument. For example, if you write a check from your bank account that is payable to the electric company, you are the drawer of the check, the bank is the drawee, and the electric company is the holder of the check. 75) B
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According to Uniform Commercial Code (UCC) Section 1-201(20), a holder is a party who is in possession of an instrument that is payable to the party or to the bearer of the instrument. 76) C According to Uniform Commercial Code (UCC) Section 3-501(a), presentment is defined as making a demand for the drawee to pay. 77) E The instrument must be explicitly dishonored; a refusal to pay does not necessarily mean that the instrument has been dishonored. 78) D The maker of a promissory note is primarily liable for the amount of the note because that party has promised to pay the amount of the instrument, and a party who is secondarily liable for an instrument must pay the amount on the instrument if the primarily liable party defaults. 79) E The secondary liability established through endorsement requires that an endorser pay anyone who endorses the instrument after him or her. 80) A In the event an instrument contains more than one endorsement, each endorser is liable for the full amount to any subsequent endorser or to any holder. The secondary liability established through endorsement requires that an endorser pay anyone who endorses the instrument after him or her. 81) D Although fraud in the factum is a real defense, courts have held that the signer's experience may determine whether the signer should have known what he or she was actually signing. 82) B If the material alteration is not fraudulent, the instrument will be enforced only under the original terms. Version 1
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83) A According to Uniform Commercial Code (UCC) Section 3-407(b), if the material alteration is fraudulent, the party whose rights have been affected by the change is completely discharged from the instrument. 84) E As in the case in the textbook, Watson Coatings, Inc. v. American Express Travel Services, Inc., the credit card companies qualified as holders in due course entitled to the funds at issue. 85) E The Uniform Commercial Code's (UCC’s) fictitious-payee rule governs the liability of companies and their endorsed checks: Any check made out to a fictitious payee and endorsed must be honored and is not considered a forgery. 86) D According to the imposter rule, if one obtains a negotiable instrument by impersonating another and endorses it with the impersonated party's signature, the loss falls on the drawer of the instrument. 87) C The purpose of holder-in-due-course status is to protect a financial intermediary, which is the party who processes a payment. 88) A According to Uniform Commercial Code (UCC) Section 1-201(20), to be a holder in due course, a party taking the instrument must be a holder, a party who is in possession of an instrument that is payable to the party or to the bearer of the instrument. 89) A
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Generally, if an item is transferred from one person to another, the transferee acquires all the rights that the transferor had in the item. This idea is called the shelter principle [UCC Section 3-203(b)]. Therefore, following the shelter principle, even if a holder cannot attain holder-indue-course status, the holder can acquire the rights and privileges of an HDC ifthe item is being transferred from an HDC. 90) A Many banking companies have policies that deem the merchant rather than the buyer responsible for the charge if the payment made is fraudulent. 91) C A party who transfers a negotiable instrument to another party in good faith for consideration creates transfer warranties. 92) A There are two (2) categories of defenses: real defenses and personal defenses. Real defenses, also called universal defenses, apply to all parties. Personal defenses do not apply to holders in due course. 93) Student responses will vary. While the result of holder in due course status at times seems unfair, its purpose is to protect a financial intermediary. The system offers greater legal protection to certain parties to encourage them to engage in financial transactions. 94) In order to be considered a holder in due course, the following requirements must be met: a) The party must be a holder of a complete and authentic negotiable instrument; b) The holder must take the instrument for value; c) The holder must take the instrument in good faith; and d) The holder must take the instrument without notice of defects.
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95) The holder in due course must take the negotiable instrument “for value.” In other areas of law, taking something for value usually means taking something with consideration, a bargained-for promise. However, the for-value requirement is more stringent than consideration. The party must take the instrument in exchange for a promise that has already been performed. The Uniform Commercial Code (UCC) explicitly excludes from “value” any promises that have not yet been performed. In other words, the party must suffer an out-of-pocket loss. Why? If a party has not yet performed the promise, he or she has not completely committed financially to the transaction and thus should not receive special legal protection. Therefore, when a party receives a negotiable instrument as a gift or acquires it through mistake, the party will be a holder instead of a holder in due course. According to Uniform Commercial Code Section 3-303(a), a holder can take an instrument for value if the holder: a) performs the promise for which the instrument was issued; b) acquires a security interest or some other lien in the instrument; c) takes the instrument for payment of a preceding claim; d) exchanges the instrument for another negotiable instrument; or e) exchanges the instrument for an irrevocable obligation to a third party. 96) A holder in due course is generally free from personal defenses. Personal defenses include: a) lack or failure of consideration; b) breach of contract; c) fraud in the inducement in the underlying contract; d) incapacity; e) illegality; f) duress; g) unauthorized completion or material alteration of the instrument; and h) unauthorized acquisition of the instrument. In contrast to personal defenses, a holder in due course is subject to real defenses. Real defenses include: a) fraud in the essence; b) discharge of the party liable through bankruptcy; c) forgery; d) material alteration of a completed instrument; and e) infancy [in other words, a party is below the legal age of consent]. Version 1
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97) Three conditions must be met for a drawer or endorser to become liable. First, the holder of the instrument must present the instrument in a proper and timely fashion. Second, the instrument must be dishonored. Third, notice of the dishonor must be given to the drawer. 98) When a party transfers an instrument for consideration, he or she warrants that: (a) The transferor is entitled to enforce the negotiable instrument; (b) Signatures on the instrument are authentic and authorized; (c) The instrument has not been altered; (d) The instrument is not subject to a defense or claim in recoupment; and (e) The transferor has no knowledge of insolvency proceedings against the maker, acceptor, or drawer of the instrument. 99) The best advice to the bank is that Laura ratified Bruce's action because she took no timely action to remedy the situation. If an agent is not authorized to sign a negotiable instrument on behalf of a principal, the principal will generally not be liable for the instrument. Consequently, the agent would be personally liable for the instrument. However, if the principal decides to ratify, or approve of, the unauthorized agent’s signature, the principal will then become liable for the instrument, and the agent will escape personal liability. A principal can ratify the unauthorized signature of an agent by explicitly approving of the signature, doing nothing despite knowledge of the signature, or accepting the benefits associated with the signature.
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CHAPTER 19 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) A secured transaction is a transaction in which the payment of a debt is guaranteed by personal property the debtor owns. ⊚ true ⊚ false
2)
Secured transactions are governed by the common law of every state. ⊚ true ⊚ false
3) Under the Uniform Commercial Code (UCC), a secured interest is an interest in personal property or fixtures which secures payment or performance of an obligation. ⊚ true ⊚ false
4)
Collateral can include farm products, documents of title, good will and proceeds. ⊚ true ⊚ false
5) Collateral should be described clearly in the written security agreement because the creditor could otherwise lose rights to the collateral. ⊚ true ⊚ false
6) According to the Uniform Commercial Code (UCC), a secured party need not give value in order to create a security interest. ⊚ true ⊚ false
7) A purchase-money security interest (PMSI) is formed when a debtor uses borrowed money from an unsecured party to buy the collateral.
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⊚ ⊚
true false
8) Perfection is a series of legal steps a secured party takes to protect its right in certain collateral from other creditors who want their debts satisfied through different collateral. ⊚ true ⊚ false
9) The least common way to perfect a security interest is to file a financing statement with a state agency. ⊚ true ⊚ false
10) When a creditor sells a consumer good to a debtor on a credit basis or a creditor extends a loan to a debtor for the purchase of a consumer goods, the security interest does not perfect automatically; instead, the secured party must file a financing statement for the security interest to perfect. ⊚ true ⊚ false
11) Perfection of a security interest in a motor vehicle generally occurs when the secured party files a financing statement with the Federal Trade Commission (FTC). ⊚ true ⊚ false
12) A security interest cannot apply to personal property that is not yet in the debtor's possession. ⊚ true ⊚ false
13) When a debtor sells collateral, the secured party automatically has an interest in the proceeds the debtor receives in exchange for the collateral. ⊚ true ⊚ false
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14) Under the Uniform Commercial Code (UCC), the secured party's interest in proceeds lasts for sixty (60) days after the debtor receives the proceeds. ⊚ true ⊚ false
15) Unsecured creditors have the same rights as secured creditors if they provide loans based on the same collateral. ⊚ true ⊚ false
16) In a dispute between a secured perfected creditor and a secured unperfected creditor for claim to the same collateral, the secured perfected creditor will prevail. ⊚ true ⊚ false
17) Under the Uniform Commercial Code (UCC), a buyer in the ordinary course of business can take goods free of any security interest created by the seller of the goods unless the security interest is perfected. ⊚ true ⊚ false
18) Chattel paper is a writing that indicates both a monetary obligation and a security interest in specific goods. ⊚ true ⊚ false
19)
The Uniform Commercial Code (UCC) does not define loan default. ⊚ true ⊚ false
20) Bankruptcy remedies are available to individuals and corporations, but not to partnerships.
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⊚ ⊚
true false
21) The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 made only minor changes to bankruptcy law. ⊚ true ⊚ false
22)
Bankruptcy law is state law. ⊚ true ⊚ false
23) The bankruptcy liquidation process begins ninety (90) days after the bankruptcy petition is filed. ⊚ true ⊚ false
24)
Creditors can attempt to repossess property during bankruptcy proceedings. ⊚ true ⊚ false
25) If the debtor made any payments to creditors within thirty (30) days of the bankruptcy petition filing, the bankruptcy court will consider such financial transfers as per se preferential payments. ⊚ true ⊚ false
26) If a party completes a Chapter 7 bankruptcy, the party is not permitted to seek a Chapter 7 bankruptcy again for three (3) years. ⊚ true ⊚ false
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27) If an individual was a debtor in a bankruptcy case that was dismissed within 180 days of the current case, the individual is generally not eligible to be a debtor under Chapters 7, 11, or 13. ⊚ true ⊚ false
28)
Chapter 11bankruptcy reorganization must be voluntary. ⊚ true ⊚ false
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 29) In a _____ transaction, payment of the debt is guaranteed by personal property owned by the debtor. A) subrogated B) reserved C) secured D) leveraged E) selective
30)
Article 9 of the _____ governs secured transactions in personal property. A) Uniform Secured Transactions Act (USTA) B) Federal Trade Commission Act (FTCA) C) Securitization of Personal Property Act (SPPA) D) Uniform Commercial Code (UCC) E) Restatement (Second) of Commercial Transactions
31) What is an interest in personal property or a fixture which secures payment of an obligation?
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A) A promissory note B) A commercial draft C) A due-on-sale addendum D) A secured interest E) A subrogated interest
32)
The person or party that holds the interest in the secured property is the _____. A) subrogee B) assignee C) delegatee D) secured party E) third-party beneficiary
33) Ralph has a car loan through North American Bank for his 2020 Corvette Stingray. Ralph is considered the _____. A) creditor B) promisee C) delegator D) debtor E) payee
34) An agreement in which the debtor gives a secured interest to the secured party is a(n) _____. A) promissory note B) novation C) accord and satisfaction D) debenture E) security agreement
35)
Which of the following would not be considered collateral used in a security interest?
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A) Goods B) Intangibles C) Proceeds D) Indispensable paper E) Lost profits
36)
Which of the following do not qualify as goods subject to security interests? A) Consumer goods B) Farm products C) Professional services D) Inventory E) Equipment
37)
Which of the following are a type of indispensable paper? A) Fixtures B) Documents of title C) Accounts D) Fixtures, documents of title, and accounts E) Fixtures and documents of title, but not accounts
38) Which of the following include accounts, goodwill, and literary rights that can all be subject to security interests? A) Goods B) Personal property C) Real property D) Tangibles E) Intangibles
39) What signifies that the creditor has become a secured party with an interest in certain collateral? Version 1
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A) An accord B) A satisfaction C) Perfection D) Attachment E) A novation
40) A(n) _____ forms when a debtor uses borrowed money from a secured party to purchase certain collateral. A) accord and satisfaction B) purchase-money security interest C) third-party beneficiary contract D) perfected security interest E) novation
41) Mark and Sherry have not made the last five (5) monthly payments to American Home Equity, LLC, the bank that holds the mortgage on their home. They have _____ the loan. A) rescinded B) revoked C) nullified D) defaulted on E) called on
42) When a party _____ its interest in collateral, it is legally protecting its claim to the collateral. A) acknowledges B) accepts C) underscores D) perfects E) affirms
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43) According to the Uniform Commercial Code (UCC), a financing statement should include the _____. A) names and addresses of all the parties involved B) names and addresses of all the parties involved and a description of the collateral C) names and addresses of all the parties involved, a description of the collateral, and the signature of the debtor D) names of the financing bank and the debtor and a description of the collateral E) name of the financing bank, the signature of the debtor, a description of the collateral, and the details of the loan repayment schedule
44) After _____ year(s), if a secured party does not renew its financing statement, the statement _____ and the security interest is not protected. A) five (5); expires B) four (4); is held in abeyance C) three (3); is withdrawn D) two (2); is renegotiated E) one (1); requires additional collateral
45)
A(n) _____ is the transfer of collateral to the secured party for the purpose of perfection. A) delegation B) pledge C) assignment D) allonge E) allegiance
46)
What type of collateral must be perfected through possession? A) Certificates of deposit (CDs) B) Stocks C) Bonds D) Certificates of deposit (CDs), stocks, and bonds E) No types of collateral must be perfected through possession
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47) A(n) _____ good is used (or purchased for use) primarily for personal, family, or household purposes. A) retail B) consumer C) commercial D) intangible E) unsecured
48)
Generally, a security interest in collateral that has been perfected in one state will _____.
A) transfer to another state for a period of four (4) months from the date that the property is brought into the state B) transfer to another state for a period of six (6) months from the date that the property is brought into the state C) transfer to another state for a period of one (1) year from the date that the property is brought into the state D) transfer to another state for a period of five (5) years from the date that the property is brought into the state E) not transfer to another state
49)
What is the national standard for perfecting a security interest in an automobile or a boat? A) Perfection by pledge or perfection by filing B) Perfection by filing or perfection by possession C) Automatic perfection or perfection by possession D) Automatic perfection or perfection by filing E) No national standard exists for perfecting a security interest in an automobile or a
boat.
50)
A security interest in a trademark, copyright, or patent is perfected _____.
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A) automatically B) by filing C) by possession D) by filing or by possession, but not automatically E) automatically, by filing, or by possession
51)
What kind of property is acquired by the debtor after the security agreement is made? A) Post-dated property B) After-acquired property C) Proceeds D) Ex post facto property E) Incidental property
52)
Which of the following can be considered after-acquired property? A) Inventory B) Livestock C) Equipment D) Inventory, livestock, or equipment E) Inventory and equipment, but not livestock
53) When a debtor sells collateral, he or she receives _____, something that is exchanged for collateral. A) after-acquired property B) consideration C) proceeds D) collateral E) value
54)
Which of the following is true regarding a secured party's interest in proceeds?
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A) A secured party automatically has an interest in proceeds for a limited amount of time. B) A secured party has an interest in proceeds, but only if the secured party takes possession of the proceeds. C) A secured party has an interest in proceeds, but only if a financing statement is filed on the proceeds. D) A secured party has an interest in proceeds, but only if the secured party takes possession of the proceeds, or if the secured party files a financing statement on the proceeds. E) The secured party may not acquire a security interest in proceeds unless a new agreement regarding the proceeds is reached with the debtor.
55) A secured party's interest in proceeds lasts for _____ after the debtor receives the proceeds. A) three (3) years B) one (1) year C) ninety (90) days D) thirty (30) days E) ten (10) days
56) Which of the following is an amendment to a financing statement stating that the debtor has no obligation to the secured party? A) A declaration against interest B) A termination statement C) An accord and satisfaction D) A settlement agreement E) A novation
57) In a dispute between two secured parties with unperfected security interests, which of the following is true?
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A) The party who attached its interest first will prevail. B) The party who attached its interest second will prevail. C) The parties must divide the proceeds evenly between them. D) The party who loaned the most money on the collateral has priority. E) The party who loaned the least money on the collateral has priority.
58) Which party routinely buys goods in good faith from a person who routinely sells such goods? A) A commercial purchaser B) A non-commercial purchaser C) A course of dealings purchaser D) A buyer in the ordinary course of business E) A holder of goods in due course
59) According to the Uniform Commercial Code (UCC), what happens if a buyer of a consumer good subject to purchase-money security interest later sells the good? A) The security interest immediately terminates. B) The security interest passes to the new buyer. C) Regardless of whether the new buyer is aware of the security interest, the security interest terminates if the sale to the buyer is made before the original secured party files a financial statement. D) As long as the new buyer is not aware of the security interest, purchases the good for his or her personal use, and purchases the good before the secured party files a financial statement, the buyer obtains the good free of the security interest. E) As long as the new buyer is not aware of the security interest, purchases the good for resale, and purchases the good before the secured party files a financial statement, the buyer obtains the good free of the security interest.
60) What type of paper indicates both a monetary obligation and a security interest in specific goods?
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A) Chattel paper B) Service paper C) Transactional paper D) Commercial paper E) Default paper
61)
Which of the following is a writing that demonstrates a right to payment of money? A) Chattel paper B) Transactional paper C) An allonge D) An instrument E) An addendum
62) If a buyer purchases chattel paper or an instrument in the ordinary course of business and he or she is unaware of any security interest in the good, the buyer obtains the good _____. A) subject to an unperfected security interest B) subject to a perfected security interest by possession C) subject to an automatically-perfected security interest D) subject to an automatically-perfected security interest and a perfected security interest by possession E) free of any security interest
63)
Which of the following is the Uniform Commercial Code's (UCC’s) definition of default? A) It is the failure to make a payment when it is due. B) It is the failure to make a payment within thirty (30) days after the payment is due. C) It is the failure to make a payment within sixty (60) days after the payment is due. D) It is the failure to make a payment within ninety (90) days after the payment is due. E) The UCC does not define default.
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64) If a debtor defaults, what type of court order does the secured party need to take possession of the collateral? A) A confiscatory decree B) A declaratory judgment C) A summary judgment D) A temporary injunction E) The secured party does not need an order to take possession.
65) Which of the following is true regarding the manner in which a secured party may sell collateral after the debtor's default? A) The sale must be at a private sale. B) The sale must be at a public sale. C) The sale may be at either a private sale or a public sale. D) The sale must be at a "without reserve" sale. E) The sale must be at a "with reserve" sale.
66) When an entity is unable to pay its debts, _____ provides various options for the entity to resolve the debts. A) common law B) the Restatement (Second) of Debtor-Creditor Relations C) bankruptcy law D) the Uniform Commercial Code (UCC) E) the Debtor Relief and Rehabilitation Act of 2005
67) Bart is having serious difficulties paying the debts he owes to his creditors in a timely fashion. Bart is a(n) _____. A) misdemeanant B) insolvent debtor C) financial malfeasant D) financial miscreant E) common law debtor
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68) The United States Congress made comprehensive changes to bankruptcy law in the _____. A) Restatement (Second) of Debtor-Creditor Relations B) Bankruptcy Fraud Protection Act of 2007 C) Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 D) Bankruptcy Fraud and Consumer Shield Act of 2006 E) Debtor Relief and Rehabilitation Act of 2003
69) Gordon filed the type of bankruptcy in which the bankruptcy trustee sold all of his assets and distributed the proceeds of the sale to his creditors. Gordon filed _____ bankruptcy. A) non-liquidation B) Chapter 7 C) Chapter 9 D) Chapter 11 E) Chapter 13
70) Perma-Bloom Flowers, LLC is having its financial affairs reorganized under the supervision of the bankruptcy court. What type of bankruptcy is this? A) Chapter 2 B) Chapter 5 C) Chapter 7 D) Chapter 9 E) Chapter 11
71) Which of the following chapters of the Bankruptcy Code recognizes insolvency proceedings pending in a foreign country and relief for foreign debtors?
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A) Chapter 7 B) Chapter 9 C) Chapter 11 D) Chapter 14 E) Chapter 15
72)
Which title of the United States Code (U.S.C.) contains the Bankruptcy Code? A) Title 9 B) Title 11 C) Title 13 D) Title 15 E) Title 23
73) Which of the following is false regarding the provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005? A) Under the BAPCPA, an individual may not generally be considered a debtor unless within 180 days prior to filing, the debtor receives credit counseling from a nonprofit budget and credit counseling agency. B) Under the BAPCPA, if an individual was a debtor in a bankruptcy case that was dismissed within 180 days of the current case, the individual is generally not eligible to be a debtor under Chapters 7, 11, or 13. C) Under the BAPCPA, if a previous bankruptcy was completed rather than dismissed, the individual is generally permitted to file for bankruptcy again. D) Under the BAPCPA, if a party completes a Chapter 7 bankruptcy, the party is not permitted to seek a Chapter 7 bankruptcy again for eight years. E) Under the BAPCPA, if a party has at least $10,000 in assets, the party may not file for any type of bankruptcy protection.
74) The most familiar type of bankruptcy proceeding is liquidation, which is sometimes called _____ bankruptcy.
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A) pro forma B) straight C) creditor fulfillment D) creditors’ rights E) repayment plan
75) Which of the following types of bankruptcy occurs when a debtor turns over all assets to a trustee? A) Liquidation B) Reorganization C) Reformation D) Rehabilitation E) Non-liquidation
76) Who takes over the administration of the debtor’s estate and is usually an attorney in private practice that specializes in bankruptcy law? A) An executor B) A trustee C) An administrator D) A delegator E) A guardian ad litem
77)
Which of the following are not eligible for relief under Chapter 7 bankruptcy?
A) Banks and railroads B) Insurance companies and health maintenance organizations C) Banks and savings and loan associations D) Banks, savings and loan associations, and credit unions E) Railroads, insurance companies, banks, savings and loan associations, credit unions, and health maintenance organizations
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78)
Once the bankruptcy petition is filed, all the debtor’s prepetition assets form what? A) The creditors’ estate B) The financial reserve C) The collective fund D) The bankruptcy estate E) The common fund
79) By filing a(n) _____ petition under Chapter 7, creditors can attempt to force into bankruptcy a debtor who is not paying debts as they become due. A) voluntary B) involuntary C) declaratory D) injunctive E) interlocutory
80) Which of the following parties cannot be forced into involuntary bankruptcy under Chapter 7? A) Farmers B) Ranchers C) Nonprofit organizations D) Farmers, ranchers, and nonprofit organizations E) Farmers and ranchers, but nonprofit organizations can be forced into involuntary bankruptcy
81) Under which test may a court presume that an individual is abusing the bankruptcy provisions of Chapter 7 when an individual's debt is primarily consumer debt and the individual's income is above the median income in his or her state?
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A) The means test B) The assets test C) The liabilities test D) The balance sheet test E) The liquidation test
82) Which of the following is a moratorium for almost all creditor litigation against a debtor in a Chapter 7 bankruptcy proceeding? A) A stop order B) An automatic stay C) A temporary injunction D) A permanent injunction E) An interlocutory appeal
83) Which of the following is true regarding actions that may be taken while an automatic stay is in effect in a Chapter 7 proceeding? A) Creditors can attempt to repossess property. B) A creditor who received a judgment against the debtor prior to the bankruptcy filing may act to enforce the judgment. C) Legal actions to collect child support payments are not subject to the automatic stay. D) Legal actions to determine paternity are subject to the automatic stay. E) Legal actions to determine alimony payments are subject to the automatic stay.
84) Which of the following is true regarding the effect of an automatic stay on claims of secured creditors in a Chapter 7 proceeding?
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A) The automatic stay affects the claims of secured creditors in the same way it affects the claims of unsecured creditors. B) Secured creditors with claims of over $5,000 are not affected by the automatic stay. C) Secured creditors with claims of over $15,000 are not affected by the automatic stay. D) Secured creditors with claims of over $20,000 are not affected by the automatic stay. E) The court may exclude secured creditors from the automatic stay if they petition the court to show that they do not have adequate protection under the stay.
85) Which of the following means that bankruptcy relief is ordered and that the bankruptcy proceedings can continue? A) An order of relief B) A petition C) A declaratory judgment D) A temporary injunction E) A permanent injunction
86)
Which of the following is true regarding the rights of a trustee in a Chapter 7 bankruptcy?
A) The trustee may take possession of the debtor's property and have it appraised. B) If someone else holds the debtor's property, the trustee has the power to require the person to return that property. C) The trustee may temporarily take over the debtor's business. D) The trustee may take possession of the debtor's property and have it appraised; if someone else holds the debtor's property, the trustee has the power to require the person to return that property; and the trustee may temporarily take over the debtor's business. E) The trustee may take possession of the debtor's property and have it appraised, and if someone else holds the debtor's property, the trustee has the power to require the person to return that property; however, the trustee may not take over the debtor's business even temporarily.
87) Which of the following is a meeting of all the creditors listed in the Chapter 7 required schedule for liquidation?
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A) The settlement conference B) The pre-trial conference C) The creditors' meeting D) Binding arbitration E) Non-binding arbitration
88)
Who calls the creditors' meeting in a Chapter 7 bankruptcy proceeding? A) The trustee B) The interim trustee C) The executor D) The executrix E) The committee of creditors
89) How is a determination made regarding selection of the permanent trustee in a Chapter 7 proceeding? A) The bankruptcy judge appoints the trustee. B) The bankruptcy executor appoints the trustee. C) The court clerk appoints the trustee. D) The debtor appoints the trustee. E) The creditors elect the trustee.
90) Which type of payment does an insolvent debtor make that gives preferential treatment to one creditor over another creditor? A) A deferential payment B) A payment in equity C) A preferential payment D) A liquidated payment E) A non-liquidated payment
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91) A(n) _____ is a written federal court order signed by a bankruptcy judge stating that the debtor is immune from creditor actions to collect debts. A) discharge B) accord and satisfaction C) grant of immunity D) relinquishment E) abandonment
92)
Which of the following are nondischargeable debts under a Chapter 7 bankruptcy filing?
A) Claims of willful or malicious conduct by the debtor that caused injury to another person or property and specific student loans (unless payment of the loans imposes undue hardship on the debtor) B) Specific student loans (unless payment of the loans imposes undue hardship on the debtor) and debts not discharged in previous bankruptcies C) Debts not discharged in previous bankruptcies and judgements against a debtor for claims resulting from the debtor’s drinking and driving D) Claims of willful or malicious conduct by the debtor that caused injury to another person or property; specific student loans (unless payment of the loans imposes undue hardship on the debtor); and judgments against a debtor for claims resulting from the debtor's drinking and driving E) Claims of willful or malicious conduct by the debtor that caused injury to another person or property; specific student loans (unless payment of the loans imposes undue hardship on the debtor); debts not discharged in previous bankruptcies; and judgements against a debtor for claims resulting from the debtor’s drinking and driving
93) Which of the following is an agreement by which the debtor agrees to pay a debt even though it could be discharged? A) An admission against interest B) A reaffirmation agreement C) A compromise agreement D) An accord and satisfaction E) A novation
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94) Which of the following is true regarding the parties who are eligible for Chapter 11 bankruptcy? A) Stockbrokers and commodities brokers are eligible for Chapter 11 reorganization, while banks and savings and loan companies are not. B) Banks and savings and loan companies are eligible for Chapter 11 reorganization, while stockbrokers and commodities brokers are not. C) Stockbrokers and banks are eligible for Chapter 11 reorganization, while commodities brokers and savings and loan companies are not. D) Commodities brokers and savings and loan companies are eligible for Chapter 11 reorganization, while stockbrokers and banks are not. E) Stockbrokers, commodities brokers, banks, and savings and loan companies are not eligible for Chapter 11 reorganization.
95) Which of the following is true regarding the number of creditors who must vote to accept a Chapter 11 reorganization plan? A) For the plan to be accepted, one-third of the creditors of each class of creditors must vote to approve it. B) For the plan to be accepted, one-half of the creditors of each class of creditors must vote to approve it. C) For the plan to be accepted, two-thirds of the creditors of each class of creditors must vote to approve it. D) For the plan to be accepted, three-fourths of the creditors of each class of creditors must vote to approve it. E) For the plan to be accepted, one-fourth of the creditors of each class of creditors must vote to approve it.
96)
Which of the following is false regarding Chapter 13 bankruptcy?
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A) Chapter 13 permits individuals to pay their debts to creditors in installment plans under the supervision of the court. B) Any debtor who files under Chapter 13 could also have filed under Chapter 11. C) Chapter 13 repayment plans are usually simpler and less expensive than Chapter 11 plans. D) By statute, Chapter 13 plans last between thirty-six (36) and sixty (60) months. E) Individuals, partnerships, and corporations may file under Chapter 13.
97) If a purchase money security interest (PMSI) is in inventory, the perfected PMSI has priority over a previously perfected non-PMSI if which of the following two (2) conditions are met? A) The PMSI party perfects its interest after the debtor receives his inventory, and the PMSI party checks for previous secured interests and gives written notice to the holders of the PMSI B) The PMSI party perfects its interest before or at the same time that the debtor receives his inventory, and the PMSI party checks for previous secured interests and gives written notice to the holders of the PMSI C) The PMSI party perfects its interest before or after the debtor receives his inventory, and the PMSI party checks for previous secured interests and gives written notice to the holders of the PMSI D) The PMSI party perfects its interest before or at the same time that the debtor receives his inventory, and the PMSI party checks for subsequent secured interests and gives written notice to the holders of the PMSI E) The PMSI party perfects its interest before or at the same time that the debtor receives his inventory, and the PMSI party checks for subsequent secured interests and gives written or oral notice to the holders of the PMSI
98) According to the Uniform Commercial Code (UCC), a purchase money security interest (PMSI) exists in all but which of the following situations?
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A) When a security interest is retained or taken by the seller of the collateral to secure part of the purchase price B) When a security interest is retained or taken by the buyer of the collateral to secure the seller’s fulfillment of an express or implied warranty C) When a security interest is retained or taken by the seller of the collateral to secure all of the purchase price D) When a security interest is retained or taken by a person who gives something of value to the debtor so that the debtor can gain rights to the collateral E) When a security interest is retained or taken by a person who gives something of value to the debtor so that the debtor can gain use of the collateral
99) Mindy liked to spend money and had a large amount of consumer debt for items such as jewelry, clothing, a personal watercraft, and a new car. Mindy was having problems making her credit card payments as they became due. She wanted, however, to make every effort to pay her debts. On September 1 she repaid a loan to Friendly Jewelry Store because she wanted to remain on good terms with the manager. Unfortunately, Mindy was simply unable to continue making payments, and on November 1 of that same year, she filed a voluntary petition for bankruptcy relief under Chapter 7. A number of her creditors complained because Friendly Jewelry Store received more from the Mindy’s early payment than it would have received in bankruptcy proceedings. Which of the following is the most likely result of a claim of preferential payment based on the payment to the jewelry store? A) The payment was not preferential because it was for a consumer good and was not made within thirty (30) days of the filing of the bankruptcy petition. B) The payment was preferential because it was made within ninety (90) days of the filing of the bankruptcy petition. C) The payment was preferential becauseit was made within ninety (90) days of the filing of the bankruptcy petition, but only if the trustee can establish Mindy's insolvency at the time. D) Because it was for a consumer good, the payment was not preferential unless the bankruptcy trustee can prove intent to defraud. E) The payment was preferential becauseit was made within two (2) years of the filing of the bankruptcy petition.
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100) Overextended Debtor. Dennis purchased a big-screen television from ABC Electronics (ABC) and financed the purchase through ABC based on an agreement granting the retailer a security interest in the television and requiring that Dennis make monthly payments. Three (3) months later, Dennis was unable to continue making payments on the television because he had purchased a boat, a new car, an expensive engagement ring for his girlfriend, and some other items. The ABC store manager called Dennis and asked him to return the television. Dennis refused on the basis that ABC never perfected its interest in the television. According to the Uniform Commercial Code (UCC), what is the proper designation for the television? A) It is a consumer good. B) It is a pledge. C) It is an allonge. D) It is unsecured property. E) It is both unsecured and unperfected property.
101) Overextended Debtor. Dennis purchased a big-screen television from ABC Electronics (ABC) and financed the purchase through ABC based on an agreement granting the retailer a security interest in the television and requiring that Dennis make monthly payments. Three (3) months later, Dennis was unable to continue making payments on the television because he had purchased a boat, a new car, an expensive engagement ring for his girlfriend, and some other items. The ABC store manager called Dennis and asked him to return the television. Dennis refused on the basis that ABC never perfected its interest in the television. Which of the following is correct regarding the effect of Dennis's failure to continue making payments? A) He refused the loan. B) He defaulted on the loan. C) He unsecured the loan. D) He rescinded the loan. E) He discharged the loan.
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102) Overextended Debtor. Dennis purchased a big-screen television from ABC Electronics (ABC) and financed the purchase through ABC based on an agreement granting the retailer a security interest in the television and requiring that Dennis make monthly payments. Three (3) months later, Dennis was unable to continue making payments on the television because he had purchased a boat, a new car, an expensive engagement ring for his girlfriend, and some other items. The ABC store manager called Dennis and asked him to return the television. Dennis refused on the basis that ABC never perfected its interest in the television. Which of the following is the term for the type of agreement Dennis had with ABC? A) A pledged-money interest B) A collateralized interest C) A purchase-money security interest D) A security perfection interest E) A cash-deferred security interest
103) Overextended Debtor. Dennis purchased a big-screen television from ABC Electronics (ABC) and financed the purchase through ABC based on an agreement granting the retailer a security interest in the television and requiring that Dennis make monthly payments. Three (3) months later, Dennis was unable to continue making payments on the television because he had purchased a boat, a new car, an expensive engagement ring for his girlfriend, and some other items. The ABC store manager called Dennis and asked him to return the television. Dennis refused on the basis that ABC never perfected its interest in the television. Which of the following is correct regarding Dennis’ assertion that the security interest was not perfected? A) Dennis is wrong because the security interest perfected automatically. B) Dennis is wrong becausethe security interest perfected when he was still in possession of the collateral thirty (30) days after the purchase. C) Dennis is wrong becausethe security interest perfected when he was still in possession of the collateral sixty (60) days after the purchase. D) Dennis is correct becausein the case of luxury goods, a financing statement must be filed within ten (10) days. E) Dennis is correct because regardless of whether a luxury good was involved, the interest was never perfected.
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104) Overextended Debtor. Dennis purchased a big-screen television from ABC Electronics (ABC) and financed the purchase through ABC based on an agreement granting the retailer a security interest in the television and requiring that Dennis make monthly payments. Three (3) months later, Dennis was unable to continue making payments on the television because he had purchased a boat, a new car, an expensive engagement ring for his girlfriend, and some other items. The ABC store manager called Dennis and asked him to return the television. Dennis refused on the basis that ABC never perfected its interest in the television. Which of the following is the correct designation for the television in the agreement between Dennis and ABC? A) It is a pledged good. B) It is an acknowledged good. C) It is collateral. D) It is a designated security. E) It is a fungible good.
105) Repossession. Tina sold used vehicles. She sold a used pick-up truck to Joan and a used convertible to Barry. She properly obtained a security interest in both vehicles. Both Joan and Barry defaulted on payments owed to Tina for the vehicles. Tina told her assistant Samantha that the only legal remedy was repossession; that she was going after the vehicles; and that Samantha should call law enforcement if she did not show up at the office by 10 a.m. for the next few mornings. Tina decided that she would repossess Joan's pick-up at Joan's house. Therefore, Tina slipped into the driveway at midnight one night and started the engine. Joan immediately ran out and confronted Tina. Tina shoved Joan away and drove off in the pick-up truck. Tina was able to repossess Barry's convertible in a public parking lot with no altercation with him. Which of the following is true regarding whether repossession was the only remedy available to Tina? A) Tina was correct regardless of whether a vehicle or another type of good was involved. B) Tina was correct, but only because a vehicle was involved. C) Tina was incorrect because only when a vehicle is involved, a party must disregard the collateral and proceed to judgment. D) Tina was incorrect because regardless of whether a vehicle or another type of good was involved, Tina only had the right to ignore the collateral and proceed to judgment. E) Tina was incorrect because regardless of whether a vehicle or another type of good was involved, Tina had the right to either take possession of the collateral or ignore rights in the collateral and proceed to judgment.
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106) Repossession. Tina sold used vehicles. She sold a used pick-up truck to Joan and a used convertible to Barry. She properly obtained a security interest in both vehicles. Both Joan and Barry defaulted on payments owed to Tina for the vehicles. Tina told her assistant Samantha that the only legal remedy was repossession; that she was going after the vehicles; and that Samantha should call law enforcement if she did not show up at the office by 10 a.m. for the next few mornings. Tina decided that she would repossess Joan's pick-up at Joan's house. Therefore, Tina slipped into the driveway at midnight one night and started the engine. Joan immediately ran out and confronted Tina. Tina shoved Joan away and drove off in the pick-up truck. Tina was able to repossess Barry's convertible in a public parking lot with no altercation with him. Which of the following is true regarding Tina's repossession of the pick-up truck? A) Tina improperly breached the peace in recovering the collateral. B) Tina did not breach the peace in recovering the collateral unless Joan can establish the existence of actual injuries. C) Tina did not breach the peace because she was entitled to repossess the vehicle and because any injury sustained by Joan was her own fault. D) Tina breached the peace, but only because she did not provide Joan with prior notification that she was coming to repossess the collateral. E) Tina breached the peace, but only because she acted to repossess the collateral after 10:00 p.m. at night.
107) Repossession. Tina sold used vehicles. She sold a used pick-up truck to Joan and a used convertible to Barry. She properly obtained a security interest in both vehicles. Both Joan and Barry defaulted on payments owed to Tina for the vehicles. Tina told her assistant Samantha that the only legal remedy was repossession; that she was going after the vehicles; and that Samantha should call law enforcement if she did not show up at the office by 10 a.m. for the next few mornings. Tina decided that she would repossess Joan's pick-up at Joan's house. Therefore, Tina slipped into the driveway at midnight one night and started the engine. Joan immediately ran out and confronted Tina. Tina shoved Joan away and drove off in the pick-up truck. Tina was able to repossess Barry's convertible in a public parking lot with no altercation with him. Which of the following is true regarding Tina's taking possession of Barry's convertible?
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A) Tina breached the peace because she did not provide Barry prior notification that she was going to repossess the vehicle. B) Tina breached the peace because she took the vehicle from a public lot. C) Tina breached the peace unless she can establish that Barry gave her prior permission to repossess the vehicle in a public lot. D) Tina did not breach the peace because she acted in a reasonable manner in taking the collateral. E) Tina did not breach the peace because Barry committed a criminal offense in retaining possession of the car.
108) Claims to Funds. Paul had a great job as a bank executive. Unfortunately, his bank came under scrutiny by federal regulators, and although Paul had done nothing illegal, he ended up being fired. Unfortunately for Paul, he had a number of debts. Among his assets was a house worth $250,000 on which he owed $150,000 to a bank, which held a security interest; three vehicles; an expensive watch worth $5,000; and $120,000 in an Individual Retirement Account (IRA). He owed $900 per month in child support to his ex-wife Suzy and was behind on payments in the amount of $1,800. He also owed $2,000 in wages consisting of four months of back pay to Bob who took care of Paul's landscaping needs and swimming pool care. Unable to find a job and believing that he had no other option, Paul filed for Chapter 7 bankruptcy. All creditors angrily demanded payment from liquidation of Paul's assets. Paul, on the other hand, claims that he needs all the above-mentioned assets and that he should not have to give up anything. Only federal bankruptcy exemptions apply to Paul's case. Which of the following forms Paul's bankruptcy estate? A) All his prepetition assets B) Only the jewelry and the IRA C) Only the nonexempt assets D) Only the personal goods lacking a security interest E) Only the real estate
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109) Claims to Funds. Paul had a great job as a bank executive. Unfortunately, his bank came under scrutiny by federal regulators, and although Paul had done nothing illegal, he ended up being fired. Unfortunately for Paul, he had a number of debts. Among his assets were a house worth $250,000 on which he owed $150,000 to a bank that held a security interest; three vehicles; an expensive watch worth $5,000; and $120,000 in an Individual Retirement Account (IRA). He owed $900 per month in child support to his ex-wife Suzy and was behind on payments in the amount of $1,800. He also owed $2,000 in wages consisting of four months of back pay to Bob who took care of Paul's landscaping needs and swimming pool care. Unable to find a job and believing that he had no other option, Paul filed for Chapter 7 bankruptcy. All creditors angrily demanded payment from liquidation of Paul's assets. Paul, on the other hand, claims that he needs all the above-mentioned assets and that he should not have to give up anything. Only federal bankruptcy exemptions apply to Paul's case. Which of the following parties has first claim to proceeds from the house? A) The bank with the security interest B) Suzy C) Sam D) Suzy and Sam, with each having a one-half interest E) The bank, Suzy, and Sam, with each having a one-third interest
110) Claims to Funds. Paul had a great job as a bank executive. Unfortunately, his bank came under scrutiny by federal regulators, and although Paul had done nothing illegal, he ended up being fired. Unfortunately for Paul, he had a number of debts. Among his assets were a house worth $250,000 on which he owed $150,000 to a bank that held a security interest; three vehicles; an expensive watch worth $5,000; and $120,000 in an Individual Retirement Account (IRA). He owed $900 per month in child support to his ex-wife Suzy and was behind on payments in the amount of $1,800. He also owed $2,000 in wages consisting of four months of back pay to Bob who took care of Paul's landscaping needs and swimming pool care. Unable to find a job and believing that he had no other option, Paul filed for Chapter 7 bankruptcy. All creditors angrily demanded payment from liquidation of Paul's assets. Paul, on the other hand, claims that he needs all the above-mentioned assets and that he should not have to give up anything. Only federal bankruptcy exemptions apply to Paul's case. Which of the following is true under bankruptcy law regarding Paul's claim to the watch?
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A) The watch will be sold, with the entire proceeds being used to satisfy the claims of creditors. B) The watch will remain Paul's property because it is automatically exempt. C) The watch will remain Paul's property if he can establish that it is needed in his profession. D) Paul's interest in the watch is exempt, but only up to $1,600. E) Paul's interest in the watch is exempt, but only up to $600.
111) Claims to Funds. Paul had a great job as a bank executive. Unfortunately, his bank came under scrutiny by federal regulators, and although Paul had done nothing illegal, he ended up being fired. Unfortunately for Paul, he had a number of debts. Among his assets were a house worth $250,000 on which he owed $150,000 to a bank that held a security interest; three vehicles; an expensive watch worth $5,000; and $120,000 in an Individual Retirement Account (IRA). He owed $900 per month in child support to his ex-wife Suzy and was behind on payments in the amount of $1,800. He also owed $2,000 in wages consisting of four months of back pay to Bob who took care of Paul's landscaping needs and swimming pool care. Unable to find a job and believing that he had no other option, Paul filed for Chapter 7 bankruptcy. All creditors angrily demanded payment from liquidation of Paul's assets. Paul, on the other hand, claims that he needs all the above-mentioned assets and that he should not have to give up anything. Only federal bankruptcy exemptions apply to Paul's case. Which of the following is true regarding Paul's claim to his vehicles? A) All vehicles will be sold, with the entire proceeds being used to satisfy claims of creditors. B) All vehicles will remain Paul's property because vehicles are automatically exempt. C) One vehicle with the least value will remain Paul's property as an exemption, and the others will be sold to satisfy the claims of creditors. D) An interest in a motor vehicle up to $3,775 is exempt. E) An interest in a motor vehicle up to $7,750 is exempt.
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112) Claims to Funds. Paul had a great job as a bank executive. Unfortunately, his bank came under scrutiny by federal regulators, and although Paul had done nothing illegal, he ended up being fired. Unfortunately for Paul, he had a number of debts. Among his assets were a house worth $250,000 on which he owed $150,000 to a bank that held a security interest; three vehicles; an expensive watch worth $5,000; and $120,000 in an Individual Retirement Account (IRA). He owed $900 per month in child support to his ex-wife Suzy and was behind on payments in the amount of $1,800. He also owed $2,000 in wages consisting of four months of back pay to Bob who took care of Paul's landscaping needs and swimming pool care. Unable to find a job and believing that he had no other option, Paul filed for Chapter 7 bankruptcy. All creditors angrily demanded payment from liquidation of Paul's assets. Paul, on the other hand, claims that he needs all the above-mentioned assets and that he should not have to give up anything. Only federal bankruptcy exemptions apply to Paul's case. Which of the following is true regarding Paul's claim to his Individual Retirement Account (IRA)? A) The IRA is entirely exempt from the claims of creditors. B) The IRA is entirely subject to the claims of creditors. C) The IRA is exempt up to $1,000. D) The IRA is exempt up to $10,000. E) The IRA is exempt up to $100,000.
113) Claims to Funds. Paul had a great job as a bank executive. Unfortunately, his bank came under scrutiny by federal regulators, and although Paul had done nothing illegal, he ended up being fired. Unfortunately for Paul, he had a number of debts. Among his assets were a house worth $250,000 on which he owed $150,000 to a bank that held a security interest; three vehicles; an expensive watch worth $5,000; and $120,000 in an Individual Retirement Account "IRA". He owed $900 per month in child support to his ex-wife Suzy and was behind on payments in the amount of $1,800. He also owed $2,000 in wages consisting of four months of back pay to Bob who took care of Paul's landscaping needs and swimming pool care. Unable to find a job and believing that he had no other option, Paul filed for Chapter 7 bankruptcy. All creditors angrily demanded payment from liquidation of Paul's assets. Paul, on the other hand, claims that he needs all the above-mentioned assets and that he should not have to give up anything. Only federal bankruptcy exemptions apply to Paul's case. Which of the following is true regarding Suzy’s and Bob’s claims as unsecured creditors?
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A) Suzy's claims have priority. B) Bob's claims have priority. C) Suzy and Bob will receive the same percentage of funds. D) Suzy's claims have priority only up to $1,000; after that amount, Suzy and Bob will receive the same percentage of funds. E) Bob's claims have priority only up to $1,000; after that amount, Suzy and Bob will receive the same percentage of funds.
114)
The secured party is also known as the secured _____. A) creditor B) debtor C) assignor D) delegator E) incidental beneficiary
115)
According to the Uniform Commercial Code (UCC), value is _____. A) intangible B) gratuitous C) consideration D) immeasurable E) tangible
116)
Where is the appropriate place for a secured party to file a financing statement? A) In probate court B) In the federal district court where the debtor and creditor reside C) In the federal district court where the subject property is located D) If the debtor is an individual, in the state in which the debtor resides E) If the debtor is an individual, in the state in which the creditor resides
117)
What is after-acquired property?
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A) Property remaining in a debtor’s estate after the bankruptcy court grants the debtor a discharge B) Property included in an original security agreement C) Property acquired by the creditor due to the debtor’s default D) Property acquired by the debtor after the security agreement is made E) Real property an heir receives in a will that requires a security interest
118) A _____ is a person who routinely buys goods in good faith from a person who routinely sells such goods. A) merchant B) non-merchant C) holder in due course D) third-party beneficiary E) buyer in the ordinary course of business
119) Since the Uniform Commercial Code (UCC) does not define default, how is it usually defined? A) By state statutes B) By federal statutes C) By the bankruptcy court D) By the security agreement E) By the Restatement (Second) of Secured Transactions
120)
Once a bankruptcy petition is filed, the court grants a(n) _____.
A) petition for writ of certiorari B) automatic stay C) search warrant particularly describing the debtor’s goods that are subject to inclusion in the bankruptcy estate D) cease and desist order E) automatic discharge
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121)
Assets a debtor gains after filing a bankruptcy petition are _____. A) part of the bankruptcy estate B) secured property and can be seized by creditors if debts remain unpaid C) seized and sold by the bankruptcy trustee D) used as a last resort to reimburse creditors E) not part of the bankruptcy estate unless they fall under an exemption
122) Within ninety (90) days of the creditors’ meeting, all creditors except _____must file a proof of claim with the bankruptcy court clerk to receive a portion of the debtor’s estate. A) financial institutions B) secured creditors C) charitable organizations D) the debtor’s friends and family members E) wholesalers in a business-to-business (B2B) distribution channel
ESSAY. Write your answer in the space provided or on a separate sheet of paper. 123) What must a creditor do to become a secured party?
124)
List three (3) advantages associated with perfection by possession.
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125) Everett buys a new electric bicycle on credit from Bicycle City, LLC (Bicycle City). Bicycle City executes a security agreement for a purchase-money security interest in the bicycle but does not file a financing statement. Everett does not have enough money to pay his rent, so he sells the bicycle to his neighbor Helen, who is unaware of Bicycle City's security interest in the bicycle. Everett fails to make payments on the bicycle, and Bicycle City plans to repossess it. Discuss the rights and obligations of the parties.
126) What rights, if any, does a creditor who does not wish to repossess collateral have in the event of a default, and why might a creditor prefer a remedy other than repossession of the collateral?
127)
What are the two (2) general goals of bankruptcy laws?
128) In order of priority, list the first four (4) classes of priority claims among unsecured creditors in a Chapter 7 bankruptcy case.
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Answer Key Test name: Chap 19_5_The Essentials_Kubasek 1) TRUE A transaction in which the payment of a debt is guaranteed by the debtor's personal propertyis called a secured transaction. 2) FALSE Uniform Commercial Code (UCC) Article 9 governs secured transactions in personal property. 3) TRUE Under the Uniform Commercial Code (UCC), a secured interest is an interest in personal property or fixtures that secures payment or performance of an obligation. Suppose, for example, that Best Buy sells you a laptop on credit. Best Buy retains a secured interest in the laptop, which means that the store can repossess the laptop if you fail to make payments. 4) TRUE Collateral is the property that is subject to the security interest.Collateral may include goods (consumer goods, farm products, inventory, and equipment), indispensable paper (documents of title, negotiable instruments, and chattel paper), intangibles (accounts, goodwill, and literary rights), and proceeds. 5) TRUE The security agreement must be signed by the debtor. Moreover, the agreement must describe the collateral. The description must be accurate and detailed enough to identify the collateral. It is important for the collateral to be described clearly in the written agreement because the creditor could otherwise lose rights to the collateral. 6) FALSE Version 1
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According to the Uniform Commercial Code (UCC), in order to create a security interest, the secured party must give value. Value is consideration. 7) FALSE A purchase-money security interest (PMSI) is formed when a debtor uses borrowed money from a secured party to buy the collateral. According to the Uniform Commercial Code, a PMSI exists when a security interest is retained or taken by a) the seller of the collateral to secure part or all of the purchase price or b) a person who gives something of value to the debtor so that the debtor can gain rights to or use of the collateral. 8) FALSE When a party perfects its interest in collateral, it is legally protecting its claim to the collateral. Perfection is a series of legal steps a secured party takes to protect its right in the collateral from other creditors who want their debts satisfied through the same collateral. 9) FALSE The most common way to perfect a security interest is to file a financing statement with a state agency. According to the Uniform Commercial Code, a financing statement should list the names and addresses of all the parties involved, a description of the collateral, and the signature of the debtor. 10) FALSE
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Under the Uniform Commercial Code (UCC), a consumer good is a good used or bought for use primarily for personal, family, or household purposes. When a creditor sells a consumer good to a debtor on a credit basis or a creditor extends a loan to a debtor for the purchase of a consumer goods, the security interest in the good perfects automatically. If an item is purchased for business use, the security interest would not perfect automatically; instead, the secured party would have to file a financing statement. 11) FALSE Perfection of a security interest in a motor vehicle occurs when a notation of the secured interest is made on the certificate of title. 12) FALSE According to the Uniform Commercial Code (UCC), a security interest can apply to personal property that is not yet in the debtor's possession. A party may agree, through a clause in a security agreement, that the security interest will attach to after-acquired property. After-acquired property is property acquired by the debtor after the security agreement is made. 13) TRUE When a debtor sells collateral, he or she receives proceeds, something that is exchanged for the collateral. The secured party automatically has an interest in the proceeds. 14) FALSE
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When a debtor sells collateral, he or she receives proceeds, something that is exchanged for the collateral. The secured party automatically has an interest in the proceeds. Under the Uniform Commercial Code (UCC), the secured party's interest in proceeds lasts only ten (10) days after the debtor receives the proceeds. At that time, the secured party will typically need to file a new financing statement. The parties may also agree in the security agreement that there will be extended coverage of interest in the proceeds. 15) FALSE Generally, secured parties have priority over unsecured creditors. Thus, if two parties provide a loan based on the same collateral, the party with the secured interest will have priority in repossession of the collateral over the party with the unsecured interest. 16) TRUE If both creditors are secured, the determination of priority for claim to collateral is based on time and perfection. According to Uniform Commercial Code (UCC) Section 9-317, the party that perfected its interest first will have priority in claim to the collateral. 17) FALSE According to Uniform Commercial Code (UCC) Section 9-320(a), a buyer in the ordinary course of business can take goods free of any security interest created by the seller of the goods even if the security interest is perfected. 18) TRUE A writing that indicates both a monetary obligation and a security interest in specific goods is known as chattel paper. 19) TRUE
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Generally, when a debtor fails to make payments on a loan or declares bankruptcy, the debtor has defaulted on the loan. However, the Uniform Commercial Code (UCC) does not define default. Consequently, each security agreement provides a specific definition of what is considered a default. Moreover, each agreement determines the procedures and consequences that occur in the event of default. Because the creditor is usually in a better bargaining position, the creditor usually determines the definition of default. 20) FALSE When an entity is unable to pay its debts, bankruptcy law provides various options for the entity to resolve those debts. Bankruptcy remedies are available for individuals, partnerships, and corporations. 21) FALSE The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 included the most comprehensive changes to bankruptcy law in over twenty-five years. 22) FALSE Bankruptcy law is federal law. Article I, Section 8 of the United States Constitution states: “The Congress shall have the power . . . to establish . . . uniform laws on the subject of bankruptcies throughout the United States.” 23) FALSE As is the case with most bankruptcies, liquidation begins when the petition is filed. Under Chapter 7, liquidation may be voluntary or involuntary; thus, a voluntary or involuntary petition is filed. 24) FALSE
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Once a petition, voluntary or involuntary, is filed, the Bankruptcy Code provides for an automatic stay, or moratorium, for almost all creditor litigation against the debtor. During the stay, creditors cannot bring or continue legal action against the debtor or his property. For example, creditors cannot attempt to repossess property during bankruptcy proceedings. 25) FALSE Because a major purpose of the Bankruptcy Code is to prevent debtors from making payments to one creditor and thus treating that creditor preferentially, the trustee has the power to recover preferential payments, or payments made by an insolvent debtor that give preferential treatment to one creditor over another. If the debtor made any payments within ninety (90) days of the bankruptcy filing, the trustee can examine these payments as preferential payments. For a payment to be preferential, the trustee must show that the transfer gave the creditor more money than the creditor would have received through bankruptcy proceedings. Thus, other creditors are disadvantaged by the debtor’s preferential payment. 26) FALSE If a party completes a Chapter 7 bankruptcy, the party is not permitted to seek a Chapter 7 bankruptcy again for eight years. 27) TRUE The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 attempts to prevent repeat filers from filing one bankruptcy claim after another. If an individual was a debtor in a bankruptcy case that was dismissed within 180 days of the current case, the individual is generally not eligible to be a debtor under Chapters 7, 11, or 13. 28) FALSE
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Most of the Chapter 11 reorganization procedures are similar to Chapter 7 liquidation procedures. Like liquidation, reorganization may be voluntary or involuntary. The reorganization process begins with the filing of the reorganization petition. 29) C In a secured transaction, payment of a debt is guaranteed by the debtor's personal property owned by the debtor. 30) D Article 9 of the Uniform Commercial Code (UCC) governs secured transactions in personal property (as opposed to real property). 31) D Uniform Commercial Code (UCC) Section 1-201(37) states that a secured interest is an "interest in personal property or fixtures which secures payment or performance of an obligation." 32) D A secured party is the person or party that holds the interest in the secured property. 33) D A debtor is the person or party that has an obligation to the secured party. 34) E A security agreement is an agreement in which the debtor gives a secured interest to the secured party. 35) E Collateral is the property that is subject to the security interest. Collateral may include goods, indispensable paper, intangibles, and proceeds. 36) C
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Collateral is the property that is subject to the security interest and may include goods. Examples of goods include consumer goods, farm products, inventory, and equipment. 37) B Collateral is the property that is subject to the security interest, and may include indispensable paper. Examples of indispensable paper include documents of title, negotiable instruments, and chattel paper. 38) E Collateral is the property that is subject to the security interest and may include intangibles. Intangibles include accounts, goodwill, and literary rights. 39) D Attachment signifies that the creditor has become a secured party with an interest in the collateral. 40) B A purchase-money security interest (PMSI) is formed when a debtor uses borrowed money from the secured party to buy the collateral. 41) D When a debtor fails to make payments on a loan, the debtor defaults on the loan. 42) D When a party perfects its interest in collateral, it is legally protecting its claim to the collateral. Perfection is a series of legal steps a secured party takes to protect its right in the collateral from other creditors who wish to have their debts satisfied through the same collateral. 43) C According to Uniform Commercial Code (UCC) Section 9-502, a financing statement should list the names and addresses of all the parties involved, a description of the collateral, and the signature of the debtor. 44) A Version 1
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According to Uniform Commercial Code (UCC) Section 9-515, once a financing statement is filed with the correct agency, the statement is valid for five years without renewal. After five years, the statement expires, and the security interest is not protected. However, within six months of the expiration date of the financing statement, the secured party can file a continuation statement, which is valid for another five years. 45) B Sometimes a debtor gives a creditor the collateral to hold until the loan is paid off. The transfer of collateral to the secured party for the purpose of perfection is called a pledge. 46) D Certain types of collateral must be perfected through possession. These types of collateral include instruments—writings that serve as evidence of rights to payment of money, such as certificates of deposit (CDs)— and stocks and bonds. 47) B According to Uniform Commercial Code (UCC) Section 9-102(23), a consumer good is used or bought for use primarily for personal, family, or household purposes. 48) A According to the Uniform Commercial Code (UCC), a security interest in collateral that has been perfected in one state will generally transfer to another state for a period of four months from the date that the property is brought into the state. The secured party may re-perfect the interest in the new state. However, if the interest is not re-perfected, the secured party may lose its protection. 49) E
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No national standard exists for perfecting a security interest in an automobile or a boat. Each state has created special laws that pertain to perfection of security interests in motor vehicles. 50) B “General intangibles” include trademarks, copyrights, and patents. A security interest in a trademark, copyright, or patent is perfected by filing. 51) B After-acquired property is acquired by the debtor after the security agreement is made. 52) D After-acquired property is acquired by the debtor after the security agreement is made. After-acquired property can be inventory, livestock, equipment, or almost any other kind of property. 53) C When a debtor sells collateral, he or she receives proceeds, something that is exchanged for collateral. 54) A When a debtor sells collateral, he or she receives proceeds, something that is exchanged for collateral. The secured party automatically has an interest in proceeds for a limited amount of time. 55) E Under the Uniform Commercial Code (UCC), the secured party's interest in proceeds lasts for only ten days after the debtor receives the proceeds. At that time, the secured party will typically need to file a new financing statement. The parties may also agree in the security agreement that there will be extended coverage of interest in the proceeds. 56) B
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According to Uniform Commercial Code (UCC) Section 9-513(a), a termination statement is an amendment to a financing statement which provides that the debtor has no obligation to the secured party. 57) A If neither party has perfected its security interest, the party that attached its security interest first will have first claim to the collateral. 58) D A buyer in the ordinary course of business is a person who routinely buys goods in good faith from a person who routinely sells these goods. 59) D According to Uniform Commercial Code (UCC) Section 9-320(b), as long as the new buyer is not aware of the security interest, purchases the good for his or her personal use, and purchases the good before the secured party files a financial statement; the buyer obtains the good free of the security interest. 60) A Chattel paper is a writing that indicates both a monetary obligation and a security interest in specific goods. 61) D An instrument is a writing that demonstrates a right to payment of money. 62) E If a buyer purchases either chattel paper (a writing that indicates both a monetary obligation and a security interest in specific goods) or an instrument (a writing that demonstrates a right to payment of money in the ordinary course of business), the buyer can obtain the good free of any security interest. Typically the buyer must be unaware of any security interest in the good. 63) E
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Generally, when a debtor fails to make payments on a loan or declares bankruptcy, the debtor has defaulted on the loan. However, the Uniform Commercial Code does not define default. Consequently, each security agreement provides a specific definition of what constitutes default. 64) E According to Uniform Commercial Code (UCC) Section 9-609, if a debtor defaults on a loan, the secured party can take possession of the collateral. The secured party may act without a court order to retain possession of the property, but the secured party may not breach the peace in repossessing the property. 65) C In disposing of collateral on default, the secured party may sell the collateral at a private or public sale. 66) C When an entity is unable to pay its debts, bankruptcy law provides various options for the entity to resolve the debts. Bankruptcy remedies are available to individuals, corporations, and partnerships. 67) B Insolvent debtors are debtors who cannot pay their debts in a timely fashion. 68) C The United States Congress revised the Bankruptcy Code through the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005. This revision included the most comprehensive changes to bankruptcy law in over twenty-five (25) years. 69) B Chapter 7 of the Bankruptcy Code involves a sale of the debtor's assets by a trustee and the distribution of money to creditors. 70) E
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Chapter 11 of the Bankruptcy Code involves reorganization of the debtor's financial affairs under the supervision of the bankruptcy court. 71) E Chapter 15 of the Bankruptcy Code involves recognition of insolvency proceedings pending in a foreign country and relief for foreign debtors. 72) B Title 11 of the United States Code (U.S.C.) contains the Bankruptcy Code, which is divided into chapters. 73) E If an individual's debt is primarily consumer debt and if the individual's income is above the median income in his or her state, the court may presume that the individual is abusing the bankruptcy provisions; however, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) has no provision stating that a party may not file for any type of bankruptcy if the party has at least $10,000 in assets. 74) B The most familiar type of bankruptcy proceeding is liquidation, which is sometimes called straight bankruptcy. 75) A Liquidation occurs when a debtor turns over all assets to a trustee. 76) B A trustee is an individual who takes over administration of the debtor's estate. Trustees are usually attorneys in private practice who specialize in bankruptcy law. 77) E Railroads, insurance companies, banks, savings and loan associations, credit unions, and health maintenance organizations are not eligible for Chapter 7 bankruptcy relief. 78) D
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Once the bankruptcy petition is filed, all the debtor's prepetition assets form the bankruptcy estate. 79) B If a debtor is not paying debts as they come due, creditors can attempt to force the debtor into bankruptcy by filing an involuntary petition under Chapter 7. 80) D Not everyone can be forced into bankruptcy through Chapter 7. Farmers, ranchers, and nonprofit organizations are examples of debtors that cannot be forced into liquidation. 81) A Under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005, a bankruptcy judge may dismiss a petition for cause. One cause for dismissal is failure of the means test. Under the means test, if an individual's debt is primarily consumer debt and if the individual's income is above the median income in his or her state, the court may presume that the individual is abusing the bankruptcy provisions. 82) B Once a voluntary or involuntary petition is filed, the Bankruptcy Code provides for an automatic stay, or moratorium, for almost all creditor litigation against the debtor. During the stay, creditors cannot bring or continue legal action against the debtor or the debtor’s property. 83) C Legal actions to determine paternity or to collect child support or alimony payments are not subject to the automatic stay. 84) E The court may exclude secured creditors from the automatic stay if they petition the court to show that they do not have adequate protection under the stay. Version 1
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85) A After a bankruptcy petition has been filed, the next step is for the court to determine whether an order of relief is granted. An order of relief means that bankruptcy relief is ordered; that is, the bankruptcy proceedings can continue. 86) D The trustee may take possession of the debtor's property and have it appraised; the trustee may examine the debtor's records and might even temporarily take over the debtor's business; and if someone else holds the debtor's property, the trustee has the power to require that the person return that property. 87) C Between twenty (20) and forty (40) days after the order of relief has been granted, a creditors' meeting—a meeting of all the creditors listed in the Chapter 7 required schedule for liquidation—is convened. 88) B Between twenty (20) and forty (40) days after the order of relief has been granted, the interim trustee calls a creditors' meeting—a meeting of all the creditors listed in the Chapter 7 required schedule for liquidation. 89) E One important purpose of the creditor’s meeting is the election of a permanent trustee. The interim trustee might become the permanent trustee, or the creditors might elect a different one. The creditors elect the trustee because the trustee generally represents the creditors. 90) C Because a major purpose of the Bankruptcy Code is to prevent debtors from making payments to one creditor and thus treating that creditor preferentially, the trustee has the power to recover preferential payments. Preferential payments are payments made by an insolvent debtor that give preferential treatment to one creditor over another. Version 1
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91) A A discharge is a written federal court order signed by a bankruptcy judge stating that the debtor is immune from creditor actions to collect debts. When a debt is discharged, the debtor is essentially no longer responsible for the debt. 92) E Examples of nondischargeable debts under the Bankruptcy Code include claims of willful or malicious conduct by the debtor that caused injury to another person or property; specific student loans, unless payment of the loans imposes undue hardship on the debtor; debts not discharged in previous bankruptcies; and judgments against a debtor for claims resulting from the debtor's drinking and driving. 93) B A debtor may wish to repay a dischargeable debt. The debtor might owe money to a family member or a longtime business associate. To maintain a good relationship with these people, a debtor might choose to repay the debt instead of having the debt discharged. This repayment can occur through a reaffirmation agreement, an agreement in which the debtor agrees to pay a debt even though it could be discharged. 94) E Stockbrokers, commodities brokers, banks, and savings and loan companies are not eligible for Chapter 11 reorganization. 95) C Once a Chapter 11 reorganization plan has been developed, creditors must vote to accept the plan. For the plan to be accepted, two-thirds of the creditors of each class of creditors must vote to approve it. 96) E Only individuals are permitted to file under Chapter 13; partnerships and corporations are not eligible. 97) B Version 1
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According to Uniform Commercial Code (UCC) Section 9-324(b), if a purchase money security interest (PMSI) is in inventory, the perfected PMSI has priority over a previously perfected non-PMSI if the following two conditions are met: a) the PMSI party perfects its interest before or at the same time that the debtor receives his inventory; and b) the PMSI party checks for previous secured interests and gives written notice to the holders of the PMSI. 98) B According to Uniform Commercial Code (UCC) Section 9-103, a purchase money security interest (PMSI) exists when a security interest is retained or taken by: a) the seller of the collateral to secure part or all of the purchase price; or b) a person who gives something of value to the debtor so that the debtor can gain rights to or use of the collateral. 99) B Because a major purpose of the Bankruptcy Code is to prevent debtors from making payments to one creditor and thus treating that creditor preferentially, the trustee has the power to recover preferential payments, or payments made by an insolvent debtor that give preferential treatment to one creditor over another. If the debtor made any payments within 90 days of the bankruptcy filing, the trustee can examine these payments as preferential payments. For a payment to be preferential, the trustee must show that the transfer gave the creditor more money than the creditor would have received through bankruptcy proceedings. Thus, other creditors are disadvantaged by the debtor’s preferential payment. 100) A
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According to Uniform Commercial Code (UCC) Section 9-102(23), a consumer good is a good used or bought for use primarily for personal, family, or household purposes. When a creditor sells a consumer good to a debtor on a credit basis or a creditor extends a loan to a debtor for the purchase of a consumer good, the security interest in the good perfects automatically. 101) B Default is the failure to make payments on a loan. 102) C A purchase-money security interest (PMSI) is formed when a debtor uses borrowed money from the secured party to buy the collateral. 103) A When a creditor sells a consumer good to a debtor on a credit basis or a creditor extends a loan to a debtor for the purchase of a consumer good, the security interest in the good perfects automatically. 104) C Collateral is property that is subject to the security interest. 105) E Upon default, the secured party can a) take possession of the collateral or b) ignore its rights in the collateral and proceed to judgment. However, the party is not limited to just one of these remedies. If one method is unsuccessful, the party can attempt to pursue the other method. 106) A While the secured party may act without any court order to retain possession of the property, the secured party may not "breach the peace" in repossessing the property. Generally, if the secured party can repossess the collateral without using force or committing trespass, the action is not a breach of the peace. 107) D Version 1
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Generally, if the secured party can repossess the collateral without using force or committing trespass, the action is not a breach of the peace. 108) A Once the petition is filed, all the debtor's prepetition assets form the bankruptcy estate. 109) A If a secured interest exists, the creditor has first claim to the property. 110) D Interest in jewelry up to $1,600 is exempt. 111) D Interest in a motor vehicle (not necessarily an automobile) up to $3,775 is exempt. 112) A Retirement funds in an Individual Retirement Account (IRA) or Simplified Employee Pension (SEP) up to $1,283,025 are exempt. 113) A With regard to classes of priority claims for distribution, class one consists of any unpaid domestic support obligations (alimony or child support) and class four consists of unsecured claims for unpaid wages, salaries, and commissions (up to $10,000 per individual) earned within 180 days of the filing of the petition. 114) A The secured party is also known as the secured creditor. 115) C According to the UCC, value is consideration. 116) D The place of filing depends on whether the debtor is an individual or a business. If the debtor is an individual, the secured party files the financing statement in the state in which the debtor resides. 117) D Version 1
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After-acquired property, property acquired by the debtor after the security agreement is made. After-acquired property can be inventory, livestock, equipment, or almost any other kind of property. 118) E A buyer in the ordinary course of business is a person who routinely buys goods in good faith from a person who routinely sells such goods. 119) D The UCC does not define default. Consequently, each security agreement provides a specific definition of what is considered a default. 120) B Once the petition is filed, the court grants an automatic stay for creditor actions against the debtor’s estate. In other words, creditors’ legal actions against the debtor must cease. 121) E Assets that the debtor gains after filing the petition are generally not part of the bankruptcy estate unless they fall under an exemption. 122) B Within 90 days of the creditors’ meeting, all creditors (except secured creditors) must file a proof of claim with the bankruptcy court clerk to receive a portion of the debtor’s estate. This proof of claim lists the creditor’s name and address and the amount of the debt owed to the creditor. 123) To become a secured party, the creditor must gain a security interest in the collateral of the debtor. Three criteria must be met to create a security interest: 1) The two parties create a security agreement and either a) there is a record of the security agreement (usually a written agreement that describes the collateral and is signed by the debtor) or b) the secured party is in possession of the collateral; 2) The secured party must give value to get the security agreement; and 3) The debtor has a right in or to the collateral. Version 1
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124) First, a secured party does not have to go through the hassle of filing a financing statement. Second, there is little chance that another party will lend money to the debtor relying on the collateral that another secured party possesses. Third, if the debtor defaults on the loan, the secured party already has possession of the collateral, so there is no trouble in trying to repossess. 125) Under the Uniform Commercial Code (UCC), so long as Helen, the buyer, was not aware of the security interest of Bicycle City, purchased the bicycle for her personal use, and purchased it before the secured party filed a financial statement, she acquires the bicycle free of the security interest. In this case, assuming Bicycle City did not file any type of financing statement, the bicycle is Helen's. 126) Rather than repossessing the collateral, a secured party can sue the debtor for the entire amount of the debt. That may be preferable to organizing a sale of collateral, particularly if the collateral is worth little. Additionally, repossession may be difficult. Students may also have other ideas on the issue. 127) First, bankruptcy laws provide protection to creditors. Bankruptcy laws ensure that creditors competing for a debtor's assets are treated equally and receive a fair share of the debtor's assets. Second, bankruptcy laws provide opportunities for debtors to gain a fresh financial start.
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128) The first four (4) classes of priority claims among unsecured creditors are as follows: 1.Any unpaid domestic support obligations (alimony or child support) 2.Court costs, trustee fees, attorney fees, and other administrative expenses associated with the bankruptcy 3.Unsecured claims in involuntary bankruptcy that arise through the debtor's ordinary business expenses from the date of filing the petition to the date of the appointment of the trustee 4.Unsecured claims for unpaid wages, salaries, and commissions earned within 180 days of the filing of the petition
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CHAPTER 20 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) Agency is generally defined as a relationship between a principal and a third-party beneficiary. ⊚ true ⊚ false
2) In an agency relationship, the party who has the authority to act on behalf of and bind another party is the principal. ⊚ true ⊚ false
3)
A fiduciary is a person who has a duty to act primarily for another person’s benefit. ⊚ true ⊚ false
4)
Agency law is primarily state law. ⊚ true ⊚ false
5)
An agency relationship can be created only for a lawful purpose. ⊚ true ⊚ false
6) An individual who lacks contractual capacity may hire an agent to make contracts on his or her behalf. ⊚ true ⊚ false
7) A power of attorney is a document that gives an agent the authority to sign legal documents on behalf of the principal. ⊚ true ⊚ false Version 1
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8)
A power of attorney can be general or specific. ⊚ true ⊚ false
9) A durable power of attorney is a written document, created by a principal, expressing his or her wishes for an agent’s authority to be terminated by the principal’s subsequent incapacity. ⊚ true ⊚ false
10)
A gratuitous agent is one who acts without consideration. ⊚ true ⊚ false
11)
An agency can be created by either a written or an oral agreement. ⊚ true ⊚ false
12) Suppose a principal leads a third party to believe that another individual serves as his or her agent but the principal has made no agreement with the purported agent. Due to his or her conduct, the principal has created an agency by ratification. ⊚ true ⊚ false
13)
Agents are always employees. ⊚ true ⊚ false
14) The Restatement of Contracts defines an agent as “a person who contracts with another to do something for him but who is not controlled by the other nor subject to the other's right to control with respect to his physical conduct in the performance of the undertaking.” ⊚ true ⊚ false Version 1
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15) The most important factor to help determine if a person is an employee or an independent contractor is how much control the employer exerts over the agent. ⊚ true ⊚ false
16)
While an agent owes duties to a principal, a principal owes no duties to an agent. ⊚ true ⊚ false
17) If an agent makes authorized expenditures in the course of working on behalf of the principal, the principal has a duty to reimburse the agent for the amount of money spent. This is known as the duty of remuneration. ⊚ true ⊚ false
18) The principal must assist the agent in the performance of his or her duties, and the principal can do nothing to interfere with the reasonable conduct of the agent. This is known as the duty of indemnification. ⊚ true ⊚ false
19) Courts suggest that the duty of loyalty is perhaps the most important duty an agent owes a principal. ⊚ true ⊚ false
20) Not only does the agent have to communicate offers from third parties, but the agent must also communicate any information the agent thinks could be important to the principal. This is known as the duty of collaboration. ⊚ true ⊚ false
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21) An agent’s implied authority is derived from an agent’s express authority and consists of what is reasonably necessary for carrying out the agent’s grant of express authority. ⊚ true ⊚ false
22) When express authority is granted for an agent to enter into a contract that is legally required to be in writing, most states require the grant of authority also to be in writing. This requirement is known as the equitable parity rule. ⊚ true ⊚ false
23) When an agency agreement fails to adhere to the equal dignity rule, the subsequent contracts are typically considered void. ⊚ true ⊚ false
24) When an agent acts within the scope of her authority on behalf of a disclosed or partially disclosed principal, the agent is liable for the acts of the principal. ⊚ true ⊚ false
25) Agents who go beyond their authority when the principal is disclosed or partially disclosed are liable for a breach of contract, not for a breach of implied warranty. ⊚ true ⊚ false
26) In order to properly provide notice of the termination of an agency relationship, actual notice of agency termination must be given to third parties who have had business interactions with the agent. ⊚ true ⊚ false
27)
Actual notice of termination of an agency can be given orally or in writing.
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⊚ ⊚
28)
true false
An agency coupled with an interest is created for the principal's benefit. ⊚ true ⊚ false
29) Insolvency of either the principal or the agent automatically results in termination of the agency relationship. ⊚ true ⊚ false
30)
Singapore has outlawed the use of electronic contracts. ⊚ true ⊚ false
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 31) In Penny Garrison et.al. v. The Superior Court of Los Angeles et. al., the case in the textbook where the plaintiff Garrison argued that the two arbitration agreements fell outside of the power of attorney, the California appeals court found that _____. A) the durable power of attorney was too broad and was therefore unenforceable B) the power of attorney only applied to health-related issues and was therefore unenforceable C) because the durable power of attorney was legal and enforceable, Garrison could not cancel the arbitration agreements into which she entered D) the durable power of attorney was not properly notarized and was therefore unenforceable E) of the two durable powers of attorney that were signed, only the second one was enforceable against the residential care facility
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32) Which of the following was the result on appeal in Iglesia Cristiana La Casa Del Senor, Inc., Etc. v. L.M., the case in the textbook involving the issue of whether a church was liable, pursuant to the doctrine of respondeat superior, for a sexual assault allegedly committed by a church pastor? A) The church was liable to the plaintiff under the doctrine of respondeat superior. B) The church was liable under the doctrine of respondeat superior, but only if it could be proven that the pastor sexually assaulted more than one person. C) The church was liable under the doctrine of respondeat superior, but only if it could be proven that the church had knowledge of at least one sexual assault prior to the plaintiff's but failed to remove the pastor from church assignments. D) The church was not liable under the doctrine of respondeat superior. E) The church was not liable under the doctrine of respondeat superior, but only because the pastor was immediately fired when his actions came to light.
33)
A relationship between a principal and an agent is generally defined as _____. A) employment B) an accord and satisfaction C) agency D) a third-party beneficiary contract E) an incidental beneficiary contract
34) Bryan hired Gilman to work as his personal assistant. Their office environment is fastpaced, and per the terms of the hiring, Gilman can make many decisions for Bryan without seeking Bryan’s permission in advance. Gilman is a(n) _____. A) incidental beneficiary B) principal C) agent D) independent contractor E) third-party beneficiary
35) Shelby hired Lynn, an attorney, to represent her in an employment discrimination case. Lynn is a(n) _____ who has a duty to act on behalf of Shelby.
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A) principal B) employee C) third-party beneficiary D) trustee E) fiduciary
36)
An agent is authorized to act for and on behalf of the _____. A) fiduciary B) principal C) independent contractor D) third-party beneficiary E) incidental beneficiary
37)
Which of the following is incorrect regarding the agency relationship?
A) It is a consensual relationship. B) It may be formed by a formal written contract. C) It may be formed by an informal oral agreement. D) It can be created only for a lawful purpose. E) As a universal rule, a person must be trained in the area of specialty involved in the agency relationship in order to qualify as an agent.
38) Which of the following is not a form of authority upon which an agency relationship can be created? A) Expressed agency B) Implied agency C) Apparent agency D) Agency by rescission E) Agency by ratification
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39) Ron and Ira execute a written agreement whereby Ron will represent Ira at an upcoming furniture show. This type of agency is known as a(n) _____ agency. A) applied B) ratified C) executed D) implied E) expressed
40)
Which of the following is the most common type of agency? A) Expressed agency B) Implied agency C) Apparent agency D) Agency by ratification E) Agency by estoppel
41) Erik agrees to hire Olivia for six (6) months. During that time, Erik agrees to hire no one other than Olivia to represent him. This type of agency is considered _____. A) all-inclusive B) exclusive C) void at Erik’s election D) void at Olivia’s election E) limited
42) If Wynn executes a document that gives Timothy the authority to sign legal documents on his behalf, Wynn has granted Timothy a(n) _____. A) power of attorney B) exclusive agency C) agency by estoppel D) agency by proclamation E) equitable agency
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43) Through a(n) _____ power of attorney, a principal gives an agent broad authority to sign legal documents on his or her behalf, as opposed to authority for only a specific purpose. A) general B) specific C) localized D) durable E) equitable
44) Xavier executes an agreement with his employee, Marcus, that gives Marcus the authority to negotiate a one-time sales contract on Xavier’s behalf. This type of agreement is a(n) _____ power of attorney. A) general B) specific C) ratified D) durable E) categorical
45) A(n) _____ power of attorney is a written document, created by a principal, expressing his or her wishes for an agent's authority not to be affected by the principal's subsequent incapacity, or for the agent’s authority to become active only after a principal becomes incapacitated in any manner. A) general B) specific C) localized D) durable E) equitable
46) A(n) _____ agent functions much like a regular agent but is not paid for his or her services.
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A) non-professional B) limited C) ethical D) gratuitous E) durable
47)
Which of the following is another name for an apparent agency? A) An expressed agency B) An equitable agency C) An implied agency D) An agency by estoppel E) An agency by ratification
48) Vivian misrepresents herself as Dylan’s agent. Dylan does not correct Vivian’s misrepresentation. This type of agency is called a(n) _____. A) implied agency B) agency by default C) agency by ratification D) expressed agency E) agency by circumstance
49)
Agency laws are relevant to which of the following relationships?
A) The principal-agent relationship B) The employer-employee relationship C) The employer-independent contractor relationship D) The principal-agent, employer-employee, and employer-independent contractor relationships E) The principal-agent and employer-employee, but not employer-independent contractor, relationships
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50) What type of relationship typically exists when an employer hires an employee to enter into contracts on behalf of the employer? A) Principal-agent B) General partnership C) Employer-independent contractor D) Limited partnership E) Agency by estoppel
51) Whenever an employer hires an employee to perform some sort of physical service, the parties have created an _____. A) employer-agent relationship B) employer-employee relationship C) employer-independent contractor relationship D) agency by estoppel E) agency by ratification
52)
Which of the following is false regarding the employer-employee relationship?
A) An employee is subject to the control of his or her employer. B) Generally, all employees are considered to be agents of their employer. C) Employees who are not legally authorized to enter into contracts binding their employer are considered agents. D) Employees not legally authorized to interact with third parties are considered agents. E) All employees are agents, and all agents are employees.
53) Fredrick hires Samantha to paint the showroom of his new furniture store instead of having one of his full-time store employees perform the work. Samantha does not work for Fredrick in any other capacity. Samantha is _____.
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A) Fredrick’s employee B) an independent contractor C) Fredrick’s exclusive agent D) Fredrick’s employee and an independent contractor E) Fredrick’s agent and employee
54) A person who contracts with another to do something for him but who is not controlled by the other nor subject to the other's right to control with respect to his physical conduct in the performance of the undertaking is an _____. A) employee B) independent contractor C) employee-contractor D) agent by estoppel E) agent by ratification
55) The question of whether a worker is an employee or an independent contractor has important implications in which of the following areas? A) Workers' compensation B) Workplace safety C) Unemployment statutes D) Workers' compensation, workplace safety, and unemployment statutes E) Workers' compensation and workplace safety, but not unemployment statutes
56) Which of the following is true regarding the applicability of various laws to the employer-employee and employer-independent contractor relationships?
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A) The employer-independent contractor relationship is subject to the workers’ compensation, workplace safety, employment discrimination, and unemployment statutes, whereas the employer-employee relationship is not. B) The employer-independent contractor relationship is subject to the workers’ compensation and workplace safety statutes, while the employer-employee relationship is subject to the employment discrimination and unemployment statutes. C) The employer-employee relationship is subject to the workers’ compensation and workplace safety statutes, while the employer-independent contractor relationship is subject to the employment discrimination and unemployment statutes. D) The employer-employee relationship is subject to the workers’ compensation and employment discrimination statutes, while the employer-independent contractor relationship is subject to the workplace safety and unemployment statutes. E) The employer-employee relationship is subject to the workers’ compensation, workplace safety, employment discrimination, and unemployment statutes, whereas the employer-independent contractor relationship is not.
57) Which of the following defines an independent contractor as "a person who contracts with another to do something for him but who is not controlled by the other nor subject to the other's right to control with respect to his physical conduct in the performance of the undertaking?" A) The Restatement of Agency B) The Independent Contractor Protection Act of 2003 C) The Employee Protection Act of 2004 D) The Employer-Employee Relations Improvement Act of 2007 E) The law of equity
58) Which of the following is true regarding the tort liability of employers for the actions of their employees and independent contractors?
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A) Employers are generally liable in tort for the actions of their employees, while they are generally not liable for the actions of independent contractors. B) Employers are generally liable in tort for the actions of independent contractors, while they are generally not liable for the actions of their employees. C) Employers are not generally liable in tort for the actions of independent contractors or for the actions of their employees. D) Employers are generally liable in tort for the actions of independent contractors and their employees. E) Employers are generally liable in tort for the actions of independent contractors and their employees, but only if the employer has agreed to assume liability in a written contract with the employee or independent contractor.
59)
A worker may be classified as an employee if he or she _____. A) engages in a distinct occupation B) performs assigned work as a specialist without supervision C) receives regular payments according to time D) supplies her own tools E) gets paid when the job is completed
60)
A principal's obligation to pay an agent for his services is the duty of _____. A) obedience B) reimbursement and indemnification C) cooperation D) compensation E) accounting
61)
Which of the following is false regarding a principal's duties to an agent?
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A) An agent can sue the principal if the principal does not fulfill the duties owed to the agent. B) In a successful suit against a principal, an agent is entitled to contract remedies but not tort remedies. C) If a principal has failed to fulfill the duties owed to the agent, the agent can refuse to act on behalf of the principal until the failure is remedied. D) A principal has a duty to compensate his or her agent for services provided unless the parties have agreed that the agent will act gratuitously. E) A principal has a duty to reimburse and indemnify the agent for authorized expenditures.
62)
A person in a position of trust and confidence is known as a(n) _____. A) third-party beneficiary B) principal C) fiduciary D) independent contractor E) employer
63) Which of the following is true if a principal and an agent have no agreement regarding the amount for which the principal will compensate the agent? A) A court will assume that the agent agreed to work on a gratuitous basis. B) The agent will be allowed to set the price that a court will enforce unless it is unconscionable. C) The principal will be allowed to set the price that a court will enforce unless it is unconscionable. D) A court will appoint a magistrate to set the price. E) A court will calculate compensation according to the customary fee in the situation.
64)
Which of the following is true regarding the status of an agent as a fiduciary?
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A) Although a principal is a fiduciary, an agent is not. B) An agent is only a fiduciary if the principal and agent agreed in a written contract that the agent would be a fiduciary. C) An agent is only a fiduciary if the principal and agent agreed by written or oral contract that the agent would be a fiduciary. D) An agent is only a fiduciary to the principal if a transaction of $10,000 or more is involved. E) An agent is a fiduciary of the principal.
65)
In most situations, how many principals may an agent represent in any one agreement? A) One (1) B) Two (2) C) Three (3) D) Four (4) E) Any numberof principals
66) A(n) _____ results if an agent tries to represent and act on behalf of more than one principal in the same transaction. A) fiduciary breach B) collaboration breach C) breach in conflict D) conflict of interest E) breach by overreach
67) Heidi hired Michael as an agent to sell her house. Michael received an offer from a potential third-party buyer, but he decided not to tell Heidi because he was afraid the ridiculously low offer would insult her. Michael has breached which, if any, of the following duties?
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A) The duty of loyalty B) The duty to indemnify C) The duty of obedience D) The duty of notification E) Michael has not breached any duty owed Heidi; instead, as Heidi’s agent, Michael had the discretion to determine whether the offer was sufficient to justify informing her of the offer
68) An agent’s duty of _____ to the principal includes the agent’s obligation to perform the duties as specified in the agency agreement. A) indemnification B) notification C) loyalty D) performance E) obedience
69) An agent’s obligation to perform the duties specified in the agency agreement with reasonable skill and care is part of the agent’s duty of _____. A) cooperation B) notification C) loyalty D) performance E) obedience
70) Arlene is Micah’s agent for the purposes of reviewing, analyzing and evaluating contracts. Arlene does not have the right to enter into any contract on Micah’s behalf. If Arlene does enter into an unauthorized agreement, this would be a breach of which of the following duties?
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A) The duty of loyalty B) The duty of performance C) The duty of indemnification D) The duty of care E) The duty of obedience
71) When an agent illegally benefits from the agency relationship, the principal may enact a(n) _____ trust on the profits, goods, or property in question. A) charitable B) fiduciary C) Totten D) constructive E) irrevocable
72) If a third party believes an agent is acting with actual or apparent authority, he or she may sue the principal for_____. A) up to three (3) times actual damages B) any breach of contract C) punitive damages D) fraud E) defamation
73) Victoria is a sales agent for Market Enterprises and sells advertisements based on commissions. Victoria is convinced that she is not receiving all her earned commissions. What can she demand that Market Enterprises provide her? A) A cost-basis sheet B) A due-on-sale contract C) A salaried employment position D) An accounting E) A revocable trust
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74) When a contract exists and a principal agrees to certain conditions but fails to perform, which of the following may the agent seek in order to force the principal to perform the contract as stipulated? A) Specific performance B) Substantial performance C) Anticipatory repudiation D) Reformation E) Renunciation
75) When an agency relationship is not contractual or the contract is for personal services, the agent _____. A) has the right to seek specific performance B) has the right to seek substantial performance C) has the right to demand contract ratification D) has the right to demand contract reformation E) does not have the right to seek specific performance
76) When an agent has express authority, what type of agency relationship does the agent have with the principal? A) Elective B) Implied C) Inherent D) Expressed E) Formal
77)
Express authority is often referred to as _____ authority.
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A) statutory B) inherent C) actual D) virtual E) equitable
78) The _____ requires that when contracts that are legally required to be in writing, the agent’s authority must also be in writing. A) parol evidence rule B) statute of limitations C) equal dignity rule D) substantial performance doctrine E) statute of repose
79)
The equal dignity rule is based on the _____. A) rule against perpetuities B) statute of frauds C) parol evidence rule D) substantial performance doctrine E) frustration of purpose doctrine
80) In which type(s) of agency is the principal-agent relationship inferred from the conduct of the parties? A) Expressed agency B) Agency by estoppel C) Implied agency D) Agency by estoppel and implied agency, but not expressed agency E) Expressed agency, agency by estoppel, and implied agency
81)
An agent's implied authority is derived from the agent's _____ authority.
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A) express B) apparent C) equitable D) statutory E) non-contractual
82) Which of the following type of agency exists when a third party reasonably believes, on the basis of the principal's actions, that an agency relationship exists between the principal and another individual? A) Express B) Implied C) Actual D) Statutory E) Apparent
83) Grant is negotiating an agreement on behalf of his principal, Dena, with a third party, Tammy. Tammy is aware that Grant has the authority to contract on behalf of Dena and knows that the contract is for Dena. Dena is what type of principal? A) An equitable principal B) A formal principal C) A disclosed principal D) An informal principal E) A virtual principal
84) Which of the following is true regarding the liability of an agent acting within his or her authority on a contract involving an undisclosed principal?
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A) The law will likely hold the agent liable for the agreement. B) The law will hold the agent liable for the agreement unless the contract the agent had with the principal expressly provided that the agent would not be held liable in such cases. C) The law will hold the agent liable for the agreement unless the contract the agent had with the principal implicitly or expressly provided that the agent would not be held liable in such cases. D) The law will hold the agent liable for the agreement unless a contract for under $500 is involved, in which case only the principal would be held liable. E) The law would not hold the agent liable on the agreement.
85) Which of the following is true regarding the liability of a principal to an agent based on a contract an agent makes with a third party that expressly excludes the principal from the contract? A) The principal is liable to the agent because it is per se unconscionable to exclude a principal from a contract. B) The principal is liable to the agent, but only if the principal is an unidentified principal. C) The principal is liable to the agent, but only if the principal is a partially disclosed principal. D) The principal is liable to the agent unless the principal gave the agent authority in writing to make the agreement with the third party. E) The principal is not liable to the agent.
86) Which of the following is true under the Uniform Commercial Code (UCC) regarding the liability of a principal to an agent if the agent enters into a contract that is a negotiable instrument?
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A) The principal is liable to the same extent as if no negotiable instrument were involved because the negotiable instrument has no effect on the principal's liability. B) The principal cannot be held liable unless the principal's name is on the instrument. C) The principal cannot be held liable unless the agent's signature indicates that it was made in a representative capacity. D) The principal cannot be held liable unless the principal's name is on the instrument or the agent's signature indicates that it was made in a representative capacity. E) The principal cannot be held liable unless the principal's name is on the instrument, the agent's signature indicates that it was made in a representative capacity, or the agent has been adjudicated insolvent.
87) Which of the following is true regarding the right of a third party to reject the performance of the principal? A) The third party may reject the performance of the principal at any time. B) The third party may never reject the performance of the principal. C) The third party may reject the performance of the principal if the third party entered into a contract with the agent such that the performance of the agent is required. D) The third party may reject the performance of the principal if the third party entered into a contract with the agent such that the performance of the agent is required or the third party can establish that the third party had been involved in past litigation with the principal. E) The third party may reject the performance of the principal if the third party entered into a contract with the agent such that the performance of the agent is required, the third party can establish that the third party had been involved in past litigation with the principal, or the principal owes money to the third party.
88) Which of the following is true in situations in which a principal was undisclosed and the third party comes to know of the undisclosed principal's identity but proceeds to obtain a judgment against the agent?
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A) The principal is liable to the third party anyway. B) The principal is liable to the third party, but only if the agent does not pay. C) The principal is liable to the third party, but only if the agent files for bankruptcy. D) The principal is released from liability to the third party. E) The principal is released from liability unless a contract for personal service was involved.
89) Which of the following is true regarding an agent's liability when a third party obtains a judgment against a previously undisclosed principal? A) The agent is freed from liability to the third party. B) The agent remains liable to the third party. C) The agent is freed from liability to the third party unless the principal refuses to pay. D) The agent is freed from liability to the third partyunless the principal files for bankruptcy. E) The agent is freed from liability to the third party unless a contract for personal service was involved.
90) Which of the following is true if an agent has no actual or apparent authority to act on behalf of a principal but the agent still enters into a contract with a third party? A) The principal is bound, but only if the principal is a disclosed principal. B) The principal is bound, but only if the principal is an unidentified principal. C) The principal is bound, but only if the principal is a partially disclosed principal. D) The principal is bound, but only if the principal is a disclosed or partially disclosed principal. E) The principal is not bound unless the principal ratifies the contract.
91) Which of the following is true regarding an agent's liability when the agent commits a tort while acting as an agent for a principal?
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A) The agent is personally liable, but only if the agent was on a mission for an unidentified principal. B) The agent is personally liable, but only if the agent was on a mission for an unidentified principal or a partially disclosed principal. C) The agent is liable regardless of the classification of the principal or the liability of the principal. D) The agent is not liable if the principal is liable. E) The agent is not liable unless the principal is insolvent.
92) Which of the following is a doctrine used in the context of the principal/employeragent/employee relationship? A) post hoc ergo propter hoc B) respondeat superior C) stare decisis D) res judicata E) res ipsa loquitur
93)
What does the Latin phrase respondeat superior mean? A) Let the superior speak B) Let the agent speak C) Let the employee speak D) Let all speak E) Let all be responsible
94) The principal-employer holds _____ liability for any harm caused by the agent-employee during the time that the agent-employee is working for the principal. A) vicarious B) strict C) conditional D) absolute E) statutory
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95) Which of the following factor(s) is/are considered by courts in determining whether an act committed by an employee occurred within the course and scope of employment? A) Whether the employer authorized the employee's act B) Whether the employer provided the tools by which the act occurred C) Whether the employer knew that the act would involve the commission of a serious crime D) Whether the employer authorized the employee's act, whether the employer provided the tools by which the act occurred, and whether the employer knew that the act would involve the commission of a serious crime E) Whether the employer authorized the employee's act and whether the employer provided the tools by which the act occurred, but not whether the employer knew that the act would involve the commission of a serious crime
96) Which of the following is true regarding the rights of an employer who is held liable and pays a third party not because of the employer's negligence, but under the doctrine of respondeat superior for the negligence of an employee? A) The employer has no right to receive any reimbursement from the negligent employee. B) The employer has the right to recover from the negligent employee one-half of any amount paid to the third party. C) The employer has a right of indemnification from the negligent employee. D) The employer can recover from the negligent employee any amount paid to the third party, but only if it can be shown that the employee's negligence was related to the violation of a statute. E) The employer can recover from the negligent employee one-half of any amount paid to the third party, but only if it can be shown that the employee's negligence was related to the violation of a statute.
97) Which of the following is false regarding the relationship between a principal and an independent contractor?
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A) An independent contractor is not an employee of the principal. B) The principal does not control the details of the independent contractor's performance. C) An individual who hires an independent contractor cannot be held liable for the independent contractor's tortious actions under the doctrine of respondeat superior. D) A principal is not liable for actions engaged in by the independent contractor, even extremely dangerous ones. E) If an independent contractor commits a crime without the authorization of the principal, the principal is not liable for the agent's crime.
98) How long does an agent's apparent authority continue once an agency relationship is terminated? A) It ends immediately. B) Twenty-four (24) hours C) Seven (7) days D) Thirty (30) days E) Until the principal notifies third parties that the agency relationship has ended
99) Which of the following is the most typical way in which to provide constructive notice of agency termination? A) By telephone B) By letter C) By posting a notice at the courthouse D) By newspaper publication E) By e-mail
100) If a manager has business transactions in one of the European Union (EU) countries and wants to terminate an agency relationship, he or she would want to have knowledge of which of the following?
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A) Chapter IV of the Agency Relationship Law B) Chapter VII of the Employment Relationship Law C) Article VI of the European Union Regulations D) Article VII of the European Union Regulations E) Section X of the United Nations Agency Regulations
101)
An agency relationship can be terminated through _____.
A) fulfillment of the agency’s purpose B) the occurrence of a specific event C) revocation of the agent’s authority D) fulfillment of the agency’s purpose, the occurrence of a specific event, or revocation of the agent’s authority E) fulfillment of the agency’s purpose and the occurrence of a specific event, but not revocation of the agent’s authority
102) Which of the following is false regarding revocation of an agent’s authority and renunciation by an agent? A) A principal can revoke an agent's authority at any time. B) A principal's revocation of an agent's authority might be a breach of contract entitling the agent to damages. C) An agent can terminate the agency relationship by renouncing the authority given to the agent. D) An agent's renunciation of a contract might be a breach of contract entitling the principal to damages. E) If an agent has breached a fiduciary duty to the principal, the principal can revoke the agent's authority, but the agent may be entitled to damages.
103)
An agency agreement created for the agent's benefit, not for the principal's, is _____.
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A) a mutually-exclusive agency B) an agency coupled with an interest C) void at the election of the principal D) void at the election of the agent E) void ab initio
104)
If either the principal or the agent dies, the agency relationship is _____. A) void ab initio B) void at the election of the surviving party C) still recognized by law D) ex post facto E) automatically terminated
105) law?
Which of the following is false regarding termination of agency based on operation of
A) Impossibility of performance terminates the agency relationship. B) An agency agreement is terminated whenever the agent, unknown to the principal, acquires an interest against the principal's interest. C) The agency agreement is terminated if the agent breaches the duty of loyalty he or she has to the principal. D) A change in law passed subsequent to the formation of an agency agreement may not terminate the agency agreement. E) If there is an unusual change in circumstances that leads the agent to believe that the principal's instructions do not apply, the agency relationship terminates.
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106) High Maintenance. Paul, who runs a retail jewelry store, went with Jane, to whom he was engaged to be married, to a wholesale jewelry store. Paul had no express, written agreement with Jane by which she was his agent. In fact, Paul had told Jane not to buy anything at the store. The wholesale jeweler, Pam, asked Paul if Jane was buying for him. Paul did not want to embarrass Jane so he nodded in agreement. A few minutes later Paul reminded Jane, outside the hearing of the wholesaler, that she should not make any purchases. Paul and Jane had a big disagreement over money that evening, and Jane broke off their engagement. The next day Jane went back to the wholesale jeweler and purchased a string of pearls for $2,000. Jane also purchased a fur jacket for $3,000 from a store owned by Harry that was next door to the jewelry store. She told Harry that Paul wanted a fur jacket for a model in his store and that Paul would be glad to pay Harry for the jacket. What type of agency, if any, did Jane have to act on behalf of Paul as far as Pam is concerned? A) No type of agency was in effect because no written agreement was in place by which Jane was Paul's agent. B) No type of agency was in effect because in fact, Jane was not Paul's agent. C) An expressed agency D) An implied agency E) An apparent agency
107) High Maintenance. Paul, who runs a retail jewelry store, went with Jane, to whom he was engaged to be married, to a wholesale jewelry store. Paul had no express, written agreement with Jane by which she was his agent. In fact, Paul had told Jane not to buy anything at the store. The wholesale jeweler, Pam, asked Paul if Jane was buying for him. Paul did not want to embarrass Jane so he nodded in agreement. A few minutes later Paul reminded Jane, outside the hearing of the wholesaler, that she should not make any purchases. Paul and Jane had a big disagreement over money that evening, and Jane broke off their engagement. The next day Jane went back to the wholesale jeweler and purchased a string of pearls for $2,000. Jane also purchased a fur jacket for $3,000 from a store owned by Harry that was next door to the jewelry store. She told Harry that Paul wanted a fur jacket for a model in his store and that Paul would be glad to pay Harry for the jacket. Which of the following is the most likely result if Pam, the wholesale jeweler, sues Paul for the price of the pearls?
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A) Pam will win, assuming she can prove that she reasonably believed, based on Paul's conduct, that Jane was acting as his agent. B) Pam will lose, because it was her responsibility to ask Paul for written documentation that Jane was his agent. C) Pam will lose, unless it can be established that Jane at some time in the past had actual authority to act as Paul's agent. D) Pam will win, but only if she can show through reasonable investigative efforts on her part that Jane cannot be located. E) Pam will win, but only if she can show that Jane has no assets with which to pay for the necklace.
108) High Maintenance. Paul, who runs a retail jewelry store, went with Jane, to whom he was engaged to be married, to a wholesale jewelry store. Paul had no express, written agreement with Jane by which she was his agent. In fact, Paul had told Jane not to buy anything at the store. The wholesale jeweler, Pam, asked Paul if Jane was buying for him. Paul did not want to embarrass Jane so he nodded in agreement. A few minutes later Paul reminded Jane, outside the hearing of the wholesaler, that she should not make any purchases. Paul and Jane had a big disagreement over money that evening, and Jane broke off their engagement. The next day Jane went back to the wholesale jeweler and purchased a string of pearls for $2,000. Jane also purchased a fur jacket for $3,000 from a store owned by Harry that was next door to the jewelry store. She told Harry that Paul wanted a fur jacket for a model in his store and that Paul would be glad to pay Harry for the jacket. Which of the following is the most likely result if Harry sues Paul for the price of the jacket? A) Paul will win, because he did nothing to cause Harry to believe that he would pay for the jacket. B) Harry will win, because Jane indicated that she had apparent authority to buy the jacket for Paul. C) Harry will win, but only if he can show through reasonable investigative efforts on his part that Jane cannot be located. D) Harry will win, but only if he can show that Jane has no assets with which to pay for the jacket. E) Paul will win on an implied agency theory.
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109) Cheap Principal. Jason, who is very knowledgeable regarding computers, agrees to purchase computers for Nick's business. Jason is retained for that purpose only, he is paid a set rate for the job, and Nick exercises no control over the way Jason does his work. Jason purchased computers on credit from ABC Computers, Inc. (ABC) without any mention of Nick. The computers worked well and were not defective in any way. Unfortunately, Nick did not pay ABC on a timely basis. Jason, therefore, paid ABC out of his own pocket because he wanted to be able to do business with ABC in the future and because his name was on the invoice. Jason asked Nick for reimbursement, but Nick refused. Nick claimed that if Jason had only waited, ABC might have agreed to take less. Which of the following likely represents Jason's status regarding his employment with Nick? A) He is an independent contractor. B) He is an employee. C) He has a special status called employee-contractor, a term used to represent a contractor who is neither an employee nor an independent contractor. D) He is an express contractor. E) He is an implied contractor.
110) Cheap Principal. Jason, who is very knowledgeable regarding computers, agrees to purchase computers for Nick's business. Jason is retained for that purpose only, he is paid a set rate for the job, and Nick exercises no control over the way Jason does his work. Jason purchased computers on credit from ABC Computers, Inc. (ABC) without any mention of Nick. The computers worked well and were not defective in any way. Unfortunately, Nick did not pay ABC on a timely basis. Jason, therefore, paid ABC out of his own pocket because he wanted to be able to do business with ABC in the future and because his name was on the invoice. Jason asked Nick for reimbursement, but Nick refused. Nick claimed that if Jason had only waited, ABC might have agreed to take less. Did Jason have any legal liability to ABC? A) Yes, because he purchased the computers B) Yes, but only because office equipment is involved C) No, because his status was as an agent regardless of whether ABC was aware of that fact D) No, because he was an independent contractor E) No, because he was an employee
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111) Cheap Principal. Jason, who is very knowledgeable regarding computers, agrees to purchase computers for Nick's business. Jason is retained for that purpose only, he is paid a set rate for the job, and Nick exercises no control over the way Jason does his work. Jason purchased computers on credit from ABC Computers, Inc. (ABC) without any mention of Nick. The computers worked well and were not defective in any way. Unfortunately, Nick did not pay ABC on a timely basis. Jason, therefore, paid ABC out of his own pocket because he wanted to be able to do business with ABC in the future and because his name was on the invoice. Jason asked Nick for reimbursement, but Nick refused. Nick claimed that if Jason had only waited, ABC might have agreed to take less. Which of the following is true regarding any reimbursement Jason is due from Nick? A) Jason is not due any reimbursement, because he did not obtain permission from Jason before paying ABC. B) JJason is only due one-half of whatever he paid, because he did not get permission from Jason before paying ABC. C) Jason is not due any reimbursement from Nick, unless he can establish that Nick signed a written contract authorizing him to personally pay debts incurred. D) Jason is not due any reimbursement from Nick, unless Jason can establish by a preponderance of the evidence that ABC would not have agreed to take a lesser amount. E) Jason is entitled to reimbursement from Nick.
112) Lakeside Property. Ronnie agreed to act as Sue's agent in finding a piece of lakeside property for her at a good price and in obtaining a loan for her with which to purchase the property. She agreed to pay him $500 for doing so. To assist Ronnie in his duties, Sue disclosed to Ronnie confidential information about her finances and debts. Ronnie decided that he needed help and paid Rick $300 to look for property for Sue. Bruce told Ronnie about a great deal on a piece of lakeside property that Bruce had for sale. In fact, the deal was so good that Ronnie purchased the property for himself. When Sue found out about the property Ronnie bought for himself, she complained to Ronnie. He defended himself on the basis that he was not actually working for Sue when he found out about the deal. At the time, he was playing golf with Bruce. He also told Sue that he had hired Rick for $300 to assist him and that he could not be held liable because he had turned the job over to Rick. He asked Sue for reimbursement of that amount. Sue fired Ronnie, threatening to sue him. Ronnie told Sue that he would counterclaim for the $300 owed to Rick. Only after he was fired, Ronnie disclosed to a number of parties information regarding Sue's spending habits that he thought were excessive. Which of the following is the most likely result if Sue sues Ronnie for purchasing the property from Bruce?
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A) Sue will lose, because Ronnie had the right to act in his own best interest. B) Sue will lose, but only because Ronnie was not involved in work duties when he heard about the property. C) Sue will lose, because Ronnie had validly assigned all duties to Rick. D) Sue will win. E) Sue will win, but only if she can establish that she expressly told Ronnie that he could not assign the contractual duties under the contract.
113) Lakeside Property. Ronnie agreed to act as Sue's agent in finding a piece of lakeside property for her at a good price and in obtaining a loan for her with which to purchase the property. She agreed to pay him $500 for doing so. To assist Ronnie in his duties, Sue disclosed to Ronnie confidential information about her finances and debts. Ronnie decided that he needed help and paid Rick $300 to look for property for Sue. Bruce told Ronnie about a great deal on a piece of lakeside property that Bruce had for sale. In fact, the deal was so good that Ronnie purchased the property for himself. When Sue found out about the property Ronnie bought for himself, she complained to Ronnie. He defended himself on the basis that he was not actually working for Sue when he found out about the deal. At the time, he was playing golf with Bruce. He also told Sue that he had hired Rick for $300 to assist him and that he could not be held liable because he had turned the job over to Rick. He asked Sue for reimbursement of that amount. Sue fired Ronnie, threatening to sue him. Ronnie told Sue that he would counterclaim for the $300 owed to Rick. Only after he was fired, Ronnie disclosed to a number of parties information regarding Sue's spending habits that he thought were excessive. Which of the following is the most likely result if Ronnie sues Sue for the $300 paid to Rick? A) Ronnie will lose. B) Ronnie will win, but only if he can establish that he had express permission from Sue to assign the duties. C) Ronnie will win, but only if he can establish that he had either express or implied permission from Sue to assign the duties. D) Ronnie will win, but only if he can establish that he had express, implied, or assumed permission from Sue to assign the duties. E) Ronnie will lose, but only if Sue can establish that Rick is incompetent to deal in real estate.
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114) Lakeside Property. Ronnie agreed to act as Sue's agent in finding a piece of lakeside property for her at a good price and in obtaining a loan for her with which to purchase the property. She agreed to pay him $500 for doing so. To assist Ronnie in his duties, Sue disclosed to Ronnie confidential information about her finances and debts. Ronnie decided that he needed help and paid Rick $300 to look for property for Sue. Bruce told Ronnie about a great deal on a piece of lakeside property that Bruce had for sale. In fact, the deal was so good that Ronnie purchased the property for himself. When Sue found out about the property Ronnie bought for himself, she complained to Ronnie. He defended himself on the basis that he was not actually working for Sue when he found out about the deal. At the time, he was playing golf with Bruce. He also told Sue that he had hired Rick for $300 to assist him and that he could not be held liable because he had turned the job over to Rick. He asked Sue for reimbursement of that amount. Sue fired Ronnie, threatening to sue him. Ronnie told Sue that he would counterclaim for the $300 owed to Rick. Only after he was fired, Ronnie disclosed to a number of parties information regarding Sue's spending habits that he thought were excessive. Which of the following is the most likely result if Sue sues Ronnie for revealing confidential information? A) Sue will lose, because Ronnie was no longer her agent when he revealed the information. B) Sue will lose because regardless of whether he was working for her, he had no legal duty to keep any information confidential. C) Sue will lose, unless she can establish that revealing the information caused her to suffer economic loss. D) Sue will lose, unless she can establish that revealing the information caused her to suffer economic loss or to seek psychological counseling. E) Sue will win.
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115) Lakeside Property. Ronnie agreed to act as Sue's agent in finding a piece of lakeside property for her at a good price and in obtaining a loan for her with which to purchase the property. She agreed to pay him $500 for doing so. To assist Ronnie in his duties, Sue disclosed to Ronnie confidential information about her finances and debts. Ronnie decided that he needed help and paid Rick $300 to look for property for Sue. Bruce told Ronnie about a great deal on a piece of lakeside property that Bruce had for sale. In fact, the deal was so good that Ronnie purchased the property for himself. When Sue found out about the property Ronnie bought for himself, she complained to Ronnie. He defended himself on the basis that he was not actually working for Sue when he found out about the deal. At the time, he was playing golf with Bruce. He also told Sue that he had hired Rick for $300 to assist him and that he could not be held liable because he had turned the job over to Rick. He asked Sue for reimbursement of that amount. Sue fired Ronnie, threatening to sue him. Ronnie told Sue that he would counterclaim for the $300 owed to Rick. Only after he was fired, Ronnie disclosed to a number of parties information regarding Sue's spending habits that he thought were excessive. What remedy should Sue seek if she wants possession of the lakeside lot Ronnie purchased? A) A resolute trust B) An actual trust C) A constructive trust D) A defined trust E) An absolute trust
116) Nasty Break-Up. Harold wants to purchase a lot next door to Sarah's home that is owned by Sarah. Harold knows Sarah will not sell the lot to him because they dated in the past and had a nasty break-up. Harold agrees with Alice that Alice will purchase the lot from Sarah for him. Alice and Sarah reach an agreement and enter into a contract whereby Sarah is to sell the lot to Alice for a price within the scope of Alice's authority. Alice tells Sarah nothing about her plan to later transfer the lot to Harold. Before title to the lot is transferred to Alice, Harold tells Alice that he no longer wants the lot. Alice tells Sarah about Harold. Sarah tells Alice that as far as she is concerned, Alice has bought the lot. Sarah says that she plans to move anyway and really does not care whether Alice or Harold ends up with the lot. She just wants her money. What type of principal is Harold? A) Disclosed B) Undisclosed C) Partially disclosed D) Unidentified E) Legally nonexistent
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117) Nasty Break-Up. Harold wants to purchase a lot next door to Sarah's home that is owned by Sarah. Harold knows Sarah will not sell the lot to him because they dated in the past and had a nasty break-up. Harold agrees with Alice that Alice will purchase the lot from Sarah for him. Alice and Sarah reach an agreement and enter into a contract whereby Sarah is to sell the lot to Alice for a price within the scope of Alice's authority. Alice tells Sarah nothing about her plan to later transfer the lot to Harold. Before title to the lot is transferred to Alice, Harold tells Alice that he no longer wants the lot. Alice tells Sarah about Harold. Sarah tells Alice that as far as she is concerned, Alice has bought the lot. Sarah says that she plans to move anyway and really does not care whether Alice or Harold ends up with the lot. She just wants her money. Which of the following is true regarding whether Alice is personally bound on the contract with Sarah? A) Alice is not personally bound, because she was acting Harold's behalf. B) Alice is personally bound, unless she can establish that Sarah would not have sold her the lot if she had known that Harold was involved. C) Alice is personally bound, unless she can establish that Harold has the funds with which to pay Sarah. D) Alice is not personally bound, unless Harold has legally filed for bankruptcy. E) Alice is personally bound.
118) Nasty Break-Up. Harold wants to purchase a lot next door to Sarah's home that is owned by Sarah. Harold knows Sarah will not sell the lot to him because they dated in the past and had a nasty break-up. Harold agrees with Alice that Alice will purchase the lot from Sarah for him. Alice and Sarah reach an agreement and enter into a contract whereby Sarah is to sell the lot to Alice for a price within the scope of Alice's authority. Alice tells Sarah nothing about her plan to later transfer the lot to Harold. Before title to the lot is transferred to Alice, Harold tells Alice that he no longer wants the lot. Alice tells Sarah about Harold. Sarah tells Alice that as far as she is concerned, Alice has bought the lot. Sarah says that she plans to move anyway and really does not care whether Alice or Harold ends up with the lot. She just wants her money. Which of the following is true regarding whether Harold is liable to Alice for the cost of the lot if Alice pays Sarah the purchase price?
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A) Harold is liable to Alice for the cost of the lot. B) Harold is liable to Alice for the cost of the lot, but only if the contract between Harold and Alice expressly stated that he would reimburse her for the cost of the lot. C) Harold is liable to Alice, but only if she resells the lot and is unable to recover as much as she paid for it. D) Harold is not liable to Alice for the cost of the lot. E) Harold can avoid liability to Alice, but only if he can establish that unexpected circumstances caused him to refuse to purchase the lot from her.
119) The Big Sale. Christy, the owner of ABC Department Store, Inc., needed to hire several employees in a hurry because of a planned big summer sale. Bob was hired by Christy to run a cash register and to assist customers with taking large purchases to their cars. Bob encountered a particularly annoying customer, Frank. Frank started complaining the minute he saw Bob. Frank complained about having to wait for Bob to assist him with carrying his television purchase to his car, the merchandise in the store, and the quality of the store's employees. Bob tried to control himself while he carted Frank's television to the car. The final straw, however, came when Frank told Bob that he should get the earring out of his ear, cut his hair, and act professionally. Bob threw the television to the ground and punched Frank in the nose. Frank investigated and discovered that Bob has just been fired from his last three jobs for violent actions against customers. Two of his former employers are willing to testify that if Christy had called them, they would have disclosed Bob's tendencies to her. Bob listed the former employers on his application, but because she was in a hurry to hire employees, Christy did not take the time to check with the former employers. Another problem confronting Christy during the big sale is that Susie, a long-time employee of Christy’s who had never caused any problem before, negligently dropped a box on the foot of Greg, a customer. Greg had to have an X-ray and is threatening to sue both Christy and Susie. Which of the following is a theory under which Christy may be held directly liable for her own tortious conduct regarding Frank's injury? A) Negligent hiring B) Strict liability C) Breach of customer warranty D) Negligent hiring, strict liability, or breach of customer warranty E) Christy may not be held liable under any theory.
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120) The Big Sale. Christy, the owner of ABC Department Store, Inc., needed to hire several employees in a hurry because of a planned big summer sale. Bob was hired by Christy to run a cash register and to assist customers with taking large purchases to their cars. Bob encountered a particularly annoying customer, Frank. Frank started complaining the minute he saw Bob. Frank complained about having to wait for Bob to assist him with carrying his television purchase to his car, the merchandise in the store, and the quality of the store's employees. Bob tried to control himself while he carted Frank's television to the car. The final straw, however, came when Frank told Bob that he should get the earring out of his ear, cut his hair, and act professionally. Bob threw the television to the ground and punched Frank in the nose. Frank investigated and discovered that Bob has just been fired from his last three jobs for violent actions against customers. Two of his former employers are willing to testify that if Christy had called them, they would have disclosed Bob's tendencies to her. Bob listed the former employers on his application, but because she was in a hurry to hire employees, Christy did not take the time to check with the former employers. Another problem confronting Christy during the big sale is that Susie, a long-time employee of Christy’s who had never caused any problem before, negligently dropped a box on the foot of Greg, a customer. Greg had to have an X-ray and is threatening to sue both Christy and Susie. Which of the following is true regarding whether Greg has any right of recovery against Susie for his injured foot? A) Greg has no right of recovery against Susie because of her status as an employee. B) Greg has no right of recovery against Susie because she did not intentionally harm him. C) Greg has no right of recovery against Susie because of her status as an employee and because she did not intentionally harm him. D) Greg has a right of recovery against Susie, but only if Christy is bankrupt. E) Greg has a right of recovery against Susie.
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121) The Big Sale. Christy, the owner of ABC Department Store, Inc., needed to hire several employees in a hurry because of a planned big summer sale. Bob was hired by Christy to run a cash register and to assist customers with taking large purchases to their cars. Bob encountered a particularly annoying customer, Frank. Frank started complaining the minute he saw Bob. Frank complained about having to wait for Bob to assist him with carrying his television purchase to his car, the merchandise in the store, and the quality of the store's employees. Bob tried to control himself while he carted Frank's television to the car. The final straw, however, came when Frank told Bob that he should get the earring out of his ear, cut his hair, and act professionally. Bob threw the television to the ground and punched Frank in the nose. Frank investigated and discovered that Bob has just been fired from his last three jobs for violent actions against customers. Two of his former employers are willing to testify that if Christy had called them, they would have disclosed Bob's tendencies to her. Bob listed the former employers on his application, but because she was in a hurry to hire employees, Christy did not take the time to check with the former employers. Another problem confronting Christy during the big sale is that Susie, a long-time employee of Christy’s who had never caused any problem before, negligently dropped a box on the foot of Greg, a customer. Greg had to have an X-ray and is threatening to sue both Christy and Susie. Which of the following is true regarding whether Greg has any right of recovery against Christy for his injured foot? A) Greg has no right of recovery against Christy because Susie had not dropped any boxes before and because Christy had no reason to suspect she would injure Greg. B) Greg has a right of recovery against Christy, but only if Susie is insolvent. C) Greg has a right of recovery against Christy, but only for one-half of his damages. D) Greg has no right of recovery against Christy because he will not be able to establish any wrongdoing on her part in hiring Susie. E) Greg has a right of recovery against Christy.
122) Roofing Issues. Sally agrees to roof a house for Bob. After doing his research, Bob chooses Sally based on her great reputation for being conscientious and doing good work. Bob knows little about roofing and stays away from all the noise involved. Sally provides her own tools for herself and other workers, sets her own schedule, and charges a flat rate of $10,000 to be paid when the job is completed. Sally hires Trudy, Glen, and Fred to help with the roofing. She pays them an hourly rate, supervises their work, provides them with tools and materials, and sets their schedules. Curious about what is going on there, Bob's friend Spencer walks by the house while the roofing is being done. Glen absentmindedly throws some old shingles off the roof and hits Spencer in the head, resulting in him going to the local emergency room and receiving a couple of stitches in his scalp. Spencer decides to sue all the roofers, Bob, and Sally for his hospital expenses and for pain and suffering. Which of the following is the most likely characterization of Sally in relation to Bob? Version 1
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A) She is both an employee and an independent contractor. B) She is an employee. C) She is an independent contractor. D) She is an undisclosed principal. E) She is both an employee and a disclosed principal.
123) Roofing Issues. Sally agrees to roof a house for Bob. After doing his research, Bob chooses Sally based on her great reputation for being conscientious and doing good work. Bob knows little about roofing and stays away from all the noise involved. Sally provides her own tools for herself and other workers, sets her own schedule, and charges a flat rate of $10,000 to be paid when the job is completed. Sally hires Trudy, Glen, and Fred to help with the roofing. She pays them an hourly rate, supervises their work, provides them with tools and materials, and sets their schedules. Curious about what is going on there, Bob's friend Spencer walks by the house while the roofing is being done. Glen absentmindedly throws some old shingles off the roof and hits Spencer in the head, resulting in him going to the local emergency room and receiving a couple of stitches in his scalp. Spencer decides to sue all the roofers, Bob, and Sally for his hospital expenses and for pain and suffering. Which of the following is the most likely characterization of Trudy, Glen, and Fred in relation to Sally? A) They are both employees and independent contractors. B) They are employees. C) They are independent contractors. D) They are undisclosed principals. E) They are both employees and disclosed principals.
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124) Roofing Issues. Sally agrees to roof a house for Bob. After doing his research, Bob chooses Sally based on her great reputation for being conscientious and doing good work. Bob knows little about roofing and stays away from all the noise involved. Sally provides her own tools for herself and other workers, sets her own schedule, and charges a flat rate of $10,000 to be paid when the job is completed. Sally hires Trudy, Glen, and Fred to help with the roofing. She pays them an hourly rate, supervises their work, provides them with tools and materials, and sets their schedules. Curious about what is going on there, Bob's friend Spencer walks by the house while the roofing is being done. Glen absentmindedly throws some old shingles off the roof and hits Spencer in the head, resulting in him going to the local emergency room and receiving a couple of stitches in his scalp. Spencer decides to sue all the roofers, Bob, and Sally for his hospital expenses and for pain and suffering. Assuming Glen was negligent, which of the following is the most likely result in a lawsuit against Sally brought by Spencer? A) Spencer will win, because Glen was acting within the scope of his employment; therefore, Sally is liable for his negligence. B) Spencer will lose, because Glen was not acting within the scope of his employment; therefore, Sally is not liable for his negligence. C) Spencer will win because regardless of whether Glen was acting within the scope of his employment, Sally is liable for his negligence. D) Spencer will lose because regardless of whether Glen was acting within the scope of his employment, Sally has no liability. E) Spencer and Sally will split the damages equally.
125) Roofing Issues. Sally agrees to roof a house for Bob. After doing his research, Bob chooses Sally based on her great reputation for being conscientious and doing good work. Bob knows little about roofing and stays away from all the noise involved. Sally provides her own tools for herself and other workers, sets her own schedule, and charges a flat rate of $10,000 to be paid when the job is completed. Sally hires Trudy, Glen, and Fred to help with the roofing. She pays them an hourly rate, supervises their work, provides them with tools and materials, and sets their schedules. Curious about what is going on there, Bob's friend Spencer walks by the house while the roofing is being done. Glen absentmindedly throws some old shingles off the roof and hits Spencer in the head, resulting in him going to the local emergency room and receiving a couple of stitches in his scalp. Spencer decides to sue all the roofers, Bob, and Sally for his hospital expenses and for pain and suffering. Assuming Glen was negligent, which of the following is the most likely result in a lawsuit against Bob brought by Spencer?
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A) Spencer will win because as the property owner, Bob is liable for any negligence occurring there. B) Spencer will win because Sally is Bob's employee; therefore, Sally is liable for the negligent acts of anyone working for her. C) Spencer will win because Sally is an independent contractor for Bob; therefore, Sally is liable for the negligent acts of anyone working for her. D) Spencer will lose because Glen is an employee of Sally, who is an independent contractor for Bob. E) Spencer will win, but only if it can be established that both Glen and Sally are insolvent and unable to pay any judgment.
126) Roofing Issues. Sally agrees to roof a house for Bob. After doing his research, Bob chooses Sally based on her great reputation for being conscientious and doing good work. Bob knows little about roofing and stays away from all the noise involved. Sally provides her own tools for herself and other workers, sets her own schedule, and charges a flat rate of $10,000 to be paid when the job is completed. Sally hires Trudy, Glen, and Fred to help with the roofing. She pays them an hourly rate, supervises their work, provides them with tools and materials, and sets their schedules. Curious about what is going on there, Bob's friend Spencer walks by the house while the roofing is being done. Glen absentmindedly throws some old shingles off the roof and hits Spencer in the head, resulting in him going to the local emergency room and receiving a couple of stitches in his scalp. Spencer decides to sue all the roofers, Bob, and Sally for his hospital expenses and for pain and suffering. Assuming Glen was negligent, which of the following is the most likely result in a lawsuit against Trudy and Fred brought by Spencer? A) Spencer will win because Trudy and Fred were coworkers with Glen. B) Spencer will win because Trudy and Fred were independent contractors on the same job as Glen. C) Spencer will win, but only if it can be established that both Sally and Bob are insolvent and unable to pay any judgment. D) Spencer will lose because Trudy and Fred were not negligent and were not employees of Spencer. E) Spencer, Trudy, and Fred must all bear one-third of any judgment because they are employees of the same rank.
127) Agency relationships are _____ formed by informal oral agreements or formal written contracts.
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A) consensual relationships B) unilateral agreements C) simplified agreements D) voided relationships E) equitable relationships
128) Under the law of the Grand Duchy of Luxembourg, the person for whom the power of attorney is acting on behalf is called a(n) _____ instead of a principal. A) donor B) delegator C) assignor D) incidental beneficiary E) attorney
129)
An independent contractor cannot _____ unless authorized to do so by the principal. A) perform work without the principals’ supervision B) engage in a distinct occupation C) enter into contracts on behalf of the principal D) operate an independently-established business E) supply her own tools of the trade
130)
An agency relationship is a(n) _____ of trust, confidence, and good faith. A) fiduciary relationship B) equitable relationship C) fictitious arrangement D) unilateral obligation E) implied mandate
131) If the agent is successful in bringing a lawsuit against the principal, the agent is entitled to _____. Version 1
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A) punitive damages only B) tort damages only C) contract damages only D) contract or tort remedies E) specific performance
132) If the third party reasonably believes that the agent has authority to represent the principal, the principal _____ any agreements made with the agent, who has apparent authority. A) must uphold B) can elect to uphold C) can void D) can rescind E) must pay punitive damages for
133) If a third party is aware that an agent is making an agreement on behalf of a principal but the third party is unaware of the identity of the principal, the principal is classified as a partially disclosed or a(n) _____ principal. A) unidentified B) undisclosed C) veiled D) constructively extant E) secret
134) If the principal or agent files a _____, the agency relationship is generally no longer in existence. A) bankruptcy petition B) noncompete agreement C) nondisclosure agreement D) security agreement E) financing statement
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ESSAY. Write your answer in the space provided or on a separate sheet of paper. 135) Discuss why agency is especially important for modern firms doing business in foreign countries.
136) List the requirements for a finding of agency by ratification and the requirements needed for ratification to be effective.
137) What is the duty of accounting an agent owes to a principal, and how would an agent satisfy that duty? Specify what actions an agent must take with regard to the accounts of a principal.
138)
Describe the two key exceptions to the equal dignity rule.
139) Set forth the rationale behind the doctrine of respondeat superior and discuss whether you believe it is an appropriate doctrine for our society.
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140) Melinda, who works in a jewelry store owned by Cindy, was picking up some gemstones for use in the store. On the way back to the jewelry store, she went through a drive-through at a fast food restaurant to get a soda. While in line, she negligently bumped the vehicle in front of her that was owned by Ralph. Melinda did not have insurance. Ralph asked Cindy to pay for the damage to his bumper. Cindy refused on the basis that she never gave Melinda authority to stop for a soda. Should Cindy be held liable, and why or why not?
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Answer Key Test name: Chap 20_5_The Essentials_Kubasek 1) FALSE Agency is generally defined as a relationship between a principal and an agent. 2) FALSE In an agency relationship, the agent is authorized to act for and on behalf of the principal, who hires the agent to represent him or her. 3) TRUE A fiduciary is a person who has a duty to act primarily for another person’s benefit. A lawyer, for example, is a fiduciary for his or her client. 4) TRUE Agency law is primarily state law. Thus, it can vary somewhat from state to state. 5) TRUE An agency relationship can be created only for a lawful purpose in the same way that a contract must have an legal purpose. 6) FALSE If an individual does not have contractual capacity, the individual could not hire an agent to make contracts on his or her behalf. For example, because a contract entered into with a minor is voidable, most states do not allow minors to hire agents. 7) TRUE A power of attorney is a document that gives an agent the authority to sign legal documents on behalf of the principal. 8) TRUE
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A power of attorney can be general or specific. For example, with a general power of attorney, a principal gives an agent broad authority to sign legal documents on behalf of the principal. In contrast, with a specific power of attorney, a principal gives authority to an agent for only the specific areas or purposes listed in the agreement. 9) FALSE A durable power of attorney is a written document, created by a principal, expressing his or her wishes for an agent’s authority to be unaffected by the principal’s subsequent incapacity. Alternatively, a durable power of attorney might become active only after a principal becomes incapacitated in any manner. Because the agreement is entered into before incapacitation, a power of attorney is legally binding after the principal becomes incapacitated. 10) TRUE Agents may perform their services gratuitously. A gratuitous agent is one who acts without consideration; that is, the agent is not paid for his or her services. Gratuitous agents function much like regular agents, with a few specific exceptions. 11) TRUE Agency relationships may be created by expressed or implied agreements. When parties form an agency relationship by making a written or oral agreement, the agency is known as expressed agency, or agency by agreement. Expressed agency is the most common type of agency. In some cases, however, an agency relationship is not created by an expressed agreement but is instead implied by the conduct of the parties. The circumstances of a situation determine the extent of an agent’s ability to conduct business on behalf of the principal. However, the implied authority cannot conflict with any express authority. 12) FALSE
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If a principal leads a third party to believe that another individual serves as his or her agent but the principal has made no agreement with the socalled agent, the principal has created an apparent agency, or agency by estoppel. According to the principal’s conduct, the agent has apparent authority to act; thus, the principal is estopped, or prevented, from denying that the individual is an agent. When a third party relies on the principal’s conduct and makes an agreement with an apparent agent, the principal must uphold any agreements made by the agent. If the principal attempts to deny an agency relationship existed, the third party must demonstrate that he or she reasonably believed, on the basis of the principal’s conduct, that an agency relationship existed. The court will consider the principal’s conduct in determining whether an agency relationship existed. 13) FALSE Although all employees are considered agents of their employers, the reverse is not true. That is, not all agents are employees. 14) FALSE Employers often hire independent contractors, persons who are not employees, to conduct certain tasks. The Restatement of Agency defines an independent contractor as “a person who contracts with another to do something for him but who is not controlled by the other nor subject to the other’s right to control with respect to his physical conduct in the performance of the undertaking.” 15) TRUE When courts are deciding whether a worker is an employee or an independent contractor, perhaps the most important issue they consider is how much control the employer exerts over the agent. If the employer has substantial control over day-to-day operations of the worker, the worker is generally considered an employee. 16) FALSE Version 1
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When a principal contractually agrees that another person can make agreements on his or her behalf, the principal owes certain duties to the agent. Those duties include the duty of compensation, reimbursement and indemnification, cooperation, and safe working conditions. If these duties are not fulfilled, the principal has violated the agent’s rights. Consequently, the agent can bring a suit against the principal. 17) FALSE If an agent makes authorized expenditures in the course of working on behalf of the principal, the principal has a duty to reimburse the agent for the amount of money spent. This is part of the principal’s duty of reimbursement and indemnification to the agent. 18) FALSE The principal owes a duty of cooperation to the agent. Therefore, the principal must assist the agent in the performance of his or her duties. Furthermore, the principal can do nothing to interfere with the reasonable conduct of an agent. 19) TRUE Courts suggest that the duty of loyalty is perhaps the most important duty an agent owes to a principal. Because the agency relationship is a fiduciary relationship (i.e., a relationship of trust), the agent has a responsibility to act in the interest of the principal. The agent carries out her duty of loyalty to the principal in a number of ways, including avoiding conflicts of interest and protecting the principal’s confidentiality. 20) FALSE
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Not only does the agent have to communicate offers from third parties, but the agent must also communicate any information the agent thinks could be important to the principal. This is known as the duty of notification. For example, if a third party has made an agreement through an agent with a principal and the third party has failed to meet the agreement, the agent must notify the principal of this information in a timely manner. 21) TRUE In an implied agency relationship, the agent has implied authority; that is, the relationship is inferred from the conduct of the parties. Consequently, the authority of the agent is implied on the basis of words and actions of the principal to the agent. An agent’s implied authority is derived from an agent’s express authority and consists of what is reasonably necessary for carrying out the agent’s grant of express authority. 22) FALSE When express authority is granted for an agent to enter into a contract that islegally required to be in writing, most states require the grant of authority also to be in writing. This requirement is known as the equal dignity rule. 23) FALSE When express authority is granted for an agent to enter into a contract that is legally required to be in writing, most states require the grant of authority also to be in writing. This requirement is known as the equal dignity rule. When an agency agreement fails to adhere to the equal dignity rule, the subsequent contracts are typically considered voidable by the principal. This rule is based on the statute of frauds. 24) FALSE
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When an agent acts within the scope of her authority on behalf of a disclosed or partially disclosed principal, the agent is not liable for the acts of the principal. 25) FALSE Agents who go beyond their authority when the principal is disclosed or partially disclosed are liable for a breach of implied warranty, not for a breach of contract. 26) TRUE Actual notice of the termination of an agency relationship must be given to third parties who have had business interactions with the agent. 27) TRUE Actual notice of termination is given when third parties are directly informed, orally or in writing, that an agency agreement has terminated. 28) FALSE An agency coupled with an interest is created for the agent's benefit, not for the principal’s. 29) FALSE If the principal or agent files a bankruptcy petition, the agency relationship is generally no longer in existence. Insolvency, which is defined as the inability to pay debts or the condition of liabilities outweighing assets, does not necessarily result in the termination of an agency relationship. 30) FALSE Although Singapore did enact new legislation regulating the use of electronic contracts, such contracts were not outlawed. 31) C According to the California appeals court, because the durable power of attorney was legal and enforceable, Garrison could not cancel the agreements into which she entered and therefore the obligation to use arbitration clauses were enforceable to the original contract. Version 1
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32) D The Court of Appeal of Florida ruled that the church was not liable under the doctrine of respondeat superior because the alleged acts were not committed during the course of the employment to further a purpose or interest of the employer. 33) C Agency is generally defined as a relationship between a principal and an agent. 34) C Agency is generally defined as a relationship between a principal and an agent. In an agency relationship, the agent is authorized to act for and on behalf of the principal, who hires the agent to represent him or her. 35) E A fiduciary is a person who has a duty to act primarily for another person's benefit. A lawyer, for example, is a fiduciary for his or her client. 36) B Agency is generally defined as a relationship between a principal and an agent. In an agency relationship, the agent is authorized to act for and on behalf of the principal. 37) E Almost anyone can act as an agent, and a person can serve as an agent regardless of age or competency. 38) D Agency relationships can be created on the basis of any of the following forms of authority: a) expressed agency; b) implied authority; c) apparent agency; or d) ratification. 39) E
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When parties form an agency relationship by making a written or oral agreement, the agency is known as expressed agency. Expressed agency is also known as agency by agreement. 40) A When parties form an agency relationship by making a written or oral agreement, the agency is known as expressed agency, or agency by agreement. Expressed agency is the most common type of agency. 41) B An exclusive agency contract is created between a principal and an agent if the principal agrees to hire no other agent for a period of time or until a particular job is done. 42) A One legal document that establishes agency relationships is a power of attorney, a document that gives an agent the authority to sign legal documents on behalf of the principal. 43) D With a general power of attorney, a principal gives an agent broad authority to sign legal documents on behalf of the principal. 44) B With a specific power of attorney, a principal gives authority to an agent for only the specific areas or purposes listed in the agreement. 45) D A durable power of attorney is a written document, created by a principal, expressing his or her wishes for an agent's authority not to be affected by the principal's subsequent incapacity. Alternatively, a durable power of attorney might become active only after a principal becomes incapacitated in any manner. 46) D
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Agents may perform their services gratuitously. A gratuitous agent is one who acts without consideration; that is, the agent is not paid for his or her services. Gratuitous agents function much like regular agents, with a few specific exceptions. 47) D An apparent agency is also known as an agency by estoppel. 48) C An agency relationship that arises when an individual misrepresents herself as an agent for another party and that party accepts the unauthorized act is an agency by ratification. 49) D Generally, three (3) types of business relationships to which agency laws are relevant include: the principal-agent relationship, the employeremployee relationship, and the employer-independent contractor relationship.f 50) A The principal-agent relationship typically exists when an employer hires an employee to enter into contracts on behalf of the employer. This relationship is the most basic type of agency relationship. 51) B An employer-employee relationship is created whenever an employer hires an employee to perform some sort of physical service. 52) E Although all employees are agents, the reverse is not true. That is, not all agents are employees. 53) B Employers often hire independent contractors, persons who are not employees, to conduct certain tasks. Here Samantha was only hired to paint the showroom. 54) B Version 1
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The Restatement of Agency defines an independent contractor as "a person who contracts with another to do something for him but who is not controlled by the other nor subject to the other's right to control with respect to his physical conduct in the performance of the undertaking." 55) D The question of whether a worker is an employee or an independent contractor has important implications in terms of workers' compensation, workplace safety, and unemployment statutes. 56) E The question of whether a worker is an employee or an independent contractor has important implications in terms of workers' compensation, workplace safety, employment discrimination, and unemployment statutes. The employer-employee relationship is subject to the workers' compensation, workplace safety, employment discrimination, and unemployment statutes, whereas the employerindependent contractor relationship is not. 57) A Employers often hire independent contractors, persons who are not employees, to conduct certain tasks. The Restatement of Agency defines an independent contractor as "a person who contracts with another to do something for him but who is not controlled by the other nor subject to the other's right to control with respect to his physical conduct in the performance of the undertaking." Typically, building contractors, doctors, stockbrokers, and lawyers are independent contractors. 58) A Employers are generally liable in tort for the actions of their employees, whereas they are generally not liable for the actions of independent contractors. 59) C
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A worker may be classified as an employee if he or she receives regular payments according to time. 60) D A principal's obligation to pay an agent for his services is the duty of compensation. 61) B If the agent is successful in bringing a suit against the principal, the agent is entitled to contract or tort remedies. 62) C A person in a position of trust and confidence is known as a fiduciary. When an agent agrees to act on behalf of a principal, the agent is a fiduciary, and as such owes certain duties to the principal. 63) E If the principal and agent have no agreement regarding compensation for the agent, a court will calculate compensation according to the customary fee in the situation. 64) E When an agent agrees to act on behalf of a principal, the agent is a fiduciary, a person in a position of trust and confidence, and as such owes certain duties to the principal. 65) A An agent can in most situations represent and act on behalf of only one (1) principal in an agreement. 66) C An agent can in most situations represent and act on behalf of only one principal in an agreement. An agent usually cannot represent both the principal and a third party (who would then become another principal if represented by the same agent) in an agreement because there could be a conflict of interest. 67) D Version 1
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Not only does the agent have to communicate offers from third parties, but the agent must also communicate any information the agent thinks could be important to the principal. This is known as the duty of notification. 68) D The agent owes a duty of performance to the principal. This includes the agent’s obligation to perform the duties as specified in the agency agreement. 69) D The agent owes a duty of performance to the principal. This includes an obligation to perform the duties specified in the agency agreement with reasonable skill and care. The agent is expected to provide the same standards of skill, care, and professionalism that a reasonable person in the same situation would provide. 70) E Under the duty of obedience, the agent must follow the lawful instruction and direction of the principal. Thus, if the agent makes an unauthorized agreement, the agent has failed to meet the duty of obedience. 71) D When an agent illegally benefits from the agency relationship, the principal may enact a constructive trust on the profits, goods, or property in question. A constructive trust is an equitable trust imposed on a person who wrongfully obtains or holds legal right to property he or she should not possess. When a principal enacts a constructive trust, the court rules that the agent is merely holding the property or goods in trust for the principal, granting the principal legal right or possession. 72) B
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Agents enter into contracts with third parties on behalf of a principal. If a third party believes that the agent is acting with actual or apparent authority, he or she may sue the principal for any breach of contract. However, when the breach was caused by the agent’s negligence, the principal has a right to indemnification. That is, when sued by a third party, a principal may sue his or her agent to recover the amount assessed to the third party if the breach of contract is the agent's fault. 73) D When an agent feels she is not being properly compensated, especially when working on commission, the agent may demand an accounting. When an agent demands an accounting, he or she may withhold further performance of duties until the principal supplies appropriate accounting data. 74) A When a contract exists and a principal agrees to certain conditions but fails to perform, the agent may seek court assistance in forcing the principal to perform the contract as stipulated. This is known as a request for specific performance. 75) E When a contract exists and a principal agrees to certain conditions but fails to perform, the agent may seek specific performance. However, when an agency relationship is not contractual or the contract is for personal services, the agent does not have the right to seek specific performance. 76) D In an expressed agency relationship, the agent has express authority. 77) C In an expressed agency relationship, the agent has express authority, which is often referred to as actual authority. The principal has explicitly instructed the agent to do something. Version 1
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78) C According to the equal dignity rule, when express authority is granted for an agent to enter into a contract legally required to be in writing, the grant of authority must also be in writing. 79) B When express authority is granted for an agent to enter into a contract legally required to be in writing, most states require the grant of authority to also be in writing. This requirement is known as the equal dignity rule. When an agency agreement fails to adhere to the equal dignity rule, the subsequent contracts are typically considered voidable by the principal. The equal dignity rule is based on the statute of frauds. 80) C In an implied agency relationship, the agent has implied authority; that is, the relationship is inferred from the conduct of the parties. Consequently, the authority of the agent is implied on the basis of words and actions of the principal to the agent. 81) A An agent's implied authority is derived from the agent's express authority and consists of what is reasonably necessary for carrying out the agent’s grant of express authority. 82) E Apparent agency exists when a third party reasonably believes, on the basis of the principal's actions, that an agency relationship exists between the principal and another individual. Thus, if the third party reasonably believes that the agent has the authority to represent the principal, the principal must uphold any agreements made with the agent, who has apparent authority. The principal is prevented (estopped) from acting as if the agent had no such authority. 83) C
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When a third party is aware that the agent is making an agreement on behalf of a principal and the third party also knows the identity of the principal, the principal is classified as a disclosed principal. 84) A When the agent acts within her authority on behalf of an undisclosed principal, the law will likely hold the agent liable for the agreement. 85) E There are certain situations in which the agent is the only party liable for the contract, including when the contract expressly excludes the principal from the contract. 86) D The Uniform Commercial Code (UCC) governs negotiable instruments and states that a principal cannot be liable for a negotiable instrument if his or her name is not on the instrument or if the agent's signature does not indicate that the agreement was made in a representative capacity. 87) C When a third party enters into a contract with an agent requiring the performance of the agent, the third party may reject the performance of the principal. 88) D In situations in which a principal was undisclosed, a judgment for a third party against an agent, when the third party comes to know of the undisclosed principal's identity, releases the principal from liability. 89) A In situations in which a principal was undisclosed, a judgment for a third party against an agent, when the third party comes to know of the undisclosed principal's identity, releases the principal from liability. Also, a judgment against a previously undisclosed principal frees the agent from liability. 90) E Version 1
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If an agent has no authority to act on behalf of a principal but the agent still enters into a contract with a third party, the principal, regardless of the classification, is not bound to the contract unless the principal ratifies the agreement. 91) C If an agent commits a tort that injures a third party, the agent is personally liable for his or her actions, regardless of both the classification of the principal and the liability of the principal. 92) B The doctrine of respondeat superior is used in the context of the principal/employer-agent/employee relationship. 93) A The term respondeat superior is a Latin phrase meaning "let the superior speak." 94) A The principal/employer holds vicarious liability (in other words, liability assigned without fault) for any harm caused by the agent/employee during the time the agent/employee is working for the principal. 95) D Courts consider a number of factors in determining whether an act committed by an employee occurred within the course and scope of employment, including whether the employer authorized the employee's act, whether the employer provided the tools by which the act occurred, and whether the employer knew that the act would involve the commission of a serious crime. 96) C
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If the third party is able to establish employee negligence such that the employer is liable, the employer has the right to recover from the employee any damages he paid to the third party as a result of the employee's negligence. This right to recover damages is referred to as the right of indemnification. 97) D If an independent contractor engages in extremely hazardous activities, such as blasting operations, for the principal, the principal will be responsible for any damages by the independent contractor. Because of their inherently dangerous nature, certain activities may result in strict liability. Thus, an employer cannot escape the strict liability associated with those hazardous activities simply by hiring an independent contractor to complete the activities. 98) E The agent's apparent authority continues until the principal notifies third parties that the agency relationship has ended. 99) D Constructive notice is how notice of termination of an agency agreement is generally announced. Constructive notice is most frequently delivered through publication in a generally circulating newspaper for the area where the agency agreement existed. 100) A If a manager has business transactions in one of the European Union countries and wants to terminate an agency relationship, he or she would want to have access to knowledge about the intricacies of Chapter IV of the Agency Relationship Law, which focuses on termination. 101) D An agency relationship can be terminated following certain events, including fulfillment of the agency’s purpose, the occurrence of a specific event, or revocation of the agent’s authority. Version 1
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102) E If the agent has somehow breached her fiduciary duty to the principal, the principal can revoke the agent's authority without being liable for damages to the agent. 103) B An agency coupled with an interest is a special kind of agency relationship. Unlike regular agency agreements, an agency coupled with an interest is created for the agent's benefit, not for the principal's. Given that the agent is the one who benefits, an agency coupled with an interest is also known as power given as security. Because the agency arrangement is created to benefit the agent, the principal may not terminate the relationship. Rather, the agency is terminated when an event occurs that discharges the principal’s obligation. 104) E If either the principal or the agent dies, the agency relationship is automatically terminated. Even if one party is unaware of the other party’s death, the agency relationship no longer exists. 105) D When a new law is passed subsequent to the formation of an agency agreement that makes the commission of the agency agreement illegal, the agency agreement is terminated. 106) E When a principal leads a third party to believe that another individual serves as his or her agent but the principal has made no agreement with the so-called agent, the principal has created an apparent agency. 107) A When a third party relies on the principal's conduct and makes an agreement with an apparent agent, the principal must uphold any agreements made by the agent. 108) A Version 1
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Apparent agency does not occur unless one party, by his actions, causes a third party to believe someone is his agent when that person actually has no authority. 109) A An independent contractor is a person who is hired to perform a task for another but who is not the other's employee. 110) A When the agent acts within her authority on behalf of an undisclosed principal, the law will likely hold the agent liable for the agreement. 111) E If the agent is liable to the third party, then the undisclosed principal is liable to the agent. 112) D Under the duty of loyalty, the agent has a duty to notify the principal of any offers from third parties. 113) A If an agent makes authorized, but not unauthorized, expenditures in the course of working on behalf of the principal, the principal has a duty to reimburse the agent for the amount of money spent. 114) E The duty of loyalty requires that the agent keep confidential any information about the principal during the course of agency, as well as after the agency relationship is terminated. 115) C When a principal enacts a constructive trust, the court rules that the agent is merely holding the property or goods in trust for the principal, granting the principal legal right or possession. 116) B If a third party does not know an agent is acting on behalf of a principal, the principal is classified as an undisclosed principal. Version 1
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117) E When the agent acts within her authority on behalf of an undisclosed principal, the law will likely hold the agent liable for the agreement. 118) A In the case of an agent acting within his authority for an undisclosed principal, if the agent is liable to the third party, then the undisclosed principal is liable to the agent. 119) A The doctrine of negligent hiring has been used when an agent commits a tort against a customer, who often argues that the principal is liable because he or she should have taken more care in hiring the agent. 120) E When a third party is injured through the negligence of an employee during the course of the employee's work, the third party can sue the employee. 121) E When a third party is injured through the negligence of an employee during the course of the employee's work, the third party can sue either the employee or the employer. 122) C The following facts point to Sally's status as an independent contractor: Bob's lack of substantial control over the day-to-day operations of the job and his lack of supervision, Sally's engagement in a distinct occupation, Sally's provision of her own tools, and Sally's entitlement to compensation only upon completion of the job. 123) B The following facts point to the status of Trudy, Glen, and Fred as employees: they were paid hourly, they were provided tools, and they were supervised by Sally and told when to work. 124) A Version 1
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When a third party is injured through the negligence of an employee during the course of the employee's work, the third party can sue either the employee or the employer. 125) D An individual who hires an independent contractor to do activities that are not extremely hazardous cannot be held liable for the independent contractor's tortious actions under the doctrine of respondeat superior. 126) D The principal/employer, not other employees, holds vicarious liability (i.e., liability assigned without fault) for any harm caused by the agent/employee during the time the agent/employee is working for the principal. 127) A Agency relationships are consensual relationships formed by informal oral agreements or formal written contracts. 128) A Under the law of the Grand Duchy of Luxembourg, the person for whom the power of attorney is acting on behalf is called a donor instead of a principal. 129) C Independent contractors cannot enter into contracts on behalf of the principal unless authorized to do so by the principal. 130) A An agency relationship is a fiduciary relationship of trust, confidence, and good faith. 131) D If the agent is successful in bringing a suit against the principal, the agent is entitled to contract or tort remedies. 132) A
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If the third party reasonably believes that the agent has authority to represent the principal, the principal must uphold any agreements made with the agent, who has apparent authority 133) A If a third party is aware that an agent is making an agreement on behalf of a principal, but the third party is unaware of the identity of the principal, the principal is classified as a partially disclosed principal or an unidentified principal. 134) A If the principal or agent files a bankruptcy petition, the agency relationship is generally no longer in existence. 135) More and more companies are expanding their commercial ventures to overseas markets. American companies often run into legal difficulties in other countries. The problems may arise from a language barrier or simply a lack of knowledge about local laws. Agents may help avoid such problems by being familiar with local laws, customs, and customers. 136) Two requirements are needed for agency by ratification: 1. An individual must misrepresent himself or herself as an agent for another party; and 2. The principal accepts or ratifies the unauthorized act. For ratification to be effective, two additional requirements must be met: 1. The principal must have complete knowledge of all material facts regarding the contract; and 2. The principal must ratify the entirety of the agent's act.
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137) Under the duty of accounting, the agent must keep an accurate account of the transactions of money and property made on behalf of the principal. In order to satisfy the duty of accounting, if the principal requests to see the accounting, the agent has a duty to provide the principal with the accounting. Part of the duty of accounting is the duty of the agent to keep separate accounts for the principal's funds and the agent's funds. 138) When express authority is granted for an agent to enter into a contract legally required to be in writing, most states require the grant of authority to also be in writing. This requirement is known as the equal dignity rule. When an agency agreement fails to adhere to the equal dignity rule, the subsequent contracts are typically considered voidable by the principal. This rule is based on the statute of frauds. There are two key exceptions to the equal dignity rule. The first pertains to executive officers. When the executive officer is conducting business in the usual course of her job, she need not obtain written approval from the corporation for every decision she makes. The second exception is rooted in common sense. The equal dignity rule does not apply to the agent when the agent is working in the direct presence of the principal.
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139) The rationale behind the doctrine is that employers should be held liable for employees who commit torts because the employer is furthering his or her business through the work of the employee. If the employer is benefiting by the work of the employee, the employer should also be responsible for the harms caused by the employee. Student responses will vary regarding whether the doctrine is appropriate. On one hand, it seems unfair to hold a business owner liable for acts of negligence that were not his or her own. On the other hand, the employer hired the agent or employee and is benefiting from work performed. Additionally, the doctrine should encourage the exercise of care in hiring employees. 140) Cindy should be held liable. Melinda was not acting on behalf of Cindy when the accident occurred. She did not, however, make a substantial departure from the business of the employer; therefore, Cindy would be subject to liability.
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CHAPTER 21 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) In a sole proprietorship, the sole proprietor is in exclusive control of the management of the business and its profits. ⊚ true ⊚ false
2)
A sole proprietorship requires very few legal formalities. ⊚ true ⊚ false
3)
A sole proprietorship is considered a legal entity separate from its owner. ⊚ true ⊚ false
4) A voluntary association between two (2) or more people who co-own a business for profit is known as a corporation. ⊚ true ⊚ false
5)
In a partnership, business income is taxed as individual income for each partner. ⊚ true ⊚ false
6)
Technically, a written agreement is not required to create a partnership. ⊚ true ⊚ false
7)
A written agreement that creates a partnership is called the articles of organization. ⊚ true ⊚ false
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8)
A limited partnership is an agreement between at least two (2) general partners. ⊚ true ⊚ false
9) A limited partnership and a limited liability partnership refer to the same type of business organization. ⊚ true ⊚ false
10) A limited partnership is a legal entity formed by issuing stock to investors, who are the owners of the limited partnership. ⊚ true ⊚ false
11)
A corporation is not considered a legal entity separate from its shareholders. ⊚ true ⊚ false
12) Members of the board of directors of a corporation are appointed by the chief executive officer of the corporation. ⊚ true ⊚ false
13)
Officers of a corporation are hired by the shareholders. ⊚ true ⊚ false
14)
Corporate income is taxed twice. ⊚ true ⊚ false
15)
An S corporation is a corporation that is taxed like a partnership.
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⊚ ⊚
16)
true false
An S corporation can have up to 500 shareholders. ⊚ true ⊚ false
17) A limited liability company (LLC) is an unincorporated business that has the tax advantages of a partnership and the limited liability of a corporation. ⊚ true ⊚ false
18) Limited liability companies typically want to do business in states other than the state in which they are formed, and they usually need to register in every additional state in which they want to operate. This process is referred to as substantiation. ⊚ true ⊚ false
19) In a manager-managed limited liability company, the managers must be members of the business. ⊚ true ⊚ false
20) Incorporated cooperatives are treated like partnerships, meaning that members share joint liability for the cooperative’s actions. ⊚ true ⊚ false
21) A joint stock company is a partnership agreement in which company members hold transferable shares, while all the goods of the company are held in the names of the partners. ⊚ true ⊚ false
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22) A franchisee is an owner of a trade name or trademark, while a franchisor is a person who sells goods or services under the trade name or trademark. ⊚ true ⊚ false
23) Distributorships are franchises in which the franchisor manufactures a product and licenses a dealer to sell the product in a non-exclusive territory. ⊚ true ⊚ false
24) In a chain-style business operation, the franchisor provides the franchisee with the formula or necessary ingredient to manufacture a product. ⊚ true ⊚ false
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 25) Brittany decides to go into a veterinary business on her own. This type of control and management is known as a(n) _____. A) agency B) sole proprietorship C) sole partnership D) entrepreneurship agreement E) limited liability company
26)
Which of the following is false regarding a sole proprietorship? A) A sole proprietorship requires few legal formalities. B) A sole proprietor has complete control of the management of the business. C) The sole proprietor keeps all the profits from the business. D) Profits are taxed as the personal income of the sole proprietor. E) A sole proprietor is not personally liable for the obligations of the business.
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27) Which of the following is the most popular form of business organization in the United States? A) The limited liability partnership B) The S corporation C) The C corporation D) The sole proprietorship E) The limited liability company
28) Joseph and David decide to form and co-own an unincorporated business that will sell custom sweatshirts. This type of business is a(n) _____. A) limited liability partnership B) limited liability corporation C) S corporation D) partnership E) C corporation
29)
The Uniform Partnership Act (UPA) _____. A) requires partners to disclose all business assets to the Internal Revenue Service (IRS) B) governs the bankruptcy procedure for all partnerships C) governs partnerships in most states in the absence of an express agreement D) establishes the maximum number of limited partners allowed in a general partnership E) establishes the maximum number of general partners allowed in a general partnership
30)
Which of the following is false regarding a partnership? A) It is easy to create. B) Partnership income is treated as the personal income of the partners. C) Business losses can be deducted from the tax obligations of the partners. D) Each partner is considered an agent of the partnership. E) In most cases, partners do not have personal liability for business losses.
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31)
The _____ is a written agreement that creates a partnership. A) partnership addendum B) agency of partnership agreement C) articles of organization D) articles of partnership E) partnership certificate
32) A partnership in which the partners divide the profits and management responsibilities and share unlimited personal liability for the partnership's debts is called a(n) _____. A) general partnership B) limited partnership C) limited liability partnership D) S corporation E) limited liability company
33)
There are several types of partnership agreements, including the _____ partnership. A) limited liability B) sole proprietor C) C corporation limited D) shareholder-managed E) S corporation limited
34) In a limited liability partnership, the partners' liability for professional malpractice is _____. A) equally shared by the individual partners B) limited to the partnership C) relegated to a trust for tax purposes D) determined by state statute E) determined by the articles of organization
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35)
Which of the following is false regarding a limited liability partnership?
A) A limited liability partnership is considered a separate legal entity. B) It is a fairly new type of business organization. C) Its business name must include the words "Limited Liability Partnership" or the abbreviation "LLP." D) The parties must file a form with the secretary of the state to create it. E) Each partner pays taxes on his or her share of the income of the business.
36)
A corporation is a legal entity formed by _____.
A) federal statutory guidelines that vary according to the type of good or service the business offers to the public B) filing articles of organization with the United States Secretary of State’s office C) filing articles of organization with the United State Attorney General’s office D) establishing a formal public-private partnership with the state in which the corporation will have its principal place of business E) issuing stock to investors
37)
Who are the investor-owners of a corporation? A) General partners B) Stakeholders C) Limited partners D) Limited liability partners E) Shareholders
38)
Who has the responsibility of managing the business of a corporation? A) The corporation’s shareholders B) The corporation’s stakeholders C) The corporation’s board of directors D) The corporation’s general partners E) The corporation’s registered agent
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39)
Who has the responsibility of running the day-to-day business of a corporation? A) The corporation’s board of directors B) The corporation’s stakeholders C) The corporation’s officers D) The corporation’s registered agent(s) E) The corporation’s principal shareholder(s)
40)
Which of the following is true regarding corporations other than S corporations?
A) A corporation does not have an identity separate from its owners (i.e., its shareholders). B) A corporation may not sue on its own behalf or be sued. C) A corporation is created according to federal, not state, law. D) A corporation’s shareholders are typically liable for its debts. E) A corporation’s shareholders must pay taxes on dividends they receive from the corporation.
41) A(n) _____ is a business organization formed under federal tax law that is considered a corporation but is taxed like a partnership (if it follows certain regulations). A) strategic alliance B) C corporation C) joint venture D) S corporation E) limited partnership
42)
Which of the following is true regarding an S corporation?
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A) It is considered a partnership but is taxed like a corporation. B) It cannot have more than eighty (80) shareholders. C) Its shareholders do not report profit on their personal income tax forms. D) It is formed under federal tax law. E) Its income is not taxed when distributed to shareholders.
43)
Which of the following is false regarding the limited liability company?
A) Wyoming first recognized it as a type of business organization. B) It has the limited liability of partnership but is taxed like a corporation. C) It must file a form with a state agency. D) Its name must include the words "Limited Liability Company" or an abbreviation of those words. E) Its owners are referred to as members.
44) Which of the following is a process that involves a limited liability company (LLC) filing a certificate of authority or a similar document and getting a business license in each state in which the LLC plans to operate (other than the state in which it was formed)? A) Incorporation B) Qualification C) Substantiation D) Matriculation E) Certification
45) If Pablo wants to sue Homer’s Industrial Supply, LLC (Homer’s), where is Homer’s considered a citizen for the purposes of jurisdiction? A) Its state of incorporation B) The state where its board of directors meets C) Any state where its members reside D) The state where it has its principal place of business E) The state in which Pablo chooses to sue (i.e., in determining where to sue a limited liability company, the plaintiff has the choice of jurisdiction)
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46) According to the Uniform Limited Liability Company Act (ULLCA), unless the operating agreement specifies otherwise, a limited liability company is _____. A) member-managed B) manager-managed C) managed by its stakeholders D) managed by its board of directors E) managed by its corporate officers
47) A _____ is a partnership agreement in which company members hold transferable shares, while all the goods of the company are held in the names of the partners. A) joint stock company B) strategic alliance C) joint venture D) limited liability partnership E) professional limited liability company
48)
What is a business trust? A) A joint enterprise that issues non-transferable, privately-held stock B) A limited partnership organized for the purpose of operating a new business venture C) A limited liability partnership organized for the purpose of operating a new business
venture D) A for-profit corporation that conducts charitable work as its exclusive mission E) A business organization governed by a group of trustees who operate the trust for its beneficiaries
49) Alejandro and Dalton are part of a group organized specifically to raise financial capital for the construction of a world-class indoor tennis center. This type of investment group is known as a(n) _____.
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A) limited partnership B) member-managed LLC C) S corporation D) 501(c)(3) corporation E) syndicate
50)
Which of the following is true regarding a joint venture?
A) Generally, a joint venture is taxed like a corporation. B) If a joint venture member dies, the joint venture automatically terminates. C) A joint venture member is an agent for the other members. D) A joint venture may be formed without drawing up a formal agreement. E) Sole proprietorship law applies to the formation, operation, and termination of a joint venture.
51) Which of the following is a business arrangement between the owner of a trade name or trademark and a person who sells goods or services under that trade name or trademark? A) A joint venture B) A franchise C) A limited partnership D) A syndicate E) A limited liability company
52) Johnathan is a franchisee who operates under Burger King’s name, franchise rules, and methods of business operation. What type of business operation is this? A) A franchise-to-market operation B) A producer-to-retailer distribution channel C) A chain-style business operation D) An arrangement-in-kind E) A “commercial standards” agreement
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53) A _____ is a franchise in which the franchisor manufactures a product and licenses a dealer to sell the product in an exclusive territory. A) distributorship B) manufacturing arrangement C) chain-style business operation D) syndicate E) commercial partnership
54) Dillard’s Eatery, Inc. (Dillard’s) is a famous restaurant chain that has a “secret formula” drink. As part of its franchise contract, Dillard’s has granted Paul, its franchisee, the right to prepare and sell this drink. What type of agreement do Dillard’s and Paul have? A) A reverse engineering agreement B) An outsourcing agreement C) A “B2B” transaction D) A franchisee exclusivity arrangement E) A franchisor exclusivity arrangement
55)
Which of the following is false regarding a franchise?
A) The franchisee often receives help from the franchisor in starting the franchise. B) The franchisor has the legal authority to ensure that the franchisee maintains the quality of goods and services associated with the franchise. C) The franchisor is not liable for torts of the franchisee's employees, regardless of the amount of control exerted by the franchisor. D) A franchise is a contractual relationship between the franchisor and the franchisee. E) The Federal Trade Commission (FTC) has a franchise rule requiring franchisors to present prospective franchisees with the material facts necessary for the franchisee to make an informed decision about entering a franchise relationship.
56) Which of the following do courts rely on in determining whether a franchise was wrongfully terminated?
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A) The written franchise agreement B) The Uniform Franchise Termination Act (UFTA) C) The Franchisor-Franchisee Protection Act (FFPA) D) The Franchise Protection Act (FPA) E) The Uniform Commercial Code (UCC)
57) Several of the painters and sculptors in Julian’s hometown have formed an organization in which they pool their resources (financial and otherwise) together in order to promote their works and otherwise attempt to gain an advantage in the hotly-competitive art market. This is known as a(n) _____. A) cooperative B) limited partnership C) joint venture D) S corporation E) 501(c)(3) corporation
58)
Which of the following is false regarding a cooperative?
A) Legally, an unincorporated cooperative is treated like a partnership. B) In an unincorporated cooperative, members share joint liability for the cooperative's actions. C) Members of an incorporated cooperative enjoy limited liability just like the shareholders of a corporation. D) A cooperative is usually formed as a syndicate. E) A cooperative is usually formed to market products.
59) When and where was the limited liability company (LLC) first recognized as a form of business organization in the United States?
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A) 1952, in New York B) 1968, in Washington, D.C. C) 1969, in California D) 1977, in Wyoming E) 2002, in Florida
60) Which of the following is false regarding a manager-managed limited liability company (LLC)? A) The managers of a manager-managed LLC have the apparent authority to enter into contracts on behalf of the LLC. B) The managers of a manager-managed LLC have the actual authority to enter into contracts on behalf of the LLC. C) In a manager-managed LLC, the members select a group of managers to manage the affairs of the company. D) The managers of a manager-managed LLC must be selected from the members of the LLC. E) The managers of a manager-managed LLC owe the LLC and its members the same fiduciary duties as the officers and directors of a corporation owe to the corporation and its shareholders.
61) Typically, the articles of organization of a limited liability company (LLC) include all but which of the following? A) The number of shares of stock (both common and preferred) the LLC is authorized to issue B) The name of the business C) The LLC’s principal business address D) The name and address of a registered agent for service E) Information regarding how the company's management will be structured
62) According to _____, after ninety (90) consecutive days with no members, a limited liability company (LLC) will dissolve.
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A) Federal Trade Commission (FTC) guidelines B) Interstate Commerce Commission (ICC) guidelines C) the Limited Liability Company Dissolution Act (LLCDA) D) the Uniform Limited Liability Company Act (ULLCA) E) the Uniform Commercial Code (UCC)
63)
A limited partnership is an agreement between at least one (1) _____ and one (1) _____. A) general partner; limited partner B) corporation; general partner C) general partner; registered agent D) limited partner; registered agent E) member of the partnership’s board of directors; partnership officer
64) In a limited partnership, who assumes unlimited personal liability for the debts of the partnership? A) General partners B) Limited partners C) Special partners D) General partners, limited partners, and special partners E) General partners and special partners, but not limited partners
65) In a limited partnership, who assumes no liability for the partnership beyond the capital they have invested? A) General partners B) Limited partners C) Special partners D) General partners, limited partners, and special partners E) General partners and special partners, but not limited partners
66)
In a limited partnership, who have no part in the management of the business?
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A) General partners B) Limited partners C) General partners and limited partners D) Owners E) General partners and owners
67)
Which of the following is true of a joint stock company? A) It is a mixture of a corporation and a partnership. B) It is a mixture of a corporation and a joint venture. C) It is a mixture of a partnership and a sole proprietorship. D) It is a mixture of a limited liability company (LLC) and a sole proprietorship. E) It is a mixture of a limited liability company (LLC) and a joint venture.
68) Which of the following was the result on appeal in Colette Bohatch v. Butler & Binion, the case in the textbook in which the plaintiff, the partner in a law firm, sued after she was expelled from the partnership following her complaint that one of the other partners was overbilling a client? A) That as a matter of public policy, the law firm was liable to her for damages B) That under federal law, the law firm was liable to her for damages because she was given insufficient notice of her expulsion C) That under state law, the law firm was liable to her for damages because she was given insufficient notice of her expulsion D) That she was properly expelled because the partner about whom she complained was senior to her in seniority E) That the law firm had a right to expel her regardless of her status as a whistleblower
69) Which of the following was the result in Cousins Subs Systems, Inc. v. Michael R. McKinney, the case in the textbook in which defendant McKinney asserted in a counterclaim that he was entitled to terminate an agreement requiring that he operate submarine sandwich shops because Cousins Subs Systems, Inc. failed to meet promises it verbally made to him?
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A) That based on principles of equity, McKinney could rely on oral statements in contradiction of the written agreement involved B) That the oral agreements could be relied upon by McKinney because they supplemented, rather than contradicted, the written agreement C) That the alleged oral agreements contradicted the written agreement signed by McKinney and would not, therefore, be considered D) The alleged oral statements should be considered by the jury in order to determine the actual agreement between the parties E) That the written agreement failed to set forth fair principles, but that the alleged oral agreements would be disregarded in favor of a form contract contained in the state's franchise law
70) Peanut Allergy. Kitty, who had a love of baking, decided to open her own bakery. She decided that she did not need and did not want to pay for a lawyer to advise her on different forms of ownership. Unfortunately, Kitty had not paid attention in business law class. She proceeded, with little thought, to simply open her business called Kitty's Baking. Bobby came in to order some cookies for his girlfriend, Bitsy, who was allergic to peanuts. Bobby told Kitty that he needed some cookies for Bitsy but that Bitsy had allergies to peanuts. Kitty told him not to worry because she would make up a special batch just for him. Kitty had hired some assistants because she was so busy. She told an assistant, Cathy, to make up several batches of cookies for different customers including Bobby and to leave out the peanuts in Bobby's order. Cathy, however, forgot the instruction and proceeded to make Bobby's cookies with crushed peanuts. Bobby picked up the cookies and gave one to Bitsy in the car while they were on the way to the movie in Bobby's new car. Bitsy became violently ill, vomited in Bobby's car, and had to have her stomach pumped. Bobby and Bitsy sought recovery from Kitty who told them that Bitsy's doctor bill and Bobby's car cleaning bill were business debts, that the business was new and not making any money at the moment, and that she had no personal liability. Following the incident involving Bobby and Bitsy, Kitty discussed with her parents her problems with the bakery. Kitty's parents would like to invest in her business and share in any profits, but they do not want to share in the management responsibilities. What type of business did Kitty initially set up? A) A limited liability company B) A sole proprietorship C) An individual proprietorship D) A traditional corporation E) An S corporation
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71) Peanut Allergy. Kitty, who had a love of baking, decided to open her own bakery. She decided that she did not need and did not want to pay for a lawyer to advise her on different forms of ownership. Unfortunately, Kitty had not paid attention in business law class. She proceeded, with little thought, to simply open her business called Kitty's Baking. Bobby came in to order some cookies for his girlfriend, Bitsy, who was allergic to peanuts. Bobby told Kitty that he needed some cookies for Bitsy but that Bitsy had allergies to peanuts. Kitty told him not to worry because she would make up a special batch just for him. Kitty had hired some assistants because she was so busy. She told an assistant, Cathy, to make up several batches of cookies for different customers including Bobby and to leave out the peanuts in Bobby's order. Cathy, however, forgot the instruction and proceeded to make Bobby's cookies with crushed peanuts. Bobby picked up the cookies and gave one to Bitsy in the car while they were on the way to the movie in Bobby's new car. Bitsy became violently ill, vomited in Bobby's car, and had to have her stomach pumped. Bobby and Bitsy sought recovery from Kitty who told them that Bitsy's doctor bill and Bobby's car cleaning bill were business debts, that the business was new and not making any money at the moment, and that she had no personal liability. Following the incident involving Bobby and Bitsy, Kitty discussed with her parents her problems with the bakery. Kitty's parents would like to invest in her business and share in any profits, but they do not want to share in the management responsibilities. Which of the following is true regarding Kitty's statement that she had no personal liability? A) She was correct. B) She was correct, but only if she can establish that she has paid all her business taxes on time. C) She was correct, but only if she can establish that she has at least five (5) employees. D) She was incorrect. E) She was incorrect, unless she signed an agreement with a financial institution in order to get a loan for the business and agreed in the document that she would not accept personal liability for any losses.
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72) Peanut Allergy. Kitty, who had a love of baking, decided to open her own bakery. She decided that she did not need and did not want to pay for a lawyer to advise her on different forms of ownership. Unfortunately, Kitty had not paid attention in business law class. She proceeded, with little thought, to simply open her business called Kitty's Baking. Bobby came in to order some cookies for his girlfriend, Bitsy, who was allergic to peanuts. Bobby told Kitty that he needed some cookies for Bitsy but that Bitsy had allergies to peanuts. Kitty told him not to worry because she would make up a special batch just for him. Kitty had hired some assistants because she was so busy. She told an assistant, Cathy, to make up several batches of cookies for different customers including Bobby and to leave out the peanuts in Bobby's order. Cathy, however, forgot the instruction and proceeded to make Bobby's cookies with crushed peanuts. Bobby picked up the cookies and gave one to Bitsy in the car while they were on the way to the movie in Bobby's new car. Bitsy became violently ill, vomited in Bobby's car, and had to have her stomach pumped. Bobby and Bitsy sought recovery from Kitty who told them that Bitsy's doctor bill and Bobby's car cleaning bill were business debts, that the business was new and not making any money at the moment, and that she had no personal liability. Following the incident involving Bobby and Bitsy, Kitty discussed with her parents her problems with the bakery. Kitty's parents would like to invest in her business and share in any profits, but they do not want to share in the management responsibilities. Which of the following would be a form of business organization for Kitty and her parents such that her parents could invest but not participate in management? A) The general partnership B) The limited partnership C) The cooperative partnership D) The strategic partnership E) The 501(c)(3) corporation
73) Tutoring Concerns. Wally and Sally want to go into business together and plan on offering a tutoring service to high school and college students. Wally proposes that they share control of the business and split profits equally and not bother with a written agreement. Sally, however, is concerned about being able to pay their debts because they will have to rent tutoring space and purchase computers and supplies. She is also concerned about parents and students who may sue if the students' test scores do not improve. She tells Wally that she just bought a new boat and car, and that she does not want her assets to be in jeopardy. She tells Wally that they should form a corporation to shield their personal assets. Wally, however, says their personal assets are not in danger with his proposal because they are a business and that, furthermore, forming a corporation would likely result in double taxation. What type of arrangement did Wally propose with his suggestion that they share control of the business and split profits equally? Version 1
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A) A joint sole proprietorship B) A partnership C) A corporation D) An S corporation E) A limited partnership
74) Tutoring Concerns. Wally and Sally want to go into business together and plan on offering a tutoring service to high school and college students. Wally proposes that they share control of the business and split profits equally and not bother with a written agreement. Sally, however, is concerned about being able to pay their debts since they will have to rent tutoring space and purchase computers and supplies. She is also concerned about parents and students who may sue if the students' test scores do not improve. She tells Wally that she just bought a new boat and car, and that she does not want her assets to be in jeopardy. She tells Wally that they should form a corporation to shield their personal assets. Wally, however, says their personal assets are not in danger with his proposal because they are a business and that, furthermore, forming a corporation would likely result in double taxation. Is Wally correct that with his proposal that because they share control of the business and split profits equally, they will not have any personal liability for debts? A) Yes, he is correct so long as they do not reach an agreement in writing. B) Yes, he is correct because they will be considered a partnership regardless of whether any agreement is in writing. C) Yes, because so long as they have nothing in writing, their arrangement will be considered a joint venture. D) No, he is incorrect because members of the corporate form chosen would be personally liable for debt. E) No, he is incorrect because partners have personal liability for debt.
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75) Tutoring Concerns. Wally and Sally want to go into business together and plan on offering a tutoring service to high school and college students. Wally proposes that they share control of the business and split profits equally and not bother with a written agreement. Sally, however, is concerned about being able to pay their debts because they will have to rent tutoring space and purchase computers and supplies. She is also concerned about parents and students who may sue if the students' test scores do not improve. She tells Wally that she just bought a new boat and car, and that she does not want her assets to be in jeopardy. She tells Wally that they should form a corporation to shield their personal assets. Wally, however, says their personal assets are not in danger with his proposal because they are a business and that, furthermore, forming a corporation would likely result in double taxation. Is Wally correct that forming a corporation would likely result in double taxation? A) Yes, because the corporation would be required to pay tax on its profits, and the shareholders would also be required to pay taxes on dividends. B) No, Wally is incorrect because all businesses are taxed in the same manner. C) No, Wally is incorrect but only because the law involving taxation of corporations does not apply until there are at least ten (10) shareholders. D) No, Wally is incorrect but only because the law involving taxation of corporations does not apply until there are at least seventy-five (75) shareholders. E) Yes, Wally is correct but only because his proposal does not involve a writing and the filing of paperwork with the secretary of state.
76) Tutoring Concerns. Wally and Sally want to go into business together and plan on offering a tutoring service to high school and college students. Wally proposes that they share control of the business and split profits equally and not bother with a written agreement. Sally, however, is concerned about being able to pay their debts because they will have to rent tutoring space and purchase computers and supplies. She is also concerned about parents and students who may sue if the students' test scores do not improve. She tells Wally that she just bought a new boat and car, and that she does not want her assets to be in jeopardy. She tells Wally that they should form a corporation to shield their personal assets. Wally, however, says their personal assets are not in danger with his proposal because they are a business and that, furthermore, forming a corporation would likely result in double taxation. What type of arrangement, if any, would avoid double taxation for Wally and Sally'sendeavor?
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A) An S corporation B) A limited liability company C) A corporation D) An S corporation, a limited liability company, or a corporation E) An S corporation or a limited liability company, but not a corporation
77) Chocolate Chips. Molly makes great chocolate chip cookies and sells them. She calls them "Molly's Famous Chocolate Chips." Some of her friends are interested in selling her cookies. They want to use her name and identify the cookies as "Molly's Famous Chocolate Chips." Molly says, however, that she does not have enough time to bake any more cookies. She agrees, for a price, to allow her friends to use her recipe and her name. Suzette, one of Molly's friends who was selling the cookies, was not being sufficiently careful and negligently put a harmful ingredient into the cookie dough resulting in a customer, Fred, becoming ill. Fred threatens to sue both Suzette and Molly. Molly is so exasperated that she cancels all the franchise contracts on the basis of aggravation although the franchise agreements provided that so long as requirements were met, the franchise agreements were good for a period of two years, Molly took the position that the cookies involved a personal service and that she could not be held liable for discontinuation. What type of arrangement did Molly make with her friends? A) A franchise that was a production-style business operation B) A franchise that was a distributorship C) A franchise that was a manufacturing arrangement D) A franchise that was a manufacturing distributorship E) A joint venture
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78) Chocolate Chips. Molly makes great chocolate chip cookies and sells them. She calls them "Molly's Famous Chocolate Chips." Some of her friends are interested in selling her cookies. They want to use her name and identify the cookies as "Molly's Famous Chocolate Chips." Molly says, however, that she does not have enough time to bake any more cookies. She agrees, for a price, to allow her friends to use her recipe and her name. Suzette, one of Molly's friends who was selling the cookies, was not being sufficiently careful and negligently put a harmful ingredient into the cookie dough resulting in a customer, Fred, becoming ill. Fred threatens to sue both Suzette and Molly. Molly is so exasperated that she cancels all the franchise contracts on the basis of aggravation although the franchise agreements provided that so long as requirements were met, the franchise agreements were good for a period of two years, Molly took the position that the cookies involved a personal service and that she could not be held liable for discontinuation. Will Molly likely be held liable to Fred? A) Yes, but only if Suzette has officially filed for bankruptcy protection. B) Yes, but only if Suzette is insolvent. C) Yes, because the cookies had her name on them. D) No, because she was a franchisor. E) It is unclear and depends on whether she exercised too much authority in the day-today affairs of Suzette's business.
79) Chocolate Chips. Molly makes great chocolate chip cookies and sells them. She calls them "Molly's Famous Chocolate Chips." Some of her friends are interested in selling her cookies. They want to use her name and identify the cookies as "Molly's Famous Chocolate Chips." Molly says, however, that she does not have enough time to bake any more cookies. She agrees, for a price, to allow her friends to use her recipe and her name. Suzette, one of Molly's friends who was selling the cookies, was not being sufficiently careful and negligently put a harmful ingredient into the cookie dough resulting in a customer, Fred, becoming ill. Fred threatens to sue both Suzette and Molly. Molly is so exasperated that she cancels all the franchise contracts on the basis of aggravation although the franchise agreements provided that so long as requirements were met, the franchise agreements were good for a period of two years, Molly took the position that the cookies involved a personal service and that she could not be held liable for discontinuation. Is Molly correct that she was entitled to cancel all franchise agreements?
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A) No, she was not entitled to cancel any franchise agreements. B) No, while she was arguably justified in canceling Suzette's franchise agreement, she was not justified in canceling other franchise agreements because no breach of the other franchise agreements had occurred. C) No, she could only cancel all franchises after a judgment was entered against her, and that had not yet occurred. D) Yes, because a personal service type of franchise was involved, she could cancel all the franchises at will. E) Yes, she can cancel the franchises but only if she can establish that her profits were less than had been expected.
80) Community Fair. Craig and Melinda are searching for a one-time business opportunity that will enable them to make a sufficient amount of cash to take a really great vacation to Galapagos. They live in a rather small rural community that has not, to date, had a community fair. Craig and Melinda decide to sponsor a fair on a weekend in October and to arrange for exhibits and awards, beauty contests, pie eating contests, food vendors, and amusement rides. The profit to Craig and Melinda will come from ticket sales and from charges to food vendors for the privilege of setting up shop. Apart from some minor skirmishes between Craig and Melinda regarding management rights, preparations go fairly well. When the weekend of the fair arrives, things initially go fairly smoothly. Unfortunately, however, one of the beauty contestants slipped on the runway. An argument broke out during the pie eating contests resulting in angry contestants throwing pies and injuring spectators. Finally, an elderly lady, who was angry because she did not win the prize for the best honey, jabbed the volunteer judge with her cane. All injured parties threaten to sue Craig and Melinda. Craig tells Melinda that she should bear the larger percentage of any damages because the idea for the fair was initially hers, and she obtained all necessary permits. Melinda, on the other hand, tells Craig that he should be wholly responsible for any damages because he was put in charge of all competitions. They can reach no agreement regarding winding up the project and splitting the meager profits, and angrily go their separate ways with no resolution. As she is leaving, Melinda shouts to Craig that as her agent he should have done a better job with security. Which of the following is the type of business organization that best fits Craig and Melinda's project? A) A partnership B) A double proprietorship C) A business trust D) A joint venture E) A distributorship
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81) Community Fair. Craig and Melinda are searching for a one-time business opportunity that will enable them to make a sufficient amount of cash to take a really great vacation to Galapagos. They live in a rather small rural community that has not, to date, had a community fair. Craig and Melinda decide to sponsor a fair on a weekend in October and to arrange for exhibits and awards, beauty contests, pie eating contests, food vendors, and amusement rides. The profit to Craig and Melinda will come from ticket sales and from charges to food vendors for the privilege of setting up shop. Apart from some minor skirmishes between Craig and Melinda regarding management rights, preparations go fairly well. When the weekend of the fair arrives, things initially go fairly smoothly. Unfortunately, however, one of the beauty contestants slipped on the runway. An argument broke out during the pie eating contests resulting in angry contestants throwing pies and injuring spectators. Finally, an elderly lady, who was angry because she did not win the prize for the best honey, jabbed the volunteer judge with her cane. All injured parties threaten to sue Craig and Melinda. Craig tells Melinda that she should bear the larger percentage of any damages because the idea for the fair was initially hers, and she obtained all necessary permits. Melinda, on the other hand, tells Craig that he should be wholly responsible for any damages because he was put in charge of all competitions. They can reach no agreement regarding winding up the project and splitting the meager profits, and angrily go their separate ways with no resolution. As she is leaving, Melinda shouts to Craig that as her agent he should have done a better job with security. Which of the following is true regarding management rights to the project? A) Unless an agreement gives one party greater management responsibilities, Craig and Melinda would share equal management for the task for which they have come together. B) For this type of project, generally state law requires that responsibilities of management be specifically assigned in writing to one of the parties. C) For this type of project, generally state law requires that responsibilities of management be specifically assigned to one of the parties, but the assignment may be oral. D) In the absence of an agreement between the parties, the party who filed for the business license for the project is charged with management responsibilities. E) Regardless of any agreement existing between the parties, the party who filed for the business license for the project is charged with management responsibilities.
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82) Community Fair. Craig and Melinda are searching for a one-time business opportunity that will enable them to make a sufficient amount of cash to take a really great vacation to Galapagos. They live in a rather small rural community that has not, to date, had a community fair. Craig and Melinda decide to sponsor a fair on a weekend in October and to arrange for exhibits and awards, beauty contests, pie eating contests, food vendors, and amusement rides. The profit to Craig and Melinda will come from ticket sales and from charges to food vendors for the privilege of setting up shop. Apart from some minor skirmishes between Craig and Melinda regarding management rights, preparations go fairly well. When the weekend of the fair arrives, things initially go fairly smoothly. Unfortunately, however, one of the beauty contestants slipped on the runway. An argument broke out during the pie eating contests resulting in angry contestants throwing pies and injuring spectators. Finally, an elderly lady, who was angry because she did not win the prize for the best honey, jabbed the volunteer judge with her cane. All injured parties threaten to sue Craig and Melinda. Craig tells Melinda that she should bear the larger percentage of any damages because the idea for the fair was initially hers, and she obtained all necessary permits. Melinda, on the other hand, tells Craig that he should be wholly responsible for any damages because he was put in charge of all competitions. They can reach no agreement regarding winding up the project and splitting the meager profits, and angrily go their separate ways with no resolution. As she is leaving, Melinda shouts to Craig that as her agent he should have done a better job with security. Which of the following is true regarding any agency relationships between Craig and Melinda? A) They were both agents of each other. B) Neither was the agent of the other. C) They were agents of each other for contracts only. D) They were agents of each other for finances only. E) They were agents of each other for insurance purposes only.
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83) Community Fair. Craig and Melinda are searching for a one-time business opportunity that will enable them to make a sufficient amount of cash to take a really great vacation to Galapagos. They live in a rather small rural community that has not, to date, had a community fair. Craig and Melinda decide to sponsor a fair on a weekend in October and to arrange for exhibits and awards, beauty contests, pie eating contests, food vendors, and amusement rides. The profit to Craig and Melinda will come from ticket sales and from charges to food vendors for the privilege of setting up shop. Apart from some minor skirmishes between Craig and Melinda regarding management rights, preparations go fairly well. When the weekend of the fair arrives, things initially go fairly smoothly. Unfortunately, however, one of the beauty contestants slipped on the runway. An argument broke out during the pie eating contests resulting in angry contestants throwing pies and injuring spectators. Finally, an elderly lady who was angry because she did not win the prize for the best honey jabbed the volunteer judge with her cane. All injured parties threaten to sue Craig and Melinda. Craig tells Melinda that she should bear the larger percentage of any damages because the idea for the fair was initially hers, and she obtained all necessary permits. Melinda, on the other hand, tells Craig that he should be wholly responsible for any damages because he was put in charge of all competitions. They can reach no agreement regarding winding up the project and splitting the meager profits, and angrily go their separate ways with no resolution. As she is leaving, Melinda shouts to Craig that as her agent he should have done a better job with security. Which of the following is true regarding the liability of Craig and Melinda for the fair? A) Each party can be held responsible for the liability of the other. B) Craig is solely responsible because he was charged with handling security. C) The party who obtained the business license is solely responsible. D) Under state law, neither party is generally exposed to liability in this type of project. E) Under state law, it is generally required that the parties agree on the issue of liability prior to starting the project and file a copy of the liability agreement with the appropriate state agency.
84)
Arguably, the most important duty that a partner has to another partner is her _____ duty. A) fiduciary B) limited C) special D) general E) non-disclosed agency
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85) An increasingly important advantage of the limited liability company is that its members _____. A) need not be citizens or permanent residents of the United States (U.S.) B) must be citizens of the U.S. C) can be citizens of countries other than the U.S. if they have permanent work visas D) can have the business incorporated overseas but recognized in the U.S. E) can also be part owners of an S corporation in the U.S. if they are from a foreign nation
86) If a limited liability company (LLC) is doing business in a state other than the one in which it was incorporated, the LLC is referred to as a(n) _____. A) unincorporated company B) foreign company C) interstate corporation D) bistate incorporation E) qualified corporation
87) Which of the following federal administrative agencies has a rule requiring franchisors to present prospective franchisees with materials necessary for the franchisee to make an informed decision about entering a franchise relationship? A) The Federal Trade Commission (FTC) B) The Federal Communications Commission (FCC) C) The Securities and Exchange Commission (SEC) D) The Uniform Commerce Commission (UCC) E) The Interstate Commerce Commission (ICC)
88) Under the Uniform Limited Liability Company Act (ULLCA) and most state limited liability company (LLC) statutes, a member’s voluntary withdrawal from the LLC, referred to as _____, does not terminate the LLC.
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A) elective termination B) symbolic disassociation C) dissociation D) statutory withdrawal E) winding up
ESSAY. Write your answer in the space provided or on a separate sheet of paper. 89) List the advantages and disadvantages of the sole proprietorship form of business organization.
90)
List the advantages and disadvantages of forming a corporation.
91) Brice just finished a residency in internal medicine and wants to go into practice with Horace and Joyce. Brice tells you that while he needs to practice with other physicians for call coverage and for other reasons, he does not want to be personally liable should the other physicians be found guilty of malpractice. You discuss various incorporation options with him, but he tells you that he would like to form a partnership. What business form would you recommend to him and why?
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92) Define what a joint venture is and explain two (2) legal differences between a joint venture and a partnership.
93)
Describe what a distributorship franchise is and provide an example.
94) Suzanne wants to open a litigation support services business and market to attorneys for their needs in trial preparation such as copying documents, the preparation of exhibits, and the service of subpoenas. She expects to hire three (3) employees to assist her. Assuming she has sufficient funding, what type of business form(s) would you encourage her to adopt and why?
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Answer Key Test name: Chap 21_5_The Essentials_Kubasek 1) TRUE If you decide to go into business on your own, you are creating a sole proprietorship. In a sole proprietorship, you, as the sole proprietor, are in sole control of the management and the profits. 2) TRUE A sole proprietorship requires very few legal formalities. Thus, one advantage of the sole proprietorship is the ease of creating such a business. 3) FALSE The sole proprietorship is not considered a separate legal entity. Thus, sole proprietorships are terminated when the sole proprietor dies. 4) FALSE A voluntary association between two or more people who co-own a business for profit is called a partnership. 5) TRUE Because a partnership is generally not considered to be a separate legal entity, the income from the business is taxed as individual income for each partner, and because the income is taxed as personal income, the partners can deduct the business losses. 6) TRUE Although an explicit written agreement is not required to create a partnership, the partners are advised to create one. The written agreement ensures that the terms of the partnership will be upheld. 7) FALSE A written agreement that creates a partnership is called the articles of partnership. Version 1
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8) FALSE A limited partnership is an agreement between at least one general partner and at least one limited partner, with the limited partner or partners having no part in the management of the company. 9) FALSE A limited partnership is a partnership consisting of at least one general partner and at least one limited partner in which the general partners assume all liability for the partnership's debts, and the limited partners assume no liability beyond their originally invested capital. A limited liability partnership is a partnership in which all the partners assume liability for any partner's professional malpractice to the extent of the partnership's assets. 10) FALSE A corporation is a legal entity formed by issuing stock to investors, who are the owners of the corporation. A limited partnership is a partnership consisting of at least one general partner and at least one limited partner in which the general partners assume all liability for the partnership's debts and the limited partners assume no liability beyond their originally invested capital. 11) FALSE A corporation is considered a separate legal entity. 12) FALSE Shareholders elect the board of directors, which is responsible for managing the business. 13) FALSE The board of directors hires officers to run the day-to-day business of the corporation. 14) TRUE
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Corporate income is taxed twice. First, the corporation must pay taxes on its profits. Second, the shareholders must pay taxes on the dividends they receive from the corporation. 15) TRUE An S corporation is a business organization formed under federal tax law that is considered a corporation yet is taxed like a partnership as long as it follows certain regulations. 16) FALSE An S corporation cannot have more than 100 shareholders. 17) TRUE One of the newest forms of business organizations in the United States is the limited liability company (LLC), an unincorporated form of business organization that combines the tax advantages and management flexibility of a partnership with the limited liability of a corporation. 18) FALSE Limited liability companies typically want to do business in states other than the state in which they are formed, and they usually need to register in every additional state in which they want to operate, a process typically referred to as qualification. 19) FALSE In a manager-managed LLC, the members select a group of managers to manage the affairs of the company. The managers may be members or may be nonmembers. The managers have the apparent and actual authority to enter into contracts on behalf of the LLC, whereas the members who are not managers do not have such authority. 20) FALSE
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Cooperatives may be incorporated or unincorporated.Unincorporated cooperatives are treated like partnerships, meaning that the members share joint liability for the cooperative’s actions. Members of incorporated cooperatives, on the other hand, enjoy limited liability just as do the shareholders of a corporation. 21) TRUE A joint stock company is a partnership agreement in which company members hold transferable shares, whereas all the goods of the company are held in the names of the partners.Thus, the joint stock company is a mixture of a corporation and a partnership. As with the corporation, the members who hold shares of stock own the joint stock company. As with the partnership, the shareholders have personal liability, and in most cases the company is not a separate legal entity. 22) FALSE A franchisor is an owner of a trade name or trademark, while a franchisee is a person who sells goods or services under the trade name or trademark. 23) FALSE Distributorships are franchises in which the franchisor manufactures a product and licenses a dealer to sell the product in an exclusive territory.A car dealership is an example of a distributorship. 24) FALSE In a chain-style business operation, the franchise operates under the franchisor’s business name and is required to follow the franchisor’s standards and methods of business operation. A manufacturing arrangement is a type of franchise in which the franchisor provides the franchisee with a formula or necessary ingredient to manufacture a product. 25) B
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If a person decides to go into business on his or her own, a sole proprietorship is created. A sole proprietorship is a business in which one person (the sole proprietor) is in control of the management and profits of the business. 26) E A sole proprietor is personally liable for any losses or any obligations associated with the business. 27) D Sole proprietorships are by far the most popular form of business organization in the United States. 28) D A partnership is a voluntary association between two or more persons who co-own a business for profit. 29) C The Uniform Partnership Act (UPA) governs partnerships in most states in the absence of an express agreement. 30) E In a partnership, each partner has personal liability for all losses, including those of another partner (in most cases). 31) D A written agreement that creates a partnership is called the articles of partnership. 32) A A general partnership is a partnership in which the partners divide profits and management responsibilities and share unlimited personal liability for the partnership's debts. 33) A The several types of partnerships are general partnerships, limited partnerships, and limited liability partnerships. 34) B Version 1
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The limited liability partnership is different from other forms of partnerships because the partners' liability for professional malpractice is limited to the partnership. 35) A The LLP is not considered a separate legal entity, and each partner pays taxes on his or her share of the income of the business. 36) E A corporation is a legal entity formed by issuing stock to investors. 37) E The investor-owners of a corporation are called shareholders. 38) C The board of directors is responsible for managing the business of a corporation. 39) C Officers run the day-to-day business of a corporation. 40) E The corporation must pay taxes on its profits, and the shareholders must pay taxes on the dividends they receive from the corporation. 41) D One way that a corporation can avoid double taxation is by forming an S corporation, a business organization formed under federal tax law that is considered a corporation yet is taxed like a partnership if it follows certain regulations. 42) D An S corporation is a business organization formed under federal tax law that is considered a corporation yet is taxed like a partnership as long as it follows certain regulations. 43) B Members of a limited liability company can choose whether to be taxed as a partnership or a corporation. Version 1
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44) B Qualification is the process that allows limited liability companies to do business in states other than the state in which they were formed. Qualification entails filing a certificate of authority or a similar document and getting a business license in each additional state in which the business plans to operate. 45) C In terms of jurisdiction, a limited liability company is considered a citizen of every state in which its members reside. 46) A According to the Uniform Limited Liability Company Act (ULLCA), unless the operating agreement specifies otherwise, limited liability companies are member-managed. In a member-managed limited liability company (LLC), all members participate in management, with decisions in the ordinary course of business activities made by a majority vote. 47) A A joint stock company is a partnership agreement in which company members hold transferable shares while all the goods of the company are held in the names of the partners.Thus, the joint stock company is a mixture of a corporation and a partnership. As with the corporation, the members who hold shares of stock own the joint stock company. As with the partnership, the shareholders have personal liability, and in most cases the company is not a separate legal entity. 48) E A business trust is a business organization governed by a group of trustees, who operate the trust for the beneficiaries. A written trust agreement establishes the duties and powers of the trustees and the interests of the beneficiaries. 49) E
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An investment group that comes together for the explicit purpose of financing a specific large project is a syndicate. 50) D Like a partnership, a joint venture may be formed without drawing up a formal agreement. 51) B A franchise is a business arrangement between an owner of a trade name or trademark and a person who sells goods or services under the trade name or trademark. 52) C In a chain-style business operation, the franchise operates under the franchisor's business name and is required to follow the franchisor's standards and methods of business operation. McDonald’s and Burger King are examples of chain-style business operations. 53) A Distributorships are franchises in which the franchisor manufactures a product and licenses a dealer to sell the product in an exclusive territory. A car dealership is an example of a distributorship. 54) B In a manufacturing arrangement, the franchisor provides the franchisee with a formula or necessary ingredient to manufacture a product. The franchisee then manufactures the product and sells it according to the franchisor’s standards. 55) C Although the franchisor has the legal authority to ensure that the franchisee maintains the quality of goods and services associated with the franchise, the franchisor must be cautious because if it exercises too much authority in the day-to-day affairs of the business, the franchisor could be held liable for the torts of the franchisee's employees. 56) A Version 1
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The franchise agreement establishes how the franchise will be terminated. Courts usually rely heavily on the written franchise agreement when determining whether a franchise was wrongfully terminated. 57) A A cooperative is an organization formed by individuals to market products. The cooperative is a business organization in which the members usually pool their resources together to gain some kind of advantage in the market. 58) D A cooperative is usually formed to market products, whereas a syndicate is an investment group that comes together for the explicit purpose of financing a specific large project. 59) D One of the newest forms of business organizations in the United States is the limited liability company, an unincorporated form of business organization that combines the tax advantages and management flexibility of a partnership with the limited liability of a corporation. This form of business organization was first recognized in the United States in 1977 in Wyoming, and is now recognized in every state. 60) D The managers of a manager-managed limited liability company (LLC) may be members or may be nonmembers. 61) A
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Although precise requirements vary by state, typically the articles of organization of a limited liability company include the name of the business (which must include the words “Limited Liability Company” or the initials “LLC”), its principal business address, the name and address of a registered agent for service, the names of the owners, and information about how the company’s management will be structured.Limited liability companies do not issue shares of stock. 62) D Under the Uniform Limited Liability Company Act (ULLCA), a limited liability company dissolves on the happening of any event that the operating agreement specifies will cause dissolution, the consent of all the members, the passage of ninety (90) consecutive days during which the company has no members, or the issuance of a court order for dissolution. 63) A A limited partnership is an agreement between at least one general partner and one limited partner. 64) A In a limited partnership, the general partners assume unlimited personal liability for the debts of the partnership. 65) B In a limited partnership, the limited partners assume no liability for the partnership beyond the capital they have invested in the business. 66) B In a limited partnership, limited partners do not have any part in the management of the company. 67) A
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A joint stock company is a mixture of a corporation and a partnership.As with the corporation, the members who hold shares of stock own the joint stock company. As with the partnership, the shareholders have personal liability, and in most cases the company is not a separate legal entity. 68) E The Supreme Court of Texas ruled that the law firm did not owe Bohatch a duty to remain partners. Although Bohatch presented a compelling argument that the firmshould not be permitted to expel partners who whistle-blow in good faith, the court could not ignore one basis of partnership law: a belief that partners should be allowed to choose their partners. The court found that forcing firms to keep whistleblowing partners would cause partners to engage in business with people they could no longer trust, thereby undermining the viability of the partnership. 69) C The United States District Court for the Eastern District of Wisconsin ruled that the written contracts would be enforced and the alleged oral conflicting statements disregarded. 70) B A sole proprietorship is a business in which one person (sole proprietor) is in control of the management and profits. 71) D In a sole proprietorship, the sole proprietor is personally liable for any losses or any obligations associated with the business. 72) B In a limited partnership, limited partners assume no liability for the partnership beyond the capital they have invested in the business. Limited partners do not have any part in the management of the company. Version 1
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73) B A partnership is a voluntary association between two or more persons who co-own a business for profit. 74) E In a partnership, the partners are personally liable for the debts of the partnership. 75) A A corporation must pay taxes on its profits, and in addition, the shareholders must pay taxes on the dividends they receive from the corporation. 76) E An S corporation is a business organization formed under federal tax law that is considered a corporation yet is taxed like a partnership as long as it follows certain regulations. Additionally, a limited liability company may combine the tax advantages and management flexibility of a partnership with the limited liability of a corporation. 77) C In a manufacturing arrangement, the franchisor provides the franchisee with a formula or necessary ingredient to manufacture a product. The franchisee then manufactures the product and sells it according to the franchisor’s standards. 78) E Although the franchisor has the legal authority to ensure that the franchisee maintains the quality of goods and services associated with the franchise, the franchisor must be cautious. If the franchisor exercises too much authority in the day-to-day affairs of the business, the franchisor could be held liable for the torts of the franchisee's employees. 79) B
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A franchise is a contractual relationship between the franchisor and the franchisee. In a franchise relationship, the parties make a franchise agreement regarding various factors: the payment to the franchisor, the location of the franchise, the restrictions the franchisee must follow, and the method of termination of the franchise. If the terms of the franchise agreement are not met, either party may sue for breach of contract. 80) D A joint venture is a relationship between two or more persons or corporations created for a specific business undertaking. From a legal standpoint, partnerships and joint ventures are virtually the same. Joint ventures differ from partnerships, however, because a joint venture is usually created for making and selling a single product while a partnership creates an ongoing full business. 81) A The parties who compose a joint venture usually share equal management of the task for which they have come together, but they can make an agreement to give one party greater management responsibilities. 82) B Members of a joint venture have less authority than general partners because members of a joint venture are not agents of other members. 83) A Each party can be held responsible for the liability of another party in a joint venture. 84) A Perhaps the most important duty of the partners is their fiduciary duty. They must, in good faith, work for the benefit of the partnership and refrain from taking any kind of action that will undermine the partnership. 85) A Version 1
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In our global environment, an increasingly important advantage of LLCs is that members need not be citizens or permanent residents of the United States. 86) B The LLC will usually be referred to as a foreign company in the additional states, and, under most state statutes, the LLC will be governed by the LLC rules of the state in which it was created, regardless of where it is transacting business. 87) A The Federal Trade Commission (FTC) has a franchise rule requiring franchisors to present prospective franchisees with the material facts necessary for the franchisee to make an informed decision about entering a franchise relationship. 88) C Under the ULLCA and most state LLC statutes, a member’s voluntary withdrawal from the LLC, referred to as dissociation, does not terminate the LLC. 89) The advantages of a sole proprietorship are a) creation is easy, b) the proprietor is in total control of management, and c) the proprietor keeps all the profits. The disadvantages of a sole proprietorship are a) personal liability of the owner for all losses and b) funding is limited to personal funds and loans. 90) The advantages of forming a corporation are a) limited liability for shareholders, b) the ease of raising capital by issuing stock, and c) profits are taxed as income to the shareholders, not the partners as in a partnership. The disadvantages of forming a corporation are a) corporate income is taxed twice and b) formalities are required in establishing and maintaining a corporate form.
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91) A limited liability partnership should be recommended. In a limited liability partnership (LLP), all the partners assume liability for any partner’s professional malpractice only to the extent of the partnership’s assets. In other words, the limited liability partnership is different from other forms of partnership because the partners’ liability for professional malpractice is limited to the partnership. If one partner in an LLP is liable for malpractice, the other partners’ personal assets cannot be taken. Therefore, professionals who do business together commonly use the LLP. It is the extra protection awarded partners in an LLP that makes the LLP a separate form of partnership from a limited partnership. 92) A joint venture is a relationship between two or more persons or corporations created for a specific undertaking. Differences are as follows: a joint venture is usually created for making and selling a single product, while a partnership creates an ongoing full business; if one of the members of a joint venture dies, the joint venture is not automatically terminated; and the members of a joint venture have less authority than general partners because members of a joint venture are not agents of the other members. 93) Generally, franchises fall into one of three (3) categories: a) chainstyle business operations, b) distributorships, and c) manufacturing arrangements. Distributorships are franchises in which the franchisor manufactures a product and licenses a dealer to sell the product in an exclusive territory. An example of a distributorship is a car dealership.
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94) Student answers may vary. Either an S corporation or a limited liability company would seem to be good choices in order to enable Suzanne to avoid personal liability for the acts of employees and to avoid double taxation. An S corporation is a business organization formed under federal tax law that is considered a corporation yet is taxed like a partnership as long as it follows certain regulations. For example, the S corporation cannot have more than one hundred shareholders. Any income of the S corporation is taxed when it is distributed to the shareholders, who must report the income on their personal income tax forms. A limited liability company (LLC) is an unincorporated form of business organization that combines the tax advantages and management flexibility of a partnership with the limited liability of a corporation.
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CHAPTER 22 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) Corporations are legal entities and can sue or be sued by others. ⊚ true ⊚ false
2)
Generally, the shareholders of a corporation can freely transfer their corporate shares. ⊚ true ⊚ false
3)
A corporation dissolves when a shareholder dies. ⊚ true ⊚ false
4)
Dividends are profits that corporations keep. ⊚ true ⊚ false
5)
Corporations have only those powers that states grant them. ⊚ true ⊚ false
6) State incorporation statutes typically grant the following implied powers to corporations: the power to have perpetual existence, the power to sue and be sued in the corporation’s name, the power to acquire property, the power to make contracts and borrow money, the power to lend money, the power to make charitable donations, and the power to establish rules for managing the corporation. ⊚ true ⊚ false
7) Corporations commit ultra vires acts most frequently when they create contracts outside the scope of their powers.
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⊚ ⊚
true false
8) Today, most state incorporation statutes permit businesses to incorporate for only express and specific purposes; thus, most articles of incorporation limit corporate powers. ⊚ true ⊚ false
9) A corporation is considered foreign in states in which it conducts business but is not incorporated. ⊚ true ⊚ false
10)
Closely held corporations generally offer stock for sale to the general public. ⊚ true ⊚ false
11) Legally, shareholders of an S corporation are not required to report their income from the corporation as personal income. ⊚ true ⊚ false
12)
Partnerships may be shareholders of an S corporation. ⊚ true ⊚ false
13) Promoters raise capital for an infant corporation by making subscription agreements with subscribers. ⊚ true ⊚ false
14) A corporation must be incorporated in the state in which it has its principal place of business.
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⊚ ⊚
true false
15) Every corporation must attach Corporation, Company, Limited, or Incorporated, or an abbreviation of one of these terms, to the end of its business name. ⊚ true ⊚ false
16) The Revised Model Business Corporation Act (RMBCA) requires two (2) or more incorporators to incorporate a business. ⊚ true ⊚ false
17) A certificate of incorporation is a document issued by a resident district court judge certifying that the corporation is incorporated in the state and is authorized to conduct business. ⊚ true ⊚ false
18) Courts usually hold that corporations that make minor errors in the incorporation process still enjoy de jure corporate status ⊚ true ⊚ false
19) A de facto corporation has not substantially met the requirements of the state incorporation statute, and as a result, courts do not recognize it as a corporation for most purposes. ⊚ true ⊚ false
20)
Corporate directors typically serve lifetime appointments. ⊚ true ⊚ false
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21)
Shareholders are directly responsible for the daily management of a corporation. ⊚ true ⊚ false
22) Corporate directors and officers have a fiduciary duty of care when making decisions for the corporation. ⊚ true ⊚ false
23) Directors and officers are self-dealing when they make decisions that violate their corporate duty of loyalty. ⊚ true ⊚ false
24) An individual director or officer may never personally benefit from decisions made by the board of directors. ⊚ true ⊚ false
25) A court may find a corporate officer criminally liable regardless of the extent to which the officer took part in the criminal activity. ⊚ true ⊚ false
26) According to the “responsible person” doctrine, directors and officers are not liable for decisions that harm the corporation if they were acting in good faith at the time of the decision. ⊚ true ⊚ false
27) Because a stock certificate is a negotiable instrument similar to currency,if a stock certificate is destroyed (for example, by fire), the shareholder’s ownership in the corporation terminates. ⊚ true ⊚ false Version 1
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28) A leveraged buyout (LBO) occurs when a group within a corporation buys all the outstanding corporate stock held by the public. ⊚ true ⊚ false
29) Hostile takeovers are takeovers to which the management of the target corporation objects. ⊚ true ⊚ false
30) In a tender offer, the aggressor offers target shareholders a price below the current market value of the stock. ⊚ true ⊚ false
31) Aggressors often try to win the favor of a few institutional investors that own a large block of shares. ⊚ true ⊚ false
32) China has adopted a three-tier board structure, with a board of directors, a supervisory board, and a subordinate board. ⊚ true ⊚ false
33) Courts are likely to pierce the corporate veil when shareholders’ personal interests and corporate interests are commingled such that the corporation has no separate identity. ⊚ true ⊚ false
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MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 34) Which of the following is false regarding corporations? A) Corporations cannot exist separately from their shareholders. B) Corporations are legal entities. C) Corporations have rights under the Fifth Amendment to the United States Constitution. D) Corporations can sue or be sued by others. E) Corporations are subject to state incorporation statutes.
35)
A corporation files articles of _____ with the state explaining its organization. A) organization B) partnership C) indemnification D) cooperation E) incorporation
36)
Which of the following is generally true regarding the management of a corporation?
A) Shareholders do not participate in corporate management. B) Shareholders elect a board of directors. C) The board of directors selects officers to manage the day-to-day business of the corporation. D) Shareholders do not participate in corporate management, shareholders elect a board of directors, and the board of directors selects officers to manage the day-to-day business of the corporation. E) Shareholders participate in corporate management, elect a board of directors, and select officers to manage the day-to-day business of the corporation.
37)
Which of the following are corporate income distributions to shareholders?
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A) Block grants B) Dividends C) Bond allocations D) Reserve allotments E) “In kind” distributions
38) If Acme Corporation retains its profits and reinvests them in the company, these types of profits are known as _____. A) reversionary funds B) reserve funds C) retained earnings D) reinvestment bonds E) elective distributions
39) Which of the following refers to the liability of corporations for torts and crimes committed by their agents during the scope of their employment? A) Stare decisis B) Res ipsa loquitur C) Respondeat superior D) Negligence per se E) Post hoc ergo propter hoc
40)
State incorporation statutes typically grant the power _____ to corporations.
A) of perpetual existence B) to sue and be sued in the corporation's name C) to make charitable donations D) of perpetual existence, the power to sue and be sued in the corporation's name, and the power to make charitable donations E) of perpetual existence and the power to sue and be sued in the corporation's name, but not the power to make charitable donations
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41) Triton Industrial Products, Inc. acted beyond its express and implied corporate powers. This is known as a(n) _____ act. A) limitus proctus B) ultra vires C) res ipsa loquitor D) de jure E) res judicata
42)
A corporation commits an ultra vires act when it _____. A) creates a contract outside the scope of its powers B) hires incompetent managers C) hires employees with criminal backgrounds D) refuses to declare dividends E) refuses to declare a stock split
43)
Which of the following corporations often have specific government duties to fulfill? A) De jure B) De facto C) Closely-held D) Public E) Publicly-traded
44) Dylan and Marie created a private corporation for the purposes of developing new embroidery designs to sell to manufacturers. Their company is a(n) _____ corporation. A) public B) private C) agency D) publicly-traded E) de facto
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45)
Which of the following is false regarding a nonprofit corporation?
A) It may not earn profits. B) It does not have shareholders. C) One of its objectives is to not earn profit. D) It does not issue stock. E) Examples of this form of business organization include churches and charitable organizations.
46) Jewel’s Fine Jewelry, Inc. (Jewel’s) is incorporated in the state of Oklahoma. In Oklahoma, Jewel’s would be considered a _____ corporation. A) de facto B) non-taxable C) multinational D) foreign E) domestic
47) Jewel’s Fine Jewelry, Inc. (Jewel’s) is incorporated in the state of Oklahoma but does business in Michigan, Illinois, and Tennessee. In Michigan, Illinois and Tennessee, Jewel’s would be considered a _____ corporation. A) hostile B) foreign C) domestic D) multistate E) non-taxable
48) Marquez incorporated his company, Brazilian Brass Manufacturers, Inc. in the United States but wants to do business in his home country of Brazil. In Brazil, Marquez’s company would be considered a(n) _____ corporation.
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A) alien B) extradited C) de facto D) non-taxable E) multinational
49)
How, if at all, does a closely held corporation offer stock to the public? A) Through private stock sales B) Through qualified investment options C) Through public stock sales D) Through a combination of private and public stock sales E) A closely held corporation generally does not offer stock to the general public.
50) Which of the following is necessary in order for a business to qualify as an S corporation? A) No more than 100 shareholders B) Only individuals, trusts, and (in certain circumstances) corporations as shareholders C) At least $10,000 in capital D) No more than 100 shareholders; only individuals, trusts, and (in certain circumstances) corporations as shareholders; and at least $10,000 in capital E) No more than 100 shareholders and only individuals, trusts, and (in certain circumstances) corporations as shareholders; however, there is no requirement of at least $10,000 in capital
51) Michael is assisting Michelle and Johnathan in their formation of a corporation by helping them arrange for the necessary capital, financing, and licenses. In this case, Michael is a corporate _____.
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A) underwriter B) incorporator C) stakeholder D) promoter E) director
52) In the United States, which of the following is true regarding the law governing the incorporation process and corporate taxation? A) Federal law exclusively governs the incorporation process and corporate taxation. B) Federal law exclusively governs the incorporation process, while state law exclusively governs corporate taxation. C) Federal and state law jointly address the incorporation process, while federal law exclusively governs corporate taxation. D) Each state has different laws governing the incorporation process, and different corporate tax rates. E) All fifty (50) states in the United States have adopted uniform laws governing the incorporation process and corporate taxation.
53) A(n) _____ is an individual who applies to the state for incorporation on behalf of a corporation. A) promoter B) incorporator C) facilitator D) rainmaker E) assessor
54) If Gerome is an incorporator helping clients organize their corporation, what is his only real duty?
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A) Secure capital for the corporation B) Select the state of incorporation C) File the required tax documents with the Internal Revenue Service (IRS) D) Co-sign loan contracts for the corporation E) Sign the articles of incorporation
55) According to the Revised Model Business Corporation Act (RMBCA), which of the following should the articles of incorporation include? A) The name of the corporation B) The name of the registered agent C) The names and addresses of the incorporators D) The name of the corporation, the name of the registered agent, and the names and addresses of the incorporators E) The names of the corporation and the registered agent, but not the names and addresses of the incorporators
56) When a corporation is incorporated, the secretary of state usually issues a(n) _____, a document certifying that the corporation is incorporated in the state and is authorized to conduct business. A) corporate prospectus B) certificate of incorporation C) warranty of corporate status D) certificate of organization E) general business license
57) Which of the following are rules and regulations that govern a corporation's internal management?
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A) Bylaws B) Corporate minutes C) Articles of organization D) Articles of incorporation E) Corporate decrees
58) If the incorporator or promoters make an error or omission during the incorporation process, courts may rule that the organization is not a corporation, in which case the organization is a(n) _____ corporation. A) demonstrative B) ultra vires C) uncertified D) defective E) foreign
59) Which of the following terms refers to a corporation that has not substantially met the requirements of the state incorporation statute, but courts nevertheless recognize it as a corporation for most purposes to avoid unfairness to third parties who believed it was properly incorporated? A) De jure corporation B) De facto corporation C) Corporation by estoppel D) Corporation with reservation E) Implied corporation
60) In order to prevent a defective corporation from escaping corporate responsibility, a court may hold that the entity is a(n) _____.
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A) corporation in fact B) implied corporation C) corporation by estoppel D) corporation with reservation E) qualified corporation
61)
In which of the following situations would a court likely pierce the corporate veil?
A) Shareholders attempt to commit fraud through a corporation B) A corporation followed statutory mandates regarding corporate business C) Shareholders’ personal interests and corporate interests are separate D) A corporation had adequate capital when it initially formed E) None of the above; because a corporation is a legal entity separate from its owners (i.e., its shareholders), a court cannot pierce the corporate veil in order to impose personal liability on shareholders
62)
Which of the following types of securities represent ownership in a corporation? A) Debt B) Equity C) Finance D) Leveraged E) Certified
63)
Which of the following are debt securities? A) Stocks B) Bonds C) Certificates of deposit D) Stocks, bonds, and certificates of deposit E) Stocks and bonds, but not certificates of deposit
64)
Owners of _____ stock enjoy preferences with respect to assets and dividends.
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A) concentrated B) premium C) unconditional D) preferred E) common
65)
Owners of _____ stock own a portion of a corporation but do not enjoy any preferences. A) watered B) secondary C) diluted D) conditional E) common
66)
Who uses a majority vote to elect the corporation’s directors? A) The board of directors B) The officers C) The incorporators and promoters D) The shareholders E) The employees at large
67)
How are directors chosen during incorporation? A) Either the incorporators appoint them or the corporate articles name them B) Either the incorporators appoint them or by a majority vote of the shareholders C) Only by the incorporators appointing them D) Only by the corporate articles naming them E) Only by the president appointing them
68)
How is the number of corporate directors determined?
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A) In the discretion of the president of the corporation B) By a vote of the stockholders in compliance with state law C) According to the corporate articles or bylaws, in compliance with state law D) According to the number of shares issued E) According to the amount of profit projected by the incorporators for the first fiscal year of the corporation’s existence
69) If a corporation has fewer than fifty (50) shareholders, the Revised Model Business Corporation Act (RMBCA) allows companies to _____. A) choose not to file articles of incorporation B) eliminate the board of directors altogether C) have as few as seven (7) corporate directors D) have as few as five (5) corporate directors E) have as few as three (3) corporate directors
70) Although most state statutes allow for longer terms, how long do directors typically serve? A) Three (3) years B) Two (2) years C) One (1) year D) Four (4) years E) Five (5) years
71)
A director may be removed _____. A) at the discretion of the president B) at the discretion of the shareholders, upon a super-majority vote C) at the discretion of the shareholders, upon a two-thirds vote D) at the discretion of other directors, upon a simple majority vote E) for cause
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72) A _____ must be present at a board of directors meeting for decisions made at the meeting to be valid. A) simple majority B) discernible minority C) super-majority D) preponderance of directors E) quorum
73) While ordinary corporate decisions made by directors require a _____ vote, more important decisions sometimes require a _____ vote. A) majority; two-thirds B) majority; three-fourths C) two-thirds; three-fourths D) one-third; majority E) majority; unanimous
74)
Belinda is both a director and an officer of her corporation. Belinda is a(n) _____. A) dual agent B) inside director C) outside director D) double-duty director E) moonlighting officer
75) A director who is not an officer or an employee of the corporation is known as what kind of director? A) Free agent B) Outside C) Presumptive D) Affiliated E) Unaffiliated
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76) An outside director who has business contacts with the corporation is known as what kind of director? A) Approved B) Presumptive C) Inside D) Affiliated E) Seasoned
77) An outside director who does not have business contacts with the corporation is known as what kind of director? A) Approved B) Certified C) Statutory D) Presumptive E) Unaffiliated
78)
Which of the following is false regarding corporate officers? A) They are executive managers. B) They run the day-to-day business of the corporation. C) In most cases an individual may serve as both a director and an officer. D) The rules of agency do not apply to their work. E) Their required qualifications are set forth in the corporate articles and bylaws.
79)
When does an individual become an owner of a particular corporation?
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A) As soon as the directors vote in favor of his ownership B) As soon as she purchases stock C) When a super-majority of shareholders approve of his ownership at a quarterly shareholder meeting D) Upon a simple majority vote in favor of her ownership at the annual shareholders’ meeting E) As soon as the organizer, promoter, or officer gives him stock options
80) The Securities and Exchange Commission (SEC) has established that any shareholder who owns more than _____ worth of stock in the corporation can submit proposals to be included in proxy materials. A) $4,000 B) $3,000 C) $2,000 D) $1,000 E) $500
81) Generally, a quorum of shareholders exists when shareholders representing more than _____ percent of the outstanding shares are present at a shareholder meeting. A) eighty (80) B) seventy (70) C) sixty (60) D) fifty (50) E) twenty-five (25)
82)
When directors or officers violate their duty of loyalty, they are _____. A) self-dealing B) breaching their duty of care C) breaching their duty of loyalty D) piercing the corporate veil E) subrogating
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83) More than one-half of all publicly traded corporations in the United States are incorporated in _____. A) Illinois B) California C) Michigan D) Delaware E) Texas
84) Which of the following is false regarding the liability of directors and officers for criminal behavior? A) Directors and officers can be held personally responsible for their own crimes. B) Directors and officers can be held personally responsible for the crimes of other employees within the organization when they have failed to adequately supervise the employee's behavior. C) An officer can be held criminally liable for the illegal conduct of an employee if the court determines that a responsible person would have known about and could have prevented the illegal activity. D) Directors and officers who use insider information to trade their corporation's stock for a profit can be held liable for breaching their fiduciary duty. E) According to the responsible person doctrine, a court may not find a corporate officer criminally liable for the illegal conduct of an employee unless the officer profited personally from the illegal activity.
85)
If there is a fixed face value noted on the stock certificate, _____ is involved. A) minimum value stock B) a stock dividend C) preferred stock D) par-value stock E) maximum value stock
86)
How much must a shareholder who signs a stock subscription pay for no-par shares?
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A) The depreciated value B) At least the stock price of the last sale C) The value as voted upon and approved by the board of directors D) The value as voted upon and approved by shareholders E) The fair market value
87) Stocks that are issued to individuals below their fair market value are called _____ stocks. A) no-par B) wholesale C) watered D) sub-par E) cut-rate
88) Directors have four (4) major rights within a corporation. Which of the following is not one of them? A) Compensation B) Participation C) Inspection D) Indemnification E) Profit-sharing
89) Which of the following may be issued to shareholders as proof of ownership in the corporation? A) Stock subscriptions B) Stock acknowledgements C) Articles of incorporation D) Stock certificates E) Articles of organization
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90)
Which of the following is true regarding stock certificates?
A) Each certificate includes the corporation's name. B) Each certificate includes the number of shares represented by the certificate. C) A shareholder's ownership in the corporation does not depend on her possession of the physical stock certificate. D) Each certificate includes the corporation's name and the number of shares represented by the certificate, but a shareholder's ownership in the corporation does not depend on her possession of the physical stock certificate. E) Each certificate includes the corporation's name and the number of shares represented by the certificate, and a shareholder's ownership in the corporation depends on her possession of the physical stock certificate.
91) Which of the following rights give preference to shareholders to purchase shares of a new issue of stock? A) Class-based B) Presumptive C) Preemptive D) Selective E) Subscription
92) Which of the following may be redeemed for a certain number of shares at a specified price within a given time period? A) Preemptive shares B) Share allowances C) Allocated shares D) Stock warrants E) Margin calls
93) Which of the following refers to the right of a corporation or its shareholder to purchase any shares of stock offered for resale by a shareholder within a specified period of time?
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A) Anticipatory repudiation B) The right of first refusal C) The right to demand adequate assurance of performance D) Sale-or-return E) Sale-on-approval
94) If corporate directors fail to sue when the corporation has been harmed by an individual, another corporation, or a director, individual shareholders can file a _____ on behalf of the corporation. A) default judgment B) class action suit C) shareholder's direct suit D) shareholder's derivative suit E) shareholder’s distributive suit
95) In which of the following does a shareholder sue alleging that he or she has suffered damages caused by the corporation? A) A subrogation action B) A shareholder's distributive suit C) A shareholder's direct suit D) A shareholder's derivative suit E) A formal declaration against interest
96) In which of the following types of attempted corporate takeovers does an aggressor offer to pay cash to targeted shareholders? A) A hostile tender offer B) A cash tender offer C) An in-kind offer D) A bait-and-switch offer E) An asset tender offer
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97)
A(n) _____ occurs when a target corporation offers to buy its shareholders' stock. A) self-tender offer B) leveraged buyout C) subrogationoffer D) initial public offering E) insulated tender offer
98) A(n)_____ occurs when a group within a corporation, usually management, buys all outstanding corporate stock held by the public. A) asset purchase B) leveraged buyout C) in-kind purchase D) confiscatory taking E) initial public offering
99)
In a hostile takeover, what does the term "going private" reference? A) A leveraged buyout B) An initial public offering C) A poison pill D) A confiscatory taking E) The non-disclosure of information related to the corporate takeover
100)
The “death” of a corporation occurs in which of the following phases? A) Dissolution and assumption B) Dissolution and rehabilitation C) Dissolution and liquidation D) Reformation and liquidation E) Notification and liquidation
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101) When the directors or shareholders of a corporation initiate dissolution procedures, it is a(n) _____. A) consolidation B) voluntary dissolution C) involuntary dissolution D) hostile takeover E) leveraged buyout
102) When the government or private parties obtain a court order to dissolve a corporation, it is a(n) _____. A) consolidation B) voluntary dissolution C) involuntary dissolution D) hostile takeover E) leveraged buyout
103)
Who has the lowest priority when a corporation distributes dividends? A) Members of the board of directors B) Officers C) Common stock owners D) Partners E) Investors
104) Which of the following was the result on appeal in Campbell, Kesser, and Williams v. Pothas Corporation, the case in the textbook in which the defendant alleged that golden parachute agreements were not enforceable because they violated public policy?
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A) That based on significant case law ruling such agreements in violation of public policy, the agreements would be declared void under principles of stare decisis B) That based on a congressional committee report, the contracts would be declared void C) That the defendant did not receive its benefit with regard to the contracts and that the golden parachute agreements were, therefore, voidable by the defendant D) That the agreements were valid and did not violate public policy E) That the agreements were valid, but only because a merger was involved
105) Acme Products, Inc. (Acme) suffered damages when a supplier failed to deliver certain goods pursuant to the terms of a contract. Acme’s president and chief executive officer did not institute suit as Garrett, a major shareholder, believed was proper. Garrett complained to the board of directors, but they refused to do anything. Which of the following is an option to Garrett with regard to a lawsuit against the supplier? A) A shareholder's derivative suit B) A shareholder's direct suit C) A consolidation suit D) A shareholder’s distributive suit E) None of these because as a shareholder, Garrett has no right to pursue litigation
106) Which of the following is available to Garrett, a major shareholder in Acme Products, Inc. who believes that the corporation has wrongfully failed to declare a dividend to shareholders? A) A shareholder's derivative suit B) A shareholder's direct suit C) A consolidation suit D) A shareholder’s distributive suit E) None of these because as a shareholder, Garrett’s only remedy is to file an administrative complaint with state authorities
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107) Nails. Mona and her friends Jack and Bobby, all United States citizens, want to open a nail salon in Tennessee. They would all like to avoid personal liability for debts of the business and for wrongful acts of each other. They would also like to avoid taxation as much as possible. Mona is in favor of a corporation and asks if there is any problem with that form of business. Jack and Bobby say that they want to receive profit distributions and that they are concerned about excessive taxation with a corporation. Jack and Bobby urged the formation of a partnership even in the face of personal liability. Mona did some research and suggested an S corporation to Jack and Bobby. Are Jack and Bobby correct that tax liability will likely be greater with a corporate form of business (not an S corporate form) and why? A) No, they are incorrect because with only three (3) shareholders, the tax liability of a corporation would likely be less than the tax liability of a partnership. B) No, they are incorrect because with only three (3) shareholders, the tax liability of a corporation would be exactly the same as the tax liability of a partnership if the net income of the corporation is not over $250,000. C) No, they are incorrect because with only three (3) shareholders, the tax liability of a corporation would be exactly the same as the tax liability of a partnership if the gross income of the corporation is not over $150,000. D) No, they are incorrect because with only three (3) shareholders, the tax liability of a corporation would be exactly the same as the tax liability of a partnership if the gross income of the corporation is not over $100,000. E) Yes, they are correct because the corporate form of business would result in double taxation, with the corporation being taxed on income and its shareholders being taxed again on dividends they receive.
108) Nails. Mona and her friends Jack and Bobby, all United States citizens, want to open a nail salon in Tennessee. They would all like to avoid personal liability for debts of the business and for wrongful acts of each other. They would also like to avoid taxation as much as possible. Mona is in favor of a corporation and asks if there is any problem with that form of business. Jack and Bobby say that they want to receive profit distributions and that they are concerned about excessive taxation with a corporation. Jack and Bobby urged the formation of a partnership even in the face of personal liability. Mona did some research and suggested an S corporation to Jack and Bobby. Would an S corporation provide the favorable tax treatment that the parties desire in a corporate form of business?
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A) No, because an S corporation is taxed in the same way as a regular corporation. B) Yes, but the S corporation is not needed because either a partnership or a regular corporation in their situation would provide the same benefits as an S corporation. C) Yes, with the only tax benefit being the avoidance of double taxation. D) Yes, because the S corporation would avoid the double taxation problem involved with a regular corporation and provide other tax benefits as well. E) No, because while the parties could form an S corporation, the tax benefits of an S corporation are only available to corporations with at least 100 shareholders.
109) Nails. Mona and her friends Jack and Bobby, all United States citizens, want to open a nail salon in Tennessee. They would all like to avoid personal liability for debts of the business and for wrongful acts of each other. They would also like to avoid taxation as much as possible. Mona is in favor of a corporation and asks if there is any problem with that form of business. Jack and Bobby say that they want to receive profit distributions and that they are concerned about excessive taxation with a corporation. Jack and Bobby urged the formation of a partnership even in the face of personal liability. Mona did some research and suggested an S corporation to Jack and Bobby. Would the proposed business qualify as an S corporation if it were incorporated in Delaware? A) No, because there must be at least 100 shareholders involved. B) No, because a business must operate as a partnership for at least two years before converting to an S corporation and because it must be incorporated under the state law of the location of the principal place of business. C) No, because a business must operate as a regular corporation for at least two years before converting to an S corporation. D) Yes, if more than one class of shares is issued. E) Yes, if only one class of shares is issued.
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110) Shaky Bicycles. Rhonda, an incorporator who filed the articles of incorporation for ABC Corporation, a corporation set up to sell bicycles, listed the correct town and street but incorrectly put the wrong street number in the document. Helen, a manufacturer of bicycle parts, had sold a number of parts to ABC Corporation. Unfortunately, the corporation was not making any profit, and Helen was not paid in a timely manner. Rhonda told her that the corporation was not liable because it was not validly formed due to the address mistake. Bernice, another creditor of ABC Corporation, also claimed that a shareholder of Shaky Bicycles, Slick, was personally liable to her. Bernice alleged that Slick committed fraud against her when he told her that ABC Corporation was making large amounts of money, that if she would only lend $50,000 to the corporation he would marry her, and that the corporation would make so much money that she would be wealthy in six months. She made the loan, but the corporation has been unable to repay her. Slick told her that he is sorry, but that her only avenue of recovery is through the corporation. Which of the following would a court likely rule regarding the status of ABC Corporation as a corporation? A) That the business was a de jure corporation. B) That the business was a de facto corporation. C) That the business was a corporation by estoppel. D) That the business was a veiled corporation. E) That the business was not a corporation at all.
111) Shaky Bicycles. Rhonda, an incorporator who filed the articles of incorporation for ABC Corporation, a corporation set up to sell bicycles, listed the correct town and street but incorrectly put the wrong street number in the document. Helen, a manufacturer of bicycle parts, had sold a number of parts to ABC Corporation. Unfortunately, the corporation was not making any profit, and Helen was not paid in a timely manner. Rhonda told her that the corporation was not liable because it was not validly formed due to the address mistake. Bernice, another creditor of ABC Corporation, also claimed that a shareholder of Shaky Bicycles, Slick, was personally liable to her. Bernice alleged that Slick committed fraud against her when he told her that ABC Corporation was making large amounts of money, that if she would only lend $50,000 to the corporation he would marry her, and that the corporation would make so much money that she would be wealthy in six months. She made the loan, but the corporation has been unable to repay her. Slick told her that he is sorry, but that her only avenue of recovery is through the corporation. Which of the following is the likely result of Helen's attempt to hold the corporation liable for her debt?
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A) She will likely be successful. B) She will be successful, but only if ABC Corporation renounces its de jure status. C) She will be successful, but only if ABC Corporation renounces its de facto status. D) She will be successful, but only if ABC Corporation has at least 50 shareholders. E) She will likely be unsuccessful.
112) Shaky Bicycles. Rhonda, an incorporator who filed the articles of incorporation for ABC Corporation, a corporation set up to sell bicycles, listed the correct town and street but incorrectly put the wrong street number in the document. Helen, a manufacturer of bicycle parts, had sold a number of parts to ABC Corporation. Unfortunately, the corporation was not making any profit, and Helen was not paid in a timely manner. Rhonda told her that the corporation was not liable because it was not validly formed due to the address mistake. Bernice, another creditor of ABC Corporation, also claimed that a shareholder of Shaky Bicycles, Slick, was personally liable to her. Bernice alleged that Slick committed fraud against her when he told her that ABC Corporation was making large amounts of money, that if she would only lend $50,000 to the corporation he would marry her, and that the corporation would make so much money that she would be wealthy in six months. She made the loan, but the corporation has been unable to repay her. Slick told her that he is sorry, but that her only avenue of recovery is through the corporation. Assuming ABC's corporate status is in place, which of the following is Bernice's best theory in order to hold Slick personally liable to her? A) That the corporate veil should be pierced because Slick committed fraud through the corporation. B) That in equity Slick should be held personally liable. C) That Slick should be personally liable because of his status as a shareholder. D) That the corporate environment should be removed because Slick committed fraud through the corporation. E) None of these. There is no theory under which she could hold Slick personally liable to her.
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113) Self-Centered President. Tina is the new president of "We Manage You," a corporation set up to manage physician practices. Tina has never been very concerned with minority shareholders because she does not believe that they have any influence over the company because they cannot even elect a director. She is told, however, that the corporation has a practice of cumulative voting. An election is coming up in which 10 directors will be elected. Minority shareholders own 2,000 shares while majority shareholders own 8,000 shares. Tina tells her vice president, George, that she wants to ignore minority shareholders and focus her interests on majority shareholders and the directors. She also tells George that she wants to be particularly conscientious toward directors because the directors appoint officers, and she does not believe that she owes any actual duties to shareholders. She further orders George to destroy some documents subpoenaed in a criminal investigation against the company for illegal tax evasion. When George protests, Tina tells him not to worry because officers cannot be held responsible for criminal actions so long as the actions are done as part of the officer's duties. She explains to him that only the corporation can be charged with liability in such cases. How many votes will the minority shareholders have in the election? A) 2,000 B) 4,000 C) 6,000 D) 10,000 E) 20,000
114) Self-Centered President. Tina is the new president of "We Manage You," a corporation set up to manage physician practices. Tina has never been very concerned with minority shareholders because she does not believe that they have any influence over the company because they cannot even elect a director. She is told, however, that the corporation has a practice of cumulative voting. An election is coming up in which 10 directors will be elected. Minority shareholders own 2,000 shares while majority shareholders own 8,000 shares. Tina tells her vice president, George, that she wants to ignore minority shareholders and focus her interests on majority shareholders and the directors. She also tells George that she wants to be particularly conscientious toward directors because the directors appoint officers, and she does not believe that she owes any actual duties to shareholders. She further orders George to destroy some documents subpoenaed in a criminal investigation against the company for illegal tax evasion. When George protests, Tina tells him not to worry because officers cannot be held responsible for criminal actions so long as the actions are done as part of the officer'sduties. She explains to him that only the corporation can be charged with liability in such cases. Is Tina accurate that she owes no duties to shareholders?
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A) Yes, she is accurate because it is the directors who owe a duty to shareholders. B) No, she is inaccurate because she owes a duty of care to shareholders although she owes no other duties. C) No, she is inaccurate because she owes a duty of loyalty to shareholders although she owes no other duties. D) No, she is inaccurate and owes both a duty of care and a duty of loyalty to shareholders. E) She is partially accurate. She owes both a duty of care and a duty of loyalty to minority shareholders, but no duties to majority shareholders because the law assumes that they have the power to protect their own interests.
115) Self-Centered President. Tina is the new president of "We Manage You," a corporation set up to manage physician practices. Tina has never been very concerned with minority shareholders because she does not believe that they have any influence over the company because they cannot even elect a director. She is told, however, that the corporation has a practice of cumulative voting. An election is coming up in which 10 directors will be elected. Minority shareholders own 2,000 shares while majority shareholders own 8,000 shares. Tina tells her vice president, George, that she wants to ignore minority shareholders and focus her interests on majority shareholders and the directors. She also tells George that she wants to be particularly conscientious toward directors because the directors appoint officers, and she does not believe that she owes any actual duties to shareholders. She further orders George to destroy some documents subpoenaed in a criminal investigation against the company for illegal tax evasion. When George protests, Tina tells him not to worry because officers cannot be held responsible for criminal actions so long as the actions are done as part of the officer'sduties. She explains to him that only the corporation can be charged with liability in such cases. Is Tina correct in that officers cannot be held criminally responsible for their actions on behalf of a corporation? A) Yes, she is correct. B) She is correct, but only if the corporation is solvent. C) She is correct, but only if the board of directors has accepted all liability for the actions of corporate officers. D) She is correct, but only if environmental or employment matters are involved. E) She is incorrect.
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116) Kite Sales. Wendy is president of ABC Kites, a business that manufactures kites. Her company's kites are sold to large toy stores. After Wendy learned a great deal about kites, she started to make kites at home and to promote them to large toy stores. She also started selling kites to friends. Some of the directors learned about her kite sales and accused her of wrongdoing. Wendy denied any wrongdoing. What duty, if any, did Wendy violate? A) She did not commit any violation. B) She violated the duty of loyalty. C) She violated the duty of care. D) She violated the duty of understanding. E) She violated the duty of profit maximization.
117) Kite Sales. Wendy is president of ABC Kites, a business that manufactures kites. Her company’s kites are sold to large toy stores. After Wendy learned a great deal about kites, she started to make kites at home and to promote them to large toy stores. She also started selling kites to friends. Some of the directors learned about her kite sales and accused her of wrongdoing. Wendy denied any wrongdoing. In which of the following objectionable activities, if any, was Wendy involved in selling and marketing the kites? A) She was not involved in any objectionable activities. B) She was involved in objectionable self-dealing. C) She was involved in an objectionable admission against interest. D) She was involved in an objectionable stipulation advancing personal interest. E) She was involved in objectionable criminal embezzlement.
118) Kite Sales. Wendy is president of ABC Kites, a business that manufactures kites. Her company's kites are sold to large toy stores. After Wendy learned a great deal about kites, she started to make kites at home and to promote them to large toy stores. She also started selling kites to friends. Some of the directors learned about her kite sales and accused her of wrongdoing. Wendy denied any wrongdoing. What measures, if any, will be imposed on Wendy for her home kite sales?
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A) None, because Wendy did not engage in any wrongdoing. B) She will be required to cede to the corporation one-half of any profits she earned as a result of the breach. C) She will be required to cede to the corporation only the profits she earned as a result of the breach that the corporation can prove beyond reasonable doubt it lost as a result of her actions. D) She will be required to cede to the corporation any profits she earned as a result of the breach unless she can prove by a preponderance of the evidence that the corporation lost no sales as a result of her actions. E) She will be required to cede to the corporation all the profits she earned as a result of the breach.
119) Machine Malfunction. Bruno, the president of a corporation operating workout facilities, convinced the board of directors to approve a large purchase of a type of fitness machine called "Perfect Body." Bruno had carefully investigated the machine and did a presentation to the board on its purported benefits. Unfortunately, after the purchase, it was announced that "Perfect Body" was actually a very dangerous machine that should not be used. The manufacturer of "Perfect Body" went bankrupt, and the corporation lost $200,000 on the purchase of the machines. The shareholders are furious and want to sue Bruno and the directors. The board of directors agrees to allow Frances, the ringleader of the shareholders, to purchase stock of the company at below its fair market value. She purchases a considerable amount of stock on that basis, but says that the shareholders plan to continue with an action against Bruno and the board members. Under which of the following should Bruno and the board of directors defend themselves in an action brought by shareholders for harming the corporation? A) The Superior Judgment Rule B) The Research and Investigation Rule C) The Business Judgment Rule D) The Rule of Corporate Integrity E) There is no defense.
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120) Machine Malfunction. Bruno, the president of a corporation operating workout facilities, convinced the board of directors to approve a large purchase of a type of fitness machine called "Perfect Body." Bruno had carefully investigated the machine and did a presentation to the board on its purported benefits. Unfortunately, after the purchase, it was announced that "Perfect Body" was actually a very dangerous machine that should not be used. The manufacturer of "Perfect Body" went bankrupt, and the corporation lost $200,000 on the purchase of the machines. The shareholders are furious and want to sue Bruno and the directors. The board of directors agrees to allow Frances, the ringleader of the shareholders, to purchase stock of the company at below its fair market value. She purchases a considerable amount of stock on that basis, but says that the shareholders plan to continue with an action against Bruno and the board members. Which of the following is a term for stock issued to individuals below its fair market value? A) No-par stock B) Uncommon stock C) Watered stock D) Dissolved stock E) Class B stock
121) Machine Malfunction. Bruno, the president of a corporation operating workout facilities, convinced the board of directors to approve a large purchase of a type of fitness machine called "Perfect Body." Bruno had carefully investigated the machine and did a presentation to the board on its purported benefits. Unfortunately, after the purchase, it was announced that "Perfect Body" was actually a very dangerous machine that should not be used. The manufacturer of "Perfect Body" went bankrupt, and the corporation lost $200,000 on the purchase of the machines. The shareholders are furious and want to sue Bruno and the directors. The board of directors agrees to allow Frances, the ringleader of the shareholders, to purchase stock of the company at below its fair market value. She purchases a considerable amount of stock on that basis, but says that the shareholders plan to continue with an action against Bruno and the board members. Which of the following is true regarding the liability of Frances, if any, for purchasing the stock at below its fair market value?
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A) If the board wanted to offer it to her, they had that right, and there is no consequence to Frances because she proceeded with the complaints of the shareholders. B) She is liable for double the stated corporate value of the stock in addition to any price she already paid. C) She is liable for the stated corporate value of the stock in addition to any price she already paid. D) She is liable for paying the difference between the price she paid for the shares and the stated corporate value of the shares. E) She is liable for paying the difference between the price she paid for the shares and the stated corporate value of the shares, plus a $10,000 penalty.
122)
Which of the following establishes the requirements for corporation formation? A) Federal common law B) State incorporation statutes C) The Corporations Act of 1965 D) The Incorporation Charter of 1945 E) The Restatement (Second) of Corporations
123) At the first organizational meeting, shareholders adopt a set of corporate _____, or rules and regulations that govern the corporation’s internal management. A) articles B) bylaws C) declarations D) statements of intent E) minutes
124) One voting process required in most states, called _____ voting, ensures that minority shareholders have a voice in electing the board of directors.
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A) non-cumulative B) minority C) proportional D) cumulative E) at-large
125) The two (2) primary fiduciary duties of directors and officers are the duty of _____ and the duty of _____. A) strict liability; accounting B) care; loyalty C) absolute liability; indemnification D) loyalty; careful consideration E) self-dealing; recrimination
126) Although shareholders may want to hold directors and officers liable for their decisions that inadvertently harm the corporation, the _____ rule does not allow them to do so. A) hold harmless B) sovereign immunity C) business judgment D) blanket immunity E) arm’s length transaction
127) Some corporations issue _____ to shareholders as proof of their ownership in the corporation. A) stock certificates B) stakeholder deeds C) promissory notes D) secured bonds E) unsecured bonds
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ESSAY. Write your answer in the space provided or on a separate sheet of paper. 128) Discuss the rights of corporations under the United States Constitution’s Bill of Rights.
129) Warren was the president of a corporation whose articles of incorporation specified that the corporation's purpose was to market dairy products. Warren, however, convinced the board of directors to support him in opening a furniture store. Warren proceeded to enter into contracts with furniture suppliers. When some of the shareholders discovered that the corporation was going into the furniture business, they wanted the furniture venture ended. Unfortunately, the corporation had already entered into a contract for upholstery supplies that had been delivered. What is the term for acts of a corporation beyond its express and implied powers, and what remedies does the Revised Model Business Corporation Act (RMBCA) provide when a corporation commits such act? What is the most likely result if the supplier of the upholstery supplies sues for payment?
130) What are the requirements for being a director? Must a director own stock in the corporation?
131) Describe the ways discussed in the textbook in which the directors and officers of the Texas energy company Enron failed in their duty of care.
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132) Mary is a director of a company that develops expensive residential subdivisions. The company is considering attempting to purchase a large section of land on which to put a development. Mary happens to own some of the land. What duty, if any, does she have regarding disclosure of the fact that she owns some of the land? What steps, if any, should the board of directors take when considering the matter, and may the board take action that benefits Mary personally?
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Answer Key Test name: Chap 22_5_The Essentials_Kubasek 1) TRUE In the United States, corporations are legal entities. In other words, corporations exist separately from their shareholders. Thus, corporations can sue or be sued by others. 2) TRUE Generally, shareholders of a corporation can freely transfer their corporate shares. For example, shareholders can sell their shares or give them to charity. 3) FALSE The life of a corporation does not end when the lives of its owners end. If shareholders die, corporations do not dissolve. 4) FALSE Corporations have control over their income. Corporations can distribute their income to shareholders in the form of dividends. Alternatively, corporations can keep profits, or retained earnings, to reinvest. Corporations’ investment of retained earnings can lead to higher stock prices, thus benefiting shareholders when they sell their stock. 5) TRUE Because corporations are creatures of the state, they have only those powers states grant them.States give powers to corporations through state incorporation statutes and through each corporation’s articles of incorporation. 6) FALSE
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State incorporation statutes typically grant the following express (not implied) powers to corporations: the power to have perpetual existence, the power to sue and be sued in the corporation’s name, the power to acquire property, the power to make contracts and borrow money, the power to lend money, the power to make charitable donations, and the power to establish rules for managing the corporation.In addition, corporations may take whatever actions are necessary to execute these express powers. Thus, corporations have implied powers. 7) TRUE If corporations act beyond their express and implied powers, the act is called an ultra vires (Latin for “beyond powers”) act. Corporations commit ultra vires acts most frequently when they create contracts outside the scope of their powers. 8) FALSE Today, most state incorporation statutes permit businesses to incorporate for any lawful purpose; thus, most articles of incorporation do not limit corporate powers. 9) TRUE A corporation is considered foreign in states in which it conducts business but is not incorporated. For example, the McDonald’s Corporation is incorporated in Delaware but does business in all fifty states. Thus, McDonald’s is a domestic corporation in Delaware and a foreign corporation in the other forty-nine states. 10) FALSE
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The stock of publicly held corporations is available to the public. Thus, if you want to invest in a corporation, you could purchase stock in a publicly held corporation. In contrast, closely held corporations (also called close, family, or privately held corporations) generally do not offer stock to the general public. Shareholders of closely held corporations are usually family members and friends who are often active in the business. 11) FALSE An S corporation has the tax status of a partnership.Thus, shareholders of S corporations report their income from the corporation as personal income. 12) FALSE Only individuals, trusts, and (in certain circumstances) corporations can be shareholders of an S corporation. Partnerships cannot be shareholders of an S corporation. 13) TRUE Promoters begin the corporate creation and organization process by arranging for necessary capital, financing, and licenses. Promoters raise capital for the infant corporation by making subscription agreements with subscribers (investors) in which the subscribers agree to purchase stock in the new corporation. 14) FALSE Although most corporations incorporate in the state in which they are located and do most of their business, more than half of all publicly held corporations, including more than half of the Fortune 500 companies, are incorporated in Delaware. 15) TRUE
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All state incorporation statutes require corporations to indicate in the name of the corporation that the business is incorporated. Every corporation must attach Corporation, Company, Limited, or Incorporated, or an abbreviation of one of these terms, to the end of its business name. 16) FALSE The Revised Model Business Corporation Act (RMBCA) requires only one incorporator to incorporate a business, although it permits more.Generally, the incorporator’s only duty is to sign the articles of incorporation. 17) FALSE A certificate of incorporation is a document issued by the secretary of state certifying that the corporation is incorporated in the state and is authorized to conduct business. 18) TRUE A de jure corporation (literally, a “lawful corporation”) has met the substantial elements of the incorporation process. A corporation that has received its certificate of incorporation has met the mandatory statutory provisions and is thus a de jure corporation.Courts usually hold that corporations that make minor errors in the incorporation process still enjoy de jure corporate status. 19) FALSE A de facto corporation (literally, a “corporation in fact”) has not substantially met the requirements of the state incorporation statute, but courts recognize it as a corporation for most purposes to avoid unfairness to third parties who believed it was properly incorporated. 20) FALSE Directors typically serve for one year, but most state statutes allow for longer terms if the terms of the various directors are staggered. 21) FALSE Version 1
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Shareholders are not directly responsible for the daily management of the corporation; instead, they elect the directors who then appoint officers who are responsible for the daily management of a corporation. 22) TRUE Directors and officers have a fiduciary duty of care, meaning that they must exercise due care when making decisions for the corporation. 23) TRUE When directors or officers violate their duty of loyalty, they are selfdealing. Directors or officers can engage in two types of self-dealing. The first form of self-dealing, called business self-dealing, occurs when a director or officer makes decisions that benefit other companies with which he has a relationship. The second form of self-dealing, called personal self-dealing, occurs when a director or officer makes business decisions that benefit her personally. 24) FALSE Because there are many times when individual directors and officers may personally benefit from decisions made by the board of directors, the directors and officers have a fiduciary duty to fully disclose conflicts of interest that arise in corporate transactions.A decision can be made that will personally benefit one director or officer as long as: a) there is full disclosure of the interest and b) the disinterested board members and/or disinterested shareholders approve the decision. 25) TRUE According to the “responsible person” doctrine, a court may find a corporate officer criminally liable regardless of the extent to which the officer took part in the criminal activity. Even if the officer knew nothing about the criminal activity, the officer can still be held criminally liable if the court determines that a responsible person would have known about and could have prevented the illegal activity. 26) FALSE Version 1
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According to the “business judgment” rule, directors and officers are not liable for decisions that harm the corporation if they were acting in good faith at the time of the decision. 27) FALSE Some corporations issue stock certificates to shareholders as proof of ownership in the corporation. Each certificate includes the corporation’s name and the number of shares represented by the certificate. A shareholder’s ownership in the corporation, however, does not depend on his possession of the physical stock certificate. For example, if the certificate is destroyed in a fire, the shareholder’s ownership in the corporation is not destroyed. 28) TRUE A leveraged buyout (LBO) occurs when a group within a corporation (usually management) buys all the outstanding corporate stock held by the public. Thus, the group gains control over corporate operations by going private, or becoming a privately held corporation. 29) TRUE Hostile takeovers are takeovers to which the management of the target corporation objects.When a hostile takeover succeeds, the target corporation’s management frequently compares the transition to a fullscale invasion characterized by layoffs and dramatic changes in company policy. 30) FALSE In a tender offer, the aggressor offers target shareholders a price above the current market value of the stock. 31) TRUE Because contacting each individual target shareholder is expensive, aggressors often try to win the favor of a few institutional investors that own a large block of shares. 32) FALSE Version 1
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A two-tier board of directors consists of a management board (all executive directors) and a separate supervisory board (all nonexecutive directors). German corporation law, for example, requires all corporations to have two boards. In recent years, China has followed the German model and adopted a two-tier board structure, with both a board of directors and a supervisory board. 33) TRUE In some cases, courts will deny limited liability to a corporation that would normally have de jure or de facto status because shareholders have used the corporation to engage in illegal or wrongful acts. Shareholders attempt to hide behind the corporate veil of limited liability to protect themselves from personal liability. In these cases, courts pierce the corporate veil, or impose personal liability on shareholders. Courts are likely to pierce the corporate veil, for example, when shareholders’ personal interests and corporate interests are commingled such that the corporation has no separate identity. 34) A In United States law, corporations are legal entities. In other words, corporations exist separately from their shareholders. 35) E A corporation files articles of incorporation with the state explaining its organization. 36) D Unless the articles of incorporation specify otherwise, shareholders do not participate in corporate management. Instead, shareholders elect a board of directors; the board, in turn, selects officers to manage the dayto-day business of the corporation. 37) B Having control over their income, corporations can distribute their income to shareholders in the form of dividends. Version 1
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38) C Having control over their income, corporations can keep profits, or retained earnings, to reinvest. 39) C Because the relationship between corporations and their directors, officers, and employees is an agency relationship, corporations are liable for torts and crimes committed by their agents during the scope of their employment. Courts refer to this liability as the doctrine of respondeat superior (Latin for "let the master answer"). 40) D State incorporation statutes typically grant the following express powers to corporations: the power to have perpetual existence, the power to sue and be sued in the corporation's name, the power to acquire property, the power to make contracts and borrow money, the power to lend money, the power to make charitable donations, and the power to establish rules for managing the corporation. 41) B If a corporation acts beyond its express and implied powers, the act is called an ultra vires (Latin for "beyond powers") act. 42) A If a corporation acts beyond its express and implied powers, the act is called an ultra vires (Latin for "beyond powers") act. A corporation commits an ultra vires act when it creates a contract outside the scope of its powers. 43) D A public corporation is a corporation created by government to help administer law. Thus, public corporations often have specific government duties to fulfill. The Federal Deposit Insurance Corporation (FDIC) is an example of a public corporation. 44) B Version 1
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Private persons create private corporations for private purposes.Private corporations do not have government duties. 45) A Nonprofit corporations may earn profits. They usually provide services to their members and often reinvest most of their profits in the business. 46) E Every corporation is incorporated in a particular state. A corporation is a domestic corporation in the state in which it is incorporated. 47) B A corporation is a foreign corporation in states in which it conducts business but is not incorporated.For example, the McDonald’s Corporation is incorporated in Delaware but does business in all fifty states. Thus, McDonald’s is a domestic corporation in Delaware and a foreign corporation in the other forty-nine states. 48) A An alien corporation is a business incorporated in another country. Thus, if a United States corporation wants to do business in Canada or Mexico, it is an alien corporation in those countries. 49) E Closely held corporations (also called close, family, or privately held corporations) generally do not offer stock to the general public. Shareholders are usually family members and friends who are often active in the business. 50) E An S corporation cannot have more than 100 shareholders. Only individuals, trusts, and (in certain circumstances) corporations can be shareholders (partnerships cannot be shareholders). S corporations can issue only one class of shares, although not all shares must have identical voting rights. S corporations must be domestic corporations, and no shareholder of an S corporation can be a nonresident alien. Version 1
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51) D Promoters begin the corporate creation and organization process by arranging for necessary capital, financing, and licenses. 52) D An infant corporation must select a state in which to incorporate. Each state has different laws governing the incorporation process and different corporate tax rates. 53) B An incorporator is an individual who applies to the state for incorporation on behalf of a corporation. 54) E An incorporator is an individual who applies to the state for incorporation on behalf of a corporation. Generally, the incorporator’s only duty is to sign the articles of incorporation. 55) D According to the Revised Model Business Corporation Act (RMBCA), a corporation's articles of incorporation must include a) the name of the corporation, b) the address of the registered office, c) the name of the registered agent [i.e., the specific person who receives legal documents on behalf of the corporation], and d) the names and addresses of the incorporators. 56) B A certificate of incorporation is a document certifying that the corporation is incorporated in the state and is authorized to conduct business. 57) A Bylaws are rules and regulations that govern a corporation's internal management. 58) D
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If the incorporator or promoters make an error or omission during the incorporation process, courts may rule that the organization is not a corporation, in which case the organization is a defective corporation. Shareholders may be personally liable for a defective corporation’s actions. 59) B A de facto corporation has not substantially met the requirements of the state incorporation statute, but courts nevertheless recognize it as a corporation for most purposes to avoid unfairness to third parties who believed it was properly incorporated. 60) C Through corporation by estoppel, courts estop (prevent) the corporation from denying its corporate status. Although a court ruling of corporation by estoppel prevents the business from denying corporate status, it does not remedy the error or grant the organization corporate status for conducting future business. 61) A Courts are likely to pierce the corporate veil and impose liability on shareholders when: a) a corporation lacked adequate capital when it initially formed; b) a corporation did not follow statutory mandates regarding corporate business; c) shareholders’ personal interests and corporate interests are commingled such that the corporation has no separate identity; or d) shareholders attempt to commit fraud through a corporation. 62) B Equity securities represent ownership in a corporation. 63) B Bonds are debt securities. 64) D
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Owners of preferred stock, or preferred shares, enjoy preferences with respect to assets and dividends.Corporations often have several classes of preferred shares. 65) E Owners of common stock, or common shares, own a portion of a corporation but do not enjoy any preferences.A common stock owner is entitled to a portion of the corporation’s dividends in proportion to the number of shares of common stock he or she owns. 66) D Typically, shareholders use a majority vote to elect corporatedirectors. 67) A Typically, shareholders use a majority vote to elect directors. The only exception occurs during incorporation. Because there are no shareholders in the beginning, either the incorporators appoint board members or the corporate articles name the board members. 68) C The corporate articles or bylaws specify the number of corporate directors, in compliance with state law. 69) B If a corporation has fewer than fifty (50) shareholders, Section 7.32 of the Revised Model Business Corporation Act (RMBCA) allows companies to eliminate the board of directors altogether. 70) C Directors typically serve for one year, but most state statutes allow for longer terms if the terms of the various directors are staggered. 71) E Directors can be removed from their positions for cause—for failing to perform a required duty.Directors who are removed for cause, however, can ask the courts to review the legality of the removal. 72) E Version 1
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A minimum number of directors, or a quorum, must be present at each meeting of the board of directors for decisions made at the meeting to be valid. Quorum requirements are different in each state, but most states leave the decision up to the corporation itself. 73) A While ordinary corporate decisions made by directors require a majority vote, more important decisions sometimes require a two-thirds vote. 74) B Some directors are also officers or employees of the corporation. These directors are known as inside directors. 75) B Directors who are not officers or employees of the corporation are called outside directors. 76) D Outside directors who have business contacts with the corporation are known as affiliated directors. 77) E Outside directors who do not have business contacts with the corporation are known as unaffiliated directors. 78) D Officers act as agents of the corporation, and thus the rules of agency apply to their work. 79) B Shareholders own the firm.As soon as an individual purchases the stock of a particular corporation, she becomes an owner of the corporation. Although she is not legally recognized as an owner of corporate property, she has an equitable, or ownership, interest in the company. 80) D
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Shareholders have the power to propose ideas for the corporation. If a shareholder feels that he has a worthwhile idea for the company, he can include his proposal in the proxy materials sent out to the shareholders before their annual meeting. The Securities and Exchange Commission (SEC) has established that any shareholder who owns more than $1,000 worth of stock in the corporation can submit proposals to be included in proxy materials. 81) D When shareholders representing more than 50 percent of the outstanding shares are presentat a shareholder meeting, a quorum of shareholders generally exists. 82) A When directors or officers violate their duty of loyalty, they are selfdealing. Directors or officers can engage in two types of self-dealing: business self-dealing and personal self-dealing. Business self-dealing occurs when a director or officer makes decisions that benefit other companies with which he has a relationship. Personal self-dealing occurs when a director or officer makes business decisions that benefit her personally. 83) D More than one-half of all publicly traded corporations in the United States are incorporated in Delaware; as a result, when Delaware courts rule on the duties of majority shareholders to minority shareholders, for example, the courts' rulings have a far-reaching impact. 84) E
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Directors and officers can be held personally responsible for the torts and crimes of other employees within the organization if they fail to supervise the employees’ behavior adequately. According to the responsible person doctrine, a court may find a corporate officer criminally liable regardless of the extent to which the officer took part in the criminal activity if the court determines that a responsible person would have known about and could have prevented the illegal activity. 85) D If there is a fixed face value noted on the stock certificate, par-value stock is involved. A shareholder must pay the corporation at least the par value of the stock. 86) E For no-par shares, or shares without a par value, the shareholder must pay the corporation the fair market value of the shares. 87) C Watered stocks are issued to individuals below their fair market value. When watered stock is issued to a shareholder, the shareholder is individually liable for paying the difference between the price he paid for the shares and the stated corporate value of the shares. 88) E The unique responsibilities of corporate directors call for unique rights. Directors have four major rights within a corporation: a) compensation; b) participation; c) inspection; and d) indemnification. 89) D Some corporations issue stock certificates to shareholders as proof of ownership in the corporation. 90) D
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Some corporations issue stock certificates to shareholders as proof of ownership in the corporation. Each certificate includes the corporation's name and the number of shares represented by the certificate, but a shareholder's ownership in the corporation does not depend on his possession of the physical stock certificate. 91) C Preemptive rights give preference to shareholders to purchase shares of a new issue of stock.Each shareholder receives preference in proportion to the percentage of stock she already owns. 92) D A stock warrant is a type of security issued by a corporation (usually together with a bond or preferred stock) that gives the holder the right to purchase a certain amount of common stock at a stated price within a given time period. 93) B One method of restricting stock transferability is called the right of first refusal. If a corporation establishes the right of first refusal in its bylaws, the corporation or its shareholders have the right to purchase any shares of stock offered for resale by a shareholder within a specified period of time. 94) D One of the shareholder’s most important rights is the right to a derivative suit. If corporate directors fail to sue when the corporation has been harmed by an individual, another corporation, or a director, individual shareholders can file a shareholder's derivative suit on behalf of the corporation. In most jurisdictions, to be able to file a shareholder’s derivative suit, a shareholder must have held stock at the time of the alleged wrongdoing. 95) C
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In addition to their right to bring suit on behalf of the corporation, shareholders can also bring a direct suit against the corporation. In a shareholder's direct suit, the shareholder alleges that he or she has suffered damages caused by the corporation. 96) B A cash tender offer is a type of attempted corporate takeover in which the aggressoroffers to pay targeted shareholders cash for their stock. 97) A If corporate directors conclude that a takeover is not in the company’s best interest, the company may employ many methods of resistance. One common method is a self-tender offer, in which the target corporation offers to buy its shareholders' stock. If the shareholders accept the offer, the target corporation maintains control of the business. 98) B A leveraged buyout (LBO) is a takeover-resistance strategy in which a group within the target corporation buys all the corporate stock held by the public. 99) A A leveraged buyout (LBO) occurs when a group within a corporation (usually management) buys all the outstanding corporate stock held by the public. Thus, the group gains control over corporate operations by "going private," or becoming a privately held corporation. 100) C The death of a corporation occurs in two phases: a) dissolution, the legal termination of the corporation, and b) liquidation, the process by which the board of directors converts the corporation's assets into cash and distributes them among the corporation's creditors and shareholders. 101) B
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Voluntary dissolution occurs when the directors or shareholders trigger the dissolution process. The directors can initiate the proposal and submit it to the shareholders for a vote, or the shareholders can begin dissolution procedures. 102) C Involuntary dissolution results when government or private parties successfully get a court order dissolving the corporation. 103) C Common stock owners have the lowest priority when a corporation distributes dividends. 104) D The United States Court of Appeals for the Sixth Circuit ruled that the "golden parachutes" did not violate public policy, and subsequently ordered enforcement of the severance agreements. 105) A One of the shareholder’s most important rights is the right to a derivative suit. If corporate directors fail to sue when the corporation has been harmed by an individual, another corporation, or a director, individual shareholders can file a shareholder's derivative suit on behalf of the corporation. 106) B In addition to their right to sue on behalf of the corporation, shareholders can also bring a direct suit against the corporation. In a shareholder's direct suit, the shareholder alleges that she has suffered damages caused by the corporation. For example, shareholders can bring a direct suit if the board of directors is improperly withholding dividends. 107) E Because the corporation pays income taxes and the shareholders are also paying taxes on their dividends, the dividends are subjected to double taxation, thus creating a disadvantage for corporations. Version 1
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108) D S corporations enjoy the tax status of partnerships, and in addition to the avoidance of double taxation, S corporations offer two other important tax advantages. First, shareholders in an S corporation are allowed to deduct corporate losses from their personal income, ultimately lowering how much the shareholders have to pay in taxes. Second, depending on a shareholder’s income level, choosing to be an S corporation can result in a personal income tax rate that is lower than what the regular corporate tax rate would be. 109) E To be classified as an S corporation, a corporation may not have more than 100 shareholders; only individuals, trusts, and (in certain circumstances) corporations can be shareholders (partnerships cannot be shareholders); only one class of shares may be issued, although not all shares must have identical voting rights; it must be a domestic corporation; and no shareholder may be a nonresident alien. 110) A A de jure corporation (literally, a "lawful corporation") has met the substantial elements of the incorporation process.A corporation that has received its certificate of incorporation has met the mandatory statutory provisions and is thus a de jure corporation. Courts usually hold that corporations that make minor errors in the incorporation process still enjoy de jure corporate status. 111) A
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A de jure corporation (literally, a "lawful corporation") has met the substantial elements of the incorporation process. A corporation that has received its certificate of incorporation has met the mandatory statutory provisions and is thus a de jure corporation. Courts usually hold that corporations that make minor errors in the incorporation process still enjoy de jure corporate status. Even if the incorporator wrote the incorrect address of the corporate office in the articles of incorporation, the corporation would still be a de jure corporation. No party can question a de jure corporation's status as a corporate entity in court. 112) A In some cases, courts will deny limited liability to a corporation that would normally have de jure or de facto status because shareholders have used the corporation to engage in illegal or wrongful acts. When shareholders attempt to hide behind the corporate veil of limited liability to protect themselves from personal liability, courts pierce the corporate veil, or impose personal liability on shareholders. One reason a court is likely to pierce the corporate veil is when shareholders attempt to commit fraud through a corporation. 113) E The number of votes of minority shareholders is determined by multiplying the number of shares the group owns by the number of open director positions. 114) D Directors and officers have duties to the shareholders and to the corporation with the two primary fiduciary duties of directors and officers being the duty of care and the duty of loyalty. 115) E Directors and officers can also be held personally responsible for their own torts and crimes. 116) B Version 1
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Directors and officers can breach their fiduciary duty of loyalty by preventing corporate opportunity. This breach usually happens when directors or officers own other companies that compete with their corporation. 117) B When directors or officers violate their duty of loyalty, they are selfdealing.Personal self-dealing occurs when a director or officer makes business decisions that benefit her personally. 118) E A director or officer convicted of breaching her duty of loyalty is required to cede to the corporation all the profits she earned as a result of the breach.The goal of this rule is to create incentives that discourage breaches of the duty of loyalty by taking from the director or officer all the profits she made. 119) C Under the business judgment rule, directors and officers are not liable for decisions that harm the corporation if they were acting in good faith at the time of the decision.In other words, if there was reason to believe that the decision was a good decision at the time, the directors and officers are not liable for the resulting harm. 120) C Watered stock is stock issued to individuals below its fair market value. 121) D Watered stock is stock issued to individuals below its fair market value. When watered stock is issued to a shareholder, the shareholder is individually liable for paying the difference between the price he paid for the shares and the stated corporate value of the shares. 122) B State incorporation statutes establish the requirements for corporate formation. Version 1
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123) B At the first organizational meeting, shareholders adopt a set of corporate bylaws, or rules and regulations that govern the corporation’s internal management. 124) D One voting process required in most states, called cumulative voting, ensures that minority shareholders have a voice in electing the board of directors. 125) B The two (2) primary fiduciary duties of directors and officers are the duty of care and the duty of loyalty. 126) C Although directors and officers are expected to make decisions that are in the best interest of the corporation, they are not expected to make perfect decisions all the time. Many directors and officers make decisions that inadvertently harm the corporation. Although shareholders may want to hold their directors and officers liable for these decisions, the business judgment rule does not allow them to do so. 127) A Some corporations issue stock certificates to shareholders as proof of their ownership in the corporation.
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128) Courts consider corporations to be legal persons. Thus, in most cases, corporations, like natural persons, have certain rights according to United States Constitution’s Bill of Rights. Specifically, the Fifth and Fourteenth Amendments state that government cannot deprive any person of life, liberty, or property without due process. Courts have held that corporations are persons in this case and thus have a right to due process. Furthermore, courts consider corporations to be persons with respect to the Fourth Amendment. Hence, the Fourth Amendment protects corporations from unreasonable searches and seizures. Finally, courts consider corporations to be persons that have free speech rights protected by the First Amendment. 129) If a corporation acts beyond its express and implied powers, the act is called an ultra vires act. If a corporation commits an ultra vires act, the Revised Model Business Corporation Act (RMBCA) provides the following remedies: 1.Shareholders may sue to prohibit the corporation from fulfilling the ultra vires contract. 2.The corporation or shareholders may sue corporate directors or officers for the damages caused by the ultra vires act. 3.The state attorney general can have the corporation dissolved or prevent the corporation from fulfilling the ultra vires contract. 4.Courts uphold ultra vires contracts if one of the parties has executed his or her part of the contract. 130) Almost anyone can become a director. The legal requirements for director qualifications are incredibly lax. In most states, directors are not required to own stock in the corporation. In some cases, however, statutory law and corporate bylaws require ownership and a minimum age.
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131) The directors and officers failed in their duty of care to their shareholders by not acting in the best interests of the company. The directors and officers continued to advocate that employees invest in employee stock-sharing options, even though it appears that the directors and officers knew the stock was drastically overpriced. Furthermore, the directors and officers failed in their duty of care regarding oversight. The directors and officers either did not pay enough attention to see the collapse of their stock coming or purposely kept the information secret. Either way, the directors and officers at Enron breached their fiduciary duty of care and were, therefore, liable to their shareholders, many of whom were employees of Enron. 132) Mary has a duty to disclose her self-interest and to abstain from voting on the issue. The company can consider a decision that will personally benefit one director or officer so long as a) there is full disclosure of the interest and b) the disinterested board members approve it.
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CHAPTER 23 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) In its Landreth Timber Co. v. Landreth decision, the United States Supreme Court held that courts should presumptively treat as a security any financial instrument designated as commercial paper. ⊚ true ⊚ false
2) In its SEC v. W.J. Howey Co. decision, the United States Supreme Court defined a security as an investment in a common enterprise with the reasonable expectation of profit gained from one’s own efforts. ⊚ true ⊚ false
3) Since the Securities Act of 1933 provides a clear, exacting, and simplified definition of a security, courts can easily determine whether a particular instrument is a security. ⊚ true ⊚ false
4)
Investment contracts are not securities. ⊚ true ⊚ false
5) The Securities Act of 1933 oversees the purchase and sale of corporate securities, while the Securities Exchange Act of 1934 regulates how companies issue securities. ⊚ true ⊚ false
6) The Securities and Exchange Commission (SEC) was created by the Securities Act of 1933. ⊚ true ⊚ false
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7) The Securities and Exchange Commission (SEC) is an independent agency whose function is to administer federal securities laws. ⊚ true ⊚ false
8) In order to protect investors, the Securities and Exchange Commission (SEC) periodically issues opinions regarding the worth of certain securities. ⊚ true ⊚ false
9) Although issuers of securities are required to file a registration statement with the Securities and Exchange Commission (SEC), they are not required to file a prospectus because the prospectus is merely an advertising tool that issuers distribute to potential investors. ⊚ true ⊚ false
10)
Securities cannot be sold during the prefiling period. ⊚ true ⊚ false
11)
In China, securities are not subject to government regulation. ⊚ true ⊚ false
12) A tombstone advertisement is a prospectus with a notice written in a conspicuous font at the top of the page warning investors that the registration has been filed with the Securities and Exchange Commission (SEC) but is not yet approved. ⊚ true ⊚ false
13) The private placement exemption allows firms to issue an unlimited number of securities to an unlimited number of accredited investors. ⊚ true ⊚ false
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14) According to the Securities Act of 1933, securities issued by municipal, state, and federal governments are exempt from the registration process. ⊚ true ⊚ false
15) According to the Securities Act of 1933, any security offered or sold to a permanent resident of the single state where the issuer of the security resides and does business is exempt from the registration process. ⊚ true ⊚ false
16) If an investor wants to sell, they must first register their securities with the Securities and Exchange Commission (SEC). ⊚ true ⊚ false
17) If the Securities and Exchange Commission (SEC) uncovers a potential violation of the 1933 act, it can take either administrative or injunctive action; it cannot, however, recommend criminal prosecution, since that is within the province of federal prosecutors. ⊚ true ⊚ false
18) Under the substantial performance defense, the defendant must show that she investigated the registration statement and had reasonable grounds to believe that the statement was accurate and had no omission of material facts. ⊚ true ⊚ false
19) If an investor purchased securities and suffered damages as a result of an issuer's false or misleading statement, the investor is entitled to bring a civil suit to recover his or her losses. ⊚ true ⊚ false
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20) According to Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, corporate officers, directors, and employees are considered insiders, while corporate lawyers, consultants, and accountants are not. ⊚ true ⊚ false
21) Insider trading occurs if a company employee or executive uses material inside information to make a profit. ⊚ true ⊚ false
22) Section 16(b) of the Securities Exchange Act of 1934 imposes strict liability on statutory insiders who earn short-swing profits. ⊚ true ⊚ false
23)
Blue-sky laws regulate the offering and sale of intrastate securities. ⊚ true ⊚ false
24) The Investment Company Act of 1940 recognizes banks, insurance companies, savings and loans, and finance companies as investment companies. ⊚ true ⊚ false
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 25) Corporations issue corporate securities known as _____ to raise capital for corporate expansion.
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A) promissory notes B) drafts C) promissory notes and drafts D) commercial paper E) stocks and bonds
26) The United States Congress passed the _____ in reaction to the mistrust of securities transactions before the Great Depression. A) Securities Exchange Act of 1934 B) Wall Street Accountability Act of 1931 C) Ponzi Scheme Elimination Act of 1932 D) New York Stock Exchange Restoration Act of 1930 E) Securities Act of 1933
27) Which of the following was the ruling in Stoneridge Inv. Partners, LLC v. ScientificAtlanta, Inc., the case in the textbook in which the United States Supreme Court addressed the issue of the liability of bankers, lawyers, and other third parties who did not directly mislead investors but worked with corporations that did?
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A) That bankers, lawyers, and other third parties who did not directly mislead investors but worked with corporations that did can be held liable to the same extent as the primary wrongdoers B) That bankers, lawyers, and other third parties who did not directly mislead investors but worked with corporations that did could be held liable to shareholders only if the primary wrongdoers were insolvent, and that the secondary wrongdoers could be punished by criminal prosecution and enforcement actions by the Securities and Exchange Commission (SEC) C) That bankers, lawyers, and other third parties who did not directly mislead investors but worked with corporations that did could be held liable to shareholders only if the primary wrongdoers were insolvent, and that the secondary wrongdoers could not be punished by criminal prosecution and enforcement actions by the Securities and Exchange Commission (SEC) D) That bankers, lawyers, and other third parties who did not directly mislead investors but worked with corporations that did cannot be sued by shareholders, and cannot be held criminally liable or be subject to enforcement actions by the Securities and Exchange Commission (SEC) E) That bankers, lawyers, and other third parties who did not directly mislead investors but worked with corporations that did cannot be sued by shareholders but can be subject to criminal prosecutions and enforcement actions by the Securities and Exchange Commission (SEC)
28) Which of the following was the result on appeal in Securities and Exchange Commission v. Texas Gulf Sulphur Co, the case in the textbook in which it was alleged that corporate employees possessed inside information involving the likelihood of a major mineral find precluding them from trading in their company's stock? A) That the defendants could not be held liable because they were not executives of the company B) That the defendants could not be held liable because company policy precluded them from disclosing the information at issue to the public C) That the defendants could not be held liable because a significant mineral discovery was not sufficiently certain to require disclosure to the public D) That the defendants could be held liable because of their status as insiders, regardless of whether the information would be deemed material E) That the defendants could be held liable because they failed to reveal material information to the public
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29) Which of the following was the result on appeal in United States v. Carpenter, the case in the textbook in which it was claimed that federal securities law was violated by a scheme by which confidential information gained in the course of obtaining news material for the Wall Street Journal was sold to stockbrokers? A) That the defendants were criminally liable for violating federal securities laws by misappropriating material, nonpublic information for their own profit in the purchase and sale of securities B) That the defendants were not criminally liable for violating federal securities laws by misappropriating material, nonpublic information for their own profit in the purchase and sale of securities, but could be held liable in a civil action to any investors who suffered harm C) That the stockbrokers were criminally liable for violating federal securities laws by misappropriating material, nonpublic information for their own profit in the purchase and sale of securities, but there was no basis upon which the newspaper employees could be held criminally liable D) That the newspaper employees could be held criminally liable for violating federal securities laws by misappropriating material, nonpublic information for their own profit, but there was no basis upon which the stockbrokers could be held liable E) That there was no basis upon which either the newspaper employees or the stockbrokers could be held criminally liable under federal securities law or under civil causes of action brought by investors
30)
Which of the following is not considered a security? A) A debenture B) A warrant C) A stock D) A check E) A bond
31)
Which of the following laws regulate(s) securities transactions?
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A) The Securities Act of 1933 B) The Securities Exchange Act of 1934 C) The Anti-Fraud Securities Act of 2001 D) The Securities Act of 1933, the Securities Exchange Act of 1934, and the Anti-Fraud Securities Act of 2001 E) The Securities Act of 1933 and the Securities Exchange Act of 1934, but not the Anti-Fraud Securities Act of 2001
32)
Which of the following laws created the Securities and Exchange Commission (SEC)? A) The Securities Exchange Regulation Act of 1929 B) The Securities Exchange Act of 1934 C) The Stock Market Restoration Act of 1932 D) The New York Stock Exchange Reformation Act of 1929 E) The Stock Brokers and Dealers Accountability Act of 1932
33)
How many individuals head the Securities and Exchange Commission (SEC)? A) Five (5) B) Seven (7) C) Nine (9) D) Eleven (11) E) Twelve (12)
34) Who is responsible for appointing the individuals that head the Securities and Exchange Commission (SEC)? A) The United States (U.S.) Senate and House of Representatives B) The U.S. Supreme Court C) The Federal Reserve Board of Governors D) The SEC Board of Directors E) The U.S. president
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35) Once an individual is appointed to the Securities and Exchange Commission (SEC), for how long does she serve? A) For a five-year fixed term B) For a three-year rotational term C) For a one-year probationary period and then for a four-year fixed term D) For a ten-year renewable term E) There is no set term; instead, she serves at the pleasure of the president, and can be terminated at will.
36)
Which of the following legislation regulates how companies issue corporate securities? A) The Securities Act of 1933 B) The Securities Exchange Act of 1934 C) The Wall Street Accountability Act of 1931 D) The Ponzi Scheme Elimination Act of 1932 E) The New York Stock Exchange Restoration Act of 1930
37)
Which of the following legislation oversees the purchase and sale of securities? A) The Securities Act of 1933 B) The Securities Exchange Act of 1934 C) The Wall Street Accountability Act of 1931 D) The Ponzi Scheme Elimination Act of 1932 E) The New York Stock Exchange Restoration Act of 1930
38) Which of the following legislation directed Securities and Exchange Commission (SEC) oversight of the Public Company Accounting Oversight Board to regulate public accounting firms? A) The Sarbanes-Oxley Act of 2002 B) The Securities Acts Amendments of 1990 C) The Market Reform Act of 1990 D) The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 E) The National Securities Markets Improvement Act of 1996
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39)
Which of the following are main functions/purposes of the Sarbanes-Oxley Act of 2002?
A) To issue cease-and-desist orders against violators of any federal securities law and to seek civil monetary penalties against any violators B) To create rules to require brokers and dealers to provide information concerning prices and risks associated with the penny-stock market and to seek civil monetary penalties against those who violate such rules C) To permit the Securities and Exchange Commission (SEC) to exempt persons, securities, and transactions from securities regulations, thereby promoting private-sector economic growth D) To increase corporate disclosure requirements and penalize violators of securities laws more heavily E) To decrease the regulatory authority of the SEC and to promote corporate selfregulation in terms of the issuance and sale of corporate stock
40) Under the _____, the Securities and Exchange Commission (SEC) may suspend trading if prices vary excessively over a short period of time. A) Reform of Securities Act of 1991 B) Market to Market Act of 1982 C) Consumer Safe Investing Act of 1999 D) Market Reform Act of 1990 E) Wall Street Reduction Act of 1995
41) Benjamin has violated foreign securities laws. Under which of the following laws can he can be punished? A) The Foreign Securities Reciprocity Act of 1990 B) The Uniform Enforcement of Foreign Securities Regulations Act of 1995 C) The Securities Act Amendments of 1990 D) The Securities and Exchange Foreign Securities Regulations Act of 1994 E) The International Securities and Exchange Act of 1990
42) Which of the following laws permit(s) the Securities and Exchange Commission (SEC) to exempt persons, securities, and transactions from securities regulations? Version 1
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A) The Sarbanes-Oxley Act of 2002 B) The Securities Acts Amendments of 1990 C) The Market Reform Act of 1990 D) The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 E) The National Securities Markets Improvement Act of 1996
43) A prospectus is a written document filed with the Securities and Exchange Commission (SEC) containing _____. A) a bank certification acknowledging the company’s ability to remain financially solvent B) the company’s reservation of rights regarding foreign investors C) a description of a security and other financial information regarding the company offering the security D) the identity of the company’s officers and directors E) the company’s mission and vision statements
44) The prefiling period begins when an issuer starts to think about issuing securities and ends when the issuer files the registration statement and prospectus with the _____. A) Securities and Exchange Commission (SEC) B) Federal Trade Commission (FTC) C) New York Stock Exchange (NYSE) D) Internal Revenue Service (IRS) E) Interstate Commerce Commission (ICC)
45) Underwriters are investment banking firms that purchase securities from the issuing corporation with the intent to sell them to brokerage houses, which then sell them to _____.
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A) the public B) third party beneficiaries C) securities dealers D) securities market intermediaries E) securities marketing intermediaries
46) Which of the following occurs after an issuer files a registration statement and prospectus? A) The waiting period B) The resolution period C) The post-filing denouement D) The expectancy interval E) The prospectus interval
47) During the _____, issuers may make oral offers to sell their securities and may distribute a red-herring prospectus—a prospectus with a notice written in red print at the top of the page warning investors that the registration has been filed with the Securities and Exchange Commission (SEC) but is not yet approved. A) expectancy period B) waiting period C) post-filing denouement D) pre-filing phase E) endorsement phase
48) A(n) _____ announces a forthcoming sale of securities during the waiting period though a brief advertisement. A) proxy advertisement B) special offering C) invitation to negotiate D) tombstone advertisement E) red-herring prospectus
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49) Which of the following refers to the time period that begins when the Securities and Exchange Commission (SEC) declares the registration statement effective and ends when the issuer sells all securities offered or withdraws them from sale? A) The post-effective period B) The acknowledgement period C) The post-filing denouement D) The waiting period E) The expectancy interval
50) Shelf registrations permit certain qualified issuers to register securities they will sell _____ on a delayed or continuous basis in the future. A) as qualified annuities B) as reserve-premium annuities C) as commercial paper D) "business-to-business" (B2B) E) "off the shelf"
51) The Securities and Exchange Commission (SEC) assumes that _____ are better able to evaluate the financial risk of buying securities. A) restricted investors B) qualified investors C) private investors D) accredited investors E) public stock exchanges such as the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ)
52)
Securities which do not have to go through the registration process include _____.
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A) limited offers and intrastate issues B) intrastate issues and resales of securities C) resales of securities and limited offers D) limited offers, intrastate issues, and resales of securities E) common stock and preferred stock
53) According to Securities and Exchange Commission (SEC) guidelines, an accredited investor does not include _____. A) a university B) a person who can prove he is gainfully employed C) an insider of the issuer (for example, an executive officer) D) a partnership with total assets of more than $5 million E) a natural person with a net worth of at least $1 million
54) In order to qualify for the intrastate exemption, an issuer must do at least _____ percent of its business within the state. A) thirty (30) B) fifty (50) C) sixty (60) D) seventy-five (75) E) eighty (80)
55) A person who controls, is controlled by, or is in common control with the issuer is known as a(n) _____. A) affiliate B) associate C) general partner D) limited partner E) insider
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56)
Who can assert the due diligence defense? A) Any defendant, except the issuer B) Only the issuer C) Only an officer of the corporation D) Only a member of the board of directors E) Any defendant, including the issuer
57)
Which of the following is true regarding the Securities Exchange Act of 1934?
A) It regulates the subsequent trading of securities. B) It requires that certain issuers file periodic reports with the Securities and Exchange Commission (SEC). C) It permits the SEC to monitor securities markets for fraud and market manipulation. D) It regulates the subsequent trading of securities, it requires that certain issuers file periodic reports with the SEC, and it permits the SEC to monitor securities markets for fraud and market manipulation. E) It regulates the subsequent trading of securities and requires that certain issuers file periodic reports with the SEC, but it does not permit monitoring by the SEC.
58) One of the most important sections of the Securities Exchange Act of 1934 is _____, which prohibits the use of manipulative and deceptive devices to bypass Securities and Exchange Commission (SEC) rules. A) Section 10(a) B) Rule 1.2 C) Section 10(b) D) Rule 2.1 E) Section 10(c)
59) Which of the following provisions of the Securities Exchange Act of 1934 prohibits fraud associated with the purchase or sale of all securities?
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A) Section 2a-6 B) Section 15(b) C) Rule 10b-5 D) Rule 5(c)(2) E) Rule 2(c)(5)
60) According to Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, which of the following constitute(s) a material omission or misrepresentation during a securities transaction? A) A change in the status of litigation against the company B) A change in dividends C) A new product, process, or discovery D) A change in the status of litigation against the company; a change in dividends; or a new product, process, or discovery E) A change in the status of litigation against the company or a change in dividends, but not a new product, process or discovery
61) Which of the following is illegal because it gives the violator an important advantage over the general public and shareholders by using inside information to make a profit? A) Prospectus dealing B) Insider trading C) Intra-organizational trading D) Private trading in a false light E) Public trading in a false light
62) Why did the United States Congress pass the Private Securities Litigation Reform Act of 1995?
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A) To provide protection to companies who issue forecasts of earnings B) To provide stronger penalties against companies who issue forecasts of earnings that turn out to be wrong C) To provide stronger penalties against insiders who trade on forecasts of earnings D) To provide protection to insiders who trade on forecasts of earnings E) To provide protection to companies who issue forecasts of earnings and to provide protection to insiders who trade on such forecasts
63) Which of the following legislation limits shareholders' ability to bring class action suits against nationally-traded companies? A) The Class Action Prohibition Act of 1997 B) The Sarbanes-Oxley Act of 2002 C) The National Securities Markets Improvement Act of 1996 D) The Market Reform Act of 1990 E) The Securities Litigation Uniform Standards Act of 1998
64) Which of the following are profits are made by a statutory insider from the sale of company stock within any six-month period? A) Short-swing B) Red-herring C) Stock-shorting D) Prospective E) Prospectus
65) The United States Congress passed the _____ in an effort to prevent the exploitation of small investors. A) Investment Company Act of 1940 B) Securities Enforcement Remedies and Penny Stock Reform of 1990 C) Market Reform Act of 1990 D) Securities Act Amendments of 1990 E) National Securities Markets Improvement Act of 1932
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66) Which of the following organizations are excluded from the Investment Company Act’s definition of an investment company? A) Banks and insurance companies, but not savings and loans and finance companies B) Banks, insurance companies, savings and loans, and finance companies C) Savings and loans and finance companies, but not banks and insurance companies D) Banks and savings and loans, but not insurance companies and finance companies E) Insurance companies and finance companies, but not banks and savings and loans
67) Coffee shops. Bernice wants to open a chain of coffee shops and begins by asking her friends in various states around the country to invest through the purchase of securities in the coffee shops. Her friend Robbie says that he would like to invest but that she should be sure that she satisfies requirements of the Securities and Exchange Commission (SEC). He tells her that she has to provide information to the SEC involving a description of the securities, an explanation of how proceeds will be used, information regarding the management of the company, and other matters. He tells her that she also has to provide a document to the SEC that will be provided as an advertising tool to potential investors who can rely on it to decide whether they should buy securities. Bernice says that she does not want to do that. She explains to Robbie that insofar as the coffee shop venture is concerned, she does not want to advertise, and she wants to offer securities only to a limited number of wealthy friends. Particularly, she has in mind Scott who has a net worth of at least $3 million and Mary, a psychiatrist. Mary recently filed bankruptcy because of some bad decisions involving an elaborate decoration of her office. Although her income for the past couple of years has been in the range of $80,000, business is improving based on her recent involvement with a number of patients suffering anxiety based upon a fear of alien invasion. Which of the following is the term for the document referenced by Robbie involving information to be provided to the SEC involving a description of the securities, an explanation of how proceeds will be used, information regarding the management of the company, and other matters? A) An initial public offering B) A confirmation statement C) A registration statement D) An acknowledgement statement E) A reference statement
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68) Coffee shops. Bernice wants to open a chain of coffee shops and begins by asking her friends in various states around the country to invest through the purchase of securities in the coffee shops. Her friend Robbie says that he would like to invest but that she should be sure that she satisfies requirements of the Securities and Exchange Commission (SEC). He tells her that she has to provide information to the SEC involving a description of the securities, an explanation of how proceeds will be used, information regarding the management of the company, and other matters. He tells her that she also has to provide a document to the SEC that will be provided as an advertising tool to potential investors who can rely on it to decide whether they should buy securities. Bernice says that she does not want to do that. She explains to Robbie that insofar as the coffee shop venture is concerned, she does not want to advertise, and she wants to offer securities only to a limited number of wealthy friends. Particularly, she has in mind Scott who has a net worth of at least $3 million and Mary, a psychiatrist. Mary recently filed bankruptcy because of some bad decisions involving an elaborate decoration of her office. Although her income for the past couple of years has been in the range of $80,000, business is improving based on her recent involvement with a number of patients suffering anxiety based upon a fear of alien invasion. Which of the following is the term for the document Robbie referenced to be provided to the SEC that will be used as an advertising tool by potential investors who can rely on it to decide whether they should buy securities? A) An initial public offering B) A prospectus C) A marketing intermediary D) A prospective income statement E) An invitation to negotiate
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69) Coffee shops. Bernice wants to open a chain of coffee shops and begins by asking her friends in various states around the country to invest through the purchase of securities in the coffee shops. Her friend Robbie says that he would like to invest but that she should be sure that she satisfies requirements of the Securities and Exchange Commission (SEC). He tells her that she has to provide information to the SEC involving a description of the securities, an explanation of how proceeds will be used, information regarding the management of the company, and other matters. He tells her that she also has to provide a document to the SEC that will be provided as an advertising tool to potential investors who can rely on it to decide whether they should buy securities. Bernice says that she does not want to do that. She explains to Robbie that insofar as the coffee shop venture is concerned, she does not want to advertise, and she wants to offer securities only to a limited number of wealthy friends. Particularly, she has in mind Scott who has a net worth of at least $3 million and Mary, a psychiatrist. Mary recently filed bankruptcy because of some bad decisions involving an elaborate decoration of her office. Although her income for the past couple of years has been in the range of $80,000, business is improving based on her recent involvement with a number of patients suffering anxiety based upon a fear of alien invasion. Which of the following may allow Bernice to avoid registration with the SEC? A) The limited exemption B) The accredited exemption C) The unadvertised exemption D) The private placement exemption E) Section 4(6) of the Securities Exchange Act of 1934
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70) Coffee shops. Bernice wants to open a chain of coffee shops and begins by asking her friends in various states around the country to invest through the purchase of securities in the coffee shops. Her friend Robbie says that he would like to invest but that she should be sure that she satisfies requirements of the Securities and Exchange Commission (SEC). He tells her that she has to provide information to the SEC involving a description of the securities, an explanation of how proceeds will be used, information regarding the management of the company, and other matters. He tells her that she also has to provide a document to the SEC that will be provided as an advertising tool to potential investors who can rely on it to decide whether they should buy securities. Bernice says that she does not want to do that. She explains to Robbie that insofar as the coffee shop venture is concerned, she does not want to advertise, and she wants to offer securities only to a limited number of wealthy friends. Particularly, she has in mind Scott who has a net worth of at least $3 million and Mary, a psychiatrist. Mary recently filed bankruptcy because of some bad decisions involving an elaborate decoration of her office. Although her income for the past couple of years has been in the range of $80,000, business is improving based on her recent involvement with a number of patients suffering anxiety based upon a fear of alien invasion. Considering only the information available, which of the following is a term that would describe Mary as an investor? A) Reserved B) Limited C) Accredited D) Unapproved E) Unaccredited
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71) Coffee shops. Bernice wants to open a chain of coffee shops and begins by asking her friends in various states around the country to invest through the purchase of securities in the coffee shops. Her friend Robbie says that he would like to invest but that she should be sure that she satisfies requirements of the Securities and Exchange Commission (SEC). He tells her that she has to provide information to the SEC involving a description of the securities, an explanation of how proceeds will be used, information regarding the management of the company, and other matters. He tells her that she also has to provide a document to the SEC that will be provided as an advertising tool to potential investors who can rely on it to decide whether they should buy securities. Bernice says that she does not want to do that. She explains to Robbie that insofar as the coffee shop venture is concerned, she does not want to advertise, and she wants to offer securities only to a limited number of wealthy friends. Particularly, she has in mind Scott who has a net worth of at least $3 million and Mary, a psychiatrist. Mary recently filed bankruptcy because of some bad decisions involving an elaborate decoration of her office. Although her income for the past couple of years has been in the range of $80,000, business is improving based on her recent involvement with a number of patients suffering anxiety based upon a fear of alien invasion. Considering only the information available, which of the following is a term that would describe Scott as an investor? A) Approved B) Sophisticated C) Accredited D) Unapproved E) Unaccredited
72) In Trouble. Bruno, an issuer of stock, may be in trouble. He sold stock in a new health club venture before the effective date of registration. He did so because he was in financial trouble involving other ventures of his and needed additional funds. Bruno thought that the health club venture would be such a success that he would never get caught in regard to the stock sale. Unfortunately, he was wrong. The health club venture was going very poorly and investors were looking for some way to hold Bruno responsible. Another problem Bruno has is that he inflated information regarding the prospects of the health club in the prospectus. Investors bitterly complained. Rick, a new lawyer, told Bruno that as far as he knew, the Securities and Exchange Commission (SEC) could fine Bruno under the Securities Act of 1933 but could not send him to jail. Bruno told Rick that was good news and that no one should feel sorry for the investors because none of them made any effort to check on information contained in the prospectus or to investigate the future profitability of the health club venture. Bruno says that he plans to rely on the due diligence defense. Bruno also asks Rick if he is aware of any other defenses. Bruno says that he has never previously been in trouble with the SEC. Is Rick correct in that the SEC would have no authority to send Bruno to jail? Version 1
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A) Rick is correct, since there are no criminal penalties for violating the Securities Act of 1933. B) Rick is incorrect because the SEC criminally prosecutes some violators, although the action would only be a misdemeanor. C) Rick is correct in that the SEC itself would not send Bruno to jail, but the SEC could recommend criminal action to the United States Department of Justice resulting in imprisonment for up to five (5) years for a violation. D) Rick is incorrect because the SEC criminally prosecutes some violators, and a violation of the act is considered a felony that could lead to a prison term of ten (10) years. E) Rick is correct in that the SEC itself would not send Bruno to jail, but the SEC could recommend criminal action to the Federal Bureau of Investigation (FBI) resulting in imprisonment for up to ten (10) years for a violation.
73) In Trouble. Bruno, an issuer of stock, may be in trouble. He sold stock in a new health club venture before the effective date of registration. He did so because he was in financial trouble involving other ventures of his and needed additional funds. Bruno thought that the health club venture would be such a success that he would never get caught in regard to the stock sale. Unfortunately, he was wrong. The health club venture was going very poorly and investors were looking for some way to hold Bruno responsible. Another problem Bruno has is that he inflated information regarding the prospects of the health club in the prospectus. Investors bitterly complained. Rick, a new lawyer, told Bruno that as far as he knew, the Securities and Exchange Commission (SEC) could fine Bruno under the Securities Act of 1933 but could not send him to jail. Bruno told Rick that was good news and that no one should feel sorry for the investors because none of them made any effort to check on information contained in the prospectus or to investigate the future profitability of the health club venture. Bruno says that he plans to rely on the due diligence defense. Bruno also asks Rick if he is aware of any other defenses. Bruno says that he has never previously been in trouble with the SEC. Which of the following is true regarding Bruno's plan to rely on the due diligence defense with regard to all charges?
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A) He will be able to do so if he can establish that the purchasers would have had reasonable grounds to question the registration statement had they reviewed it with due diligence. B) He will be able to do so if he can establish that the purchasers would have had reasonable grounds to question the prospectus had they reviewed it with due diligence. C) He will be able to do so if he can establish that the purchasers would have had reasonable grounds to question either the registration statement or the prospectus had they reviewed them with due diligence. D) He will not be able to use that defense unless he can establish that he reviewed the registration statement and the prospectus, and had reasonable grounds to believe that the registration statement was accurate and had no omission of material facts. E) He will not be able to rely on that defense because he is an issuer.
74) In Trouble. Bruno, an issuer of stock, may be in trouble. He sold stock in a new health club venture before the effective date of registration. He did so because he was in financial trouble involving other ventures of his and needed additional funds. Bruno thought that the health club venture would be such a success that he would never get caught in regard to the stock sale. Unfortunately, he was wrong. The health club venture was going very poorly and investors were looking for some way to hold Bruno responsible. Another problem Bruno has is that he inflated information regarding the prospects of the health club in the prospectus. Investors bitterly complained. Rick, a new lawyer, told Bruno that as far as he knew, the Securities and Exchange Commission (SEC) could fine Bruno under the Securities Act of 1933 but could not send him to jail. Bruno told Rick that was good news and that no one should feel sorry for the investors because none of them made any effort to check on information contained in the prospectus or to investigate the future profitability of the health club venture. Bruno says that he plans to rely on the due diligence defense. Bruno also asks Rick if he is aware of any other defenses. Bruno says that he has never previously been in trouble with the SEC. Which of the following is true regarding Bruno's sale of securities before the effective date of registration? A) He will be able to avoid liability if he can establish the due diligence defense. B) He will be able to avoid liability if he can establish that the investors who purchased stock early were aware that the securities were sold before the effective date of registration. C) He will be able to avoid liability if he can establish that the sales before the effective date did not directly result in any losses to investors. D) That is not a violation of the securities laws, so there is no question about liability. E) He will almost certainly be liable because the Securities Act of 1933 provides no defenses for that violation.
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75) In Trouble. Bruno, an issuer of stock, may be in trouble. He sold stock in a new health club venture before the effective date of registration. He did so because he was in financial trouble involving other ventures of his and needed additional funds. Bruno thought that the health club venture would be such a success that he would never get caught in regard to the stock sale. Unfortunately, he was wrong. The health club venture was going very poorly and investors were looking for some way to hold Bruno responsible. Another problem Bruno has is that he inflated information regarding the prospects of the health club in the prospectus. Investors bitterly complained. Rick, a new lawyer, told Bruno that as far as he knew, the Securities and Exchange Commission (SEC) could fine Bruno under the Securities Act of 1933 but could not send him to jail. Bruno told Rick that was good news and that no one should feel sorry for the investors because none of them made any effort to check on information contained in the prospectus or to investigate the future profitability of the health club venture. Bruno says that he plans to rely on the due diligence defense. Bruno also asks Rick if he is aware of any other defenses. Bruno says that he has never previously been in trouble with the SEC. Which of the following, if any, may be defenses for Bruno? A) Except for the violation of selling securities before the effective registration date, Bruno could raise the defense that an omitted or false statement was immaterial to the sale of the security. B) Except for the violation of selling securities before the effective registration date, Bruno could raise the defense that the plaintiff was aware of the omission or false statement when the security was purchased. C) Except for the violation of selling securities before the effective registration date, Bruno could raise the defense that a plaintiff was aware of the omission or false statement when the security was purchased, and that any omitted or false statement was immaterial to the sale of the security. D) For any alleged violations, Bruno could raise the specific filing rule. E) No defenses are available to Bruno, since he had already been held liable by the SEC on one occasion.
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76) Presidential Profits. Linda was president of a publicly traded tractor company, Tough Tractors. Linda became aware that stock in her company would likely increase significantly in value because her company had a contract to purchase the assets of Rough Tractors. The boards of both companies wanted the information kept confidential until the purchase was complete and a news release was made. Before the news was made public, Linda immediately purchased a significant number of shares in Tough Tractors. Linda also told her friend Frank about the contract to purchase assets. Frank, who knew that the information was not public, told his brother, George. Frank and George purchased a number of shares of stock in Tough Tractors prior to any public announcement of the sale. After the public announcement was made and the purchase of assets went through, Linda, George and Frank, all sold their shares in Tough Tractors and made a significant profit. In which of the following prohibited practices was Linda engaged by purchasing the shares after she found out about the merger? A) Insider trading B) Embezzlement C) Grafting D) Receipt of bribery E) Solicitation of bribery
77) Presidential Profits. Linda was president of a publicly traded tractor company, Tough Tractors. Linda became aware that stock in her company would likely increase significantly in value because her company had a contract to purchase the assets of Rough Tractors. The boards of both companies wanted the information kept confidential until the purchase was complete and a news release was made. Before the news was made public, Linda immediately purchased a significant number of shares in Tough Tractors. Linda also told her friend Frank about the contract to purchase assets. Frank, who knew that the information was not public, told his brother, George. Frank and George purchased a number of shares of stock in Tough Tractors prior to any public announcement of the sale. After the public announcement was made and the purchase of assets went through, Linda, George and Frank, all sold their shares in Tough Tractors and made a significant profit. Which of the following describes Linda in providing information about the asset sale to Frank? A) A tipper B) An enabler C) An informant D) A leaker E) A third-party beneficiary
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78) Presidential Profits. Linda was president of a publicly traded tractor company, Tough Tractors. Linda became aware that stock in her company would likely increase significantly in value because her company had a contract to purchase the assets of Rough Tractors. The boards of both companies wanted the information kept confidential until the purchase was complete and a news release was made. Before the news was made public, Linda immediately purchased a significant number of shares in Tough Tractors. Linda also told her friend Frank about the contract to purchase assets. Frank, who knew that the information was not public, told his brother, George. Frank and George purchased a number of shares of stock in Tough Tractors prior to any public announcement of the sale. After the public announcement was made and the purchase of assets went through, Linda, George and Frank, all sold their shares in Tough Tractors and made a significant profit. Which of the following describes Frank in receiving the information from Linda and acting upon it? A) An incidental beneficiary B) A third-party beneficiary C) An assignee D) A tippee E) A delegatee
79) Presidential Profits. Linda was president of a publicly traded tractor company, Tough Tractors. Linda became aware that stock in her company would likely increase significantly in value because her company had a contract to purchase the assets of Rough Tractors. The boards of both companies wanted the information kept confidential until the purchase was complete and a news release was made. Before the news was made public, Linda immediately purchased a significant number of shares in Tough Tractors. Linda also told her friend Frank about the contract to purchase assets. Frank, who knew that the information was not public, told his brother, George. Frank and George purchased a number of shares of stock in Tough Tractors prior to any public announcement of the sale. After the public announcement was made and the purchase of assets went through, Linda, George and Frank, all sold their shares in Tough Tractors and made a significant profit. Which of the following describes Frank in providing information about the asset sale to George? A) A tipper B) A provider C) An assignor D) A tippee E) A delegator
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80) Presidential Profits. Linda was president of a publicly traded tractor company, Tough Tractors. Linda became aware that stock in her company would likely increase significantly in value because her company had a contract to purchase the assets of Rough Tractors. The boards of both companies wanted the information kept confidential until the purchase was complete and a news release was made. Before the news was made public, Linda immediately purchased a significant number of shares in Tough Tractors. Linda also told her friend Frank about the contract to purchase assets. Frank, who knew that the information was not public, told his brother, George. Frank and George purchased a number of shares of stock in Tough Tractors prior to any public announcement of the sale. After the public announcement was made and the purchase of assets went through, Linda, George and Frank, all sold their shares in Tough Tractors and made a significant profit. For which of the following is Linda liable? A) Her own profits only B) Her profits and Frank’s profits only C) Her profits, Frank’s profits, and George’s profits D) Her profits only, plus a 10% penalty E) Nothing, because she did nothing illegal
81) Presidential Profits. Linda was president of a publicly traded tractor company, Tough Tractors. Linda became aware that stock in her company would likely increase significantly in value because her company had a contract to purchase the assets of Rough Tractors. The boards of both companies wanted the information kept confidential until the purchase was complete and a news release was made. Before the news was made public, Linda immediately purchased a significant number of shares in Tough Tractors. Linda also told her friend Frank about the contract to purchase assets. Frank, who knew that the information was not public, told his brother, George. Frank and George purchased a number of shares of stock in Tough Tractors prior to any public announcement of the sale. After the public announcement was made and the purchase of assets went through, Linda, George and Frank, all sold their shares in Tough Tractors and made a significant profit. For which of the following is George liable? A) His own profits and Frank’s profits B) His own profits, Frank’s profits, and Linda’s profits C) His own profits, regardless of whether he knew he was trading in information that had not been made public D) Only his own profits and Linda’s profits E) Only his own profits, and then only if it can be shown that he knew or should have known that the material information was not public
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82)
A security is merely _____, but investors are buying it for what it represents. A) a piece of paper B) a bill of exchange C) commercial paper D) a negotiable instrument E) a non-negotiable instrument
83)
A prospectus is filed _____. A) at a bank B) at stock brokerage firm C) with the Federal Trade Commission (FTC) D) with the Securities and Exchange Commission (SEC) E) with the Internal Revenue Service (IRS)
84) Who is liable for the profits of her transactions if she knew or should have known that the material information was not public? A) A tipster B) A profiteer C) A racketeer D) A saboteur E) A tippee
85)
Which of the following regulate(s) the offering and sale of intrastate securities? A) The Intrastate Commerce Code (ICC) B) The Uniform Commerce Code (UCC) C) Blue-Sky laws D) Blue-Moon laws E) The Restatement (Second) of Securities Law
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86) The Investment Company Act of 1940 excludes several institutions in its definition of an investment company. Which of the following institutions is not excluded? A) A savings and loan B) A bank C) A business engaged primarily in the business of trading in securities D) A finance company E) An insurance company
ESSAY. Write your answer in the space provided or on a separate sheet of paper. 87) Describe the three-part definition of a security as established by the United States Supreme Court in its SEC v. W.J. Howey Co. decision.
88) Describe the four (4) major responsibilities of the Securities and Exchange Commission (SEC).
89) Describe what a registration statement filed with the Securities and Exchange Commission (SEC) generally contains.
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90) Rebecca, a secretary at ABC Software Company, a publicly traded company, enjoyed snooping through the desk of her boss, Emma. One day while snooping, Rebecca came across information indicating that ABC Software was in the process of launching a new type of software that it believed would be very profitable. Rebecca immediately purchased a large amount of stock in ABC Company and sold it for a nice profit after the product was made public. Her conscience was bothering her a bit, so she confessed her snooping to a friend, Jason. Jason told Rebecca not to worry because she could have no liability. Is Jason correct, and if not, what theory of liability could be applied against Rebecca? In your answer, include the definition of insider according to Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934.
91) What is a proxy solicitation, and how does the Securities and Exchange Commission (SEC) regulate it?
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Answer Key Test name: Chap 23_5_The Essentials_Kubasek 1) FALSE In its Landreth Timber Co. v. Landreth decision, the United States Supreme Court held that courts should presumptively treat as a security any financial instrument designated as a note, stock, bond, or other instrument named in the Securities Act of 1933. 2) FALSE In its SEC v. W.J. Howey Co. decision, the United States Supreme Court defined a security as an investment in a common enterprise with the reasonable expectation of profit gained primarily or substantially from others’ efforts. 3) FALSE The Securities Act of 1933 offers a complicated definition of a security, and as a result, courts have struggled when determining whether a particular instrument is a security. 4) FALSE Investment contracts, contracts in which individuals invest money with the expectation of making a profit, are securities. 5) FALSE The Securities Act of 1933 regulates how companies issue corporate securities, while the Securities Exchange Act of 1934 oversees the purchase and sale of securities. 6) FALSE The Securities Exchange Act of 1934 created the Securities and Exchange Commission (SEC). 7) TRUE
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The Securities and Exchange Commission (SEC) is an independent agency whose function is to administer federal securities laws. The SEC is headed by five individuals appointed by the president, and these five individuals serve fixed five-year terms. 8) FALSE Although the Securities and Exchange Commission (SEC) requires the registration of securities, the SEC does not approve these securities. In other words, the SEC does not make any judgment about the worth of securities; it simply enforces the requirement that issuers must provide certain information to potential buyers. 9) FALSE Along with filing a registration statement, issuers of securities must also file a prospectus with the Securities and Exchange Commission (SEC). A prospectus is a written document that contains most of the information that appears in the registration statement. The prospectus is different from the registration statement, however, because it is an advertising tool that issuers distribute to potential investors, who rely on the prospectus to help decide whether they should buy securities. 10) TRUE Because they cannot offer to sell securities during the prefiling period, issuers, officers, directors, and underwriters usually try to avoid generating publicity about possibly issuing securities because the Securities and Exchange Commission (SEC) may construe such publicity as an attempt to condition the market to generate interest in the securities. 11) FALSE
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The purpose of securities regulation in China is similar to that of the Securities and Exchange Commission (SEC) in the United States. The Securities Law of the People’s Republic of China, for example, contains twelve chapters that regulate items such as stock issuance, stock transactions, prohibited transactions, stock exchanges, securities companies, securities registration, and much more. 12) FALSE A red-herring prospectus is a prospectus with a notice written in red print at the top of the page warning investors that the registration has been filed with the Securities and Exchange Commission (SEC) but is not yet approved. A tombstone advertisement announces a forthcoming sale of securities in a format similar to that of a tombstone. 13) TRUE Issuers who make private offerings of securities are exempt from the registration process. These issuers, however, cannot advertise their private offerings to the general public. This exemption, usually referred to as the private placement exemption, allows firms to issue an unlimited number of securities to an unlimited number of accredited investors. 14) TRUE The Securities Act of 1933 provides that certain securities are exempt from the registration process. These securities are unregistered unrestricted securities, and they include securities issued by governments, including municipal, state, and federal governments. 15) TRUE Under Section 3 of the Securities Act of 1933, any security offered or sold to a permanent resident of the single state where the issuer of the security resides and does business is exempt; it is considered an intrastate offering. Thus, local businesses can rely on local investors to raise an unlimited amount of capital without registration. 16) FALSE Version 1
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The average investor does not have to register securities when he or she wants to sell. 17) TRUE If the Securities and Exchange Commission (SEC) uncovers a potential violation of the 1933 act, it can: a) take administrative action; b) take injunctive action; or c) recommend criminal prosecution. If the SEC recommends criminal action, the United States Department of Justice prosecutes criminal charges against the violator(s). Criminal penalties include a fine of up to $10,000, imprisonment for up to five years, or both. 18) FALSE The due diligence defense requires the defendant to demonstrate that he or she investigated the registration statement and had reasonable grounds to believe that the statement was accurate and had no omission of material facts. 19) TRUE If an investor purchased securities and suffered damages as a result of an issuer's false or misleading statement, the investor is entitled to bring a civil suit to recover his losses.The burden of proof falls on the investor to demonstrate the issuer’s incomplete or inaccurate disclosure of facts. 20) FALSE Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 define insiders as corporate officers, directors, employees, lawyers, consultants, accountants, majority shareholders, or any other individuals who receive private information regarding the trading of securities. 21) TRUE When a company employee or executive uses material inside information to make a profit, he or she is engaging in insider trading. Insider trading is illegal because it gives the violator an important advantage over the general public and shareholders. Version 1
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22) TRUE Section 16(b) of the Securities Exchange Act of 1934 imposes strict liability on statutory insiders who earn short-swing profits. In other words, violators cannot use lack of intent or lack of knowledge as a defense.Statutory insiders are considered to be certain large stockholders, executive officers, and directors. 23) TRUE Not only must issuers obey federal securities regulations, but they are also subject to state securities laws, often referred to as blue-sky laws. Blue-sky laws regulate the offering and sale of purely intrastate securities. Hence, although certain securities are exempt from federal securities regulation, they may be subject to state securities laws. 24) FALSE The Investment Company Act of 1940defines an investment company as an entity: a) that is engaged primarily in the business of investing, reinvesting, or trading in securities or b) that is engaged in such business and in which more than forty percent of the company’s assets are investment securities. The act excludes a number of institutions, however, including banks, insurance companies, savings and loans, and finance companies 25) E Corporations issue corporate securities—stocks and bonds—to raise capital for corporate expansion. 26) E In reaction to the mistrust of securities transactions before the Great Depression, the United States Congress passed the Securities Act of 1933. A function of the act was to legitimize security transactions by requiring the registration of securities offered to the public. 27) E
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The United States Supreme Court held that bankers, lawyers, and other third parties who did not directly mislead investors but worked with corporations that did cannot be sued by shareholders, and that primary punishment of such secondary offenders would come from criminal prosecutions and enforcement actions by the Securities and Exchange Commission (SEC). 28) E The United States Court of Appeals for the Second Circuit ruled that the information regarding an expected mineral find was material and that the defendants purchased stock in violation of Securities and Exchange Commission (SEC) Rule 10b-5. 29) A The United States Court of Appeals for the Second Circuit held that the newspaper employees and broker, acting in concert, criminally violated the federal securities laws by misappropriating material, nonpublic information in contravention of established policies of the newspapers for their own profit in the purchase and sale of securities. 30) D Securities include stocks, bonds, debentures, and warrants. 31) E Two (2) crucial acts regulate securities transactions. The Securities Act of 1933 regulates how companies issue corporate securities, while the Securities Exchange Act of 1934 oversees the purchase and sale of securities.Both attempt to provide greater stability to securities transactions. 32) B The Securities Exchange Act of 1934 created the Securities and Exchange Commission (SEC), an agency whose function is to administer federal securities laws. 33) A Version 1
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Five individuals head the Securities and Exchange Commission (SEC). 34) E The Securities and Exchange Commission (SEC) is headed by five individuals appointed by the president. 35) A The Securities and Exchange Commission (SEC) is headed by five individuals appointed by the president. These five individuals serve. 36) A The Securities Act of 1933 regulates how companies issue corporate securities. 37) B The Securities Exchange Act of 1934 oversees the purchase and sale of securities. 38) A The Sarbanes-Oxley Act of 2002 created and established Securities and Exchange Commission (SEC) oversight of the Public Company Accounting Oversight Board to regulate public accounting firms. 39) D Main functions/purposes of the Sarbanes-Oxley Act of 2002 include increasing corporate disclosure requirements, penalizing violators of securities laws more heavily, and holding executives responsible for errors in corporate reports filed with the Securities and Exchange Commission (SEC). 40) D The Market Reform Act of 1990 allows the Securities and Exchange Commission (SEC) to suspend securities trading if prices vary excessively within a short time period. 41) C
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The Securities Acts Amendments of 1990 permit the Securities and Exchange Commission (SEC) to seek punishment of violators of foreign securities laws. 42) E The National Securities Markets Improvement Act of 1996 permits the Securities and Exchange Commission (SEC) to exempt persons, securities, and transactions from securities regulations. 43) C A prospectus is a written document filed with the Securities and Exchange Commission (SEC) that contains a description of a security and other financial information regarding the company offering the security. 44) A The prefiling period begins when an issuer starts to think about issuing securities and ends when the issuer files the registration statement and prospectus with the Securities and Exchange Commission (SEC). 45) A Underwriters are investment banking firms that purchase securities from the issuing corporation with the intent to sell them to brokerage houses, which then sell them to the public. 46) A The waiting period begins after an issuer files a registration statement and prospectus. 47) B During the waiting period, issuers may make oral offers to sell their securities and may distribute a red-herring prospectus—a prospectus with a notice written in red print at the top of the page warning investors that the registration has been filed with the Securities and Exchange Commission (SEC) but is not yet approved. 48) D Version 1
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During the waiting period, the issuer may publish a tombstone advertisement, a brief advertisement with a format similar to that of a tombstone. 49) A The post-effective period begins when the Securities and Exchange Commission (SEC) declares the registration statement effective and ends when the issuer sells all securities offered or withdraws them from sale. During this time, investors may buy and sell the securities, but purchasers must receive a final prospectus, a version of the prospectus the buyer must receive at the point of sale. 50) E Shelf registrations permit certain qualified issuers to register securities they will sell “off the shelf" on a delayed or continuous basis in the future. 51) D A private investor who is allowed to accept private securities offerings under certain specific guidelines set by the Securities and Exchange Commission (SEC) is known as an accredited investor.The SEC assumes that accredited investors are better able to evaluate the financial risk of buying securities. 52) D The Securities Act of 1933 provides that certain securities transactions are exempt from the registration process. Exempt transactions include limited offers, intrastate issues, and resales of securities. 53) B
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The Securities and Exchange Commission (SEC) defines an accredited investor as: 1.Any natural person who has a net worth of at least $1 million. 2.Any natural person whose annual income has been at least $200,000 for the two previous years and expects to make at least $200,000 in the current year. 3.Any corporation or partnership with total assets in excess of $5 million. 4.Insiders of the issuers, such as executive officers or directors. 5.Registered investment companies, colleges and universities, banks, and insurance companies. 54) E In order to qualify for the intrastate exemption, issuers must do at least 80 percent of their business within the state, receive at least 80 percent of their profits within the state, have at least 80 percent of their assets within the state, plan to use at least 80 percent of the profits within the state, and have their main offices in the state. 55) A An affiliate is a person who controls, is controlled by, or is in common control with the issuer. 56) A The due diligence defense requires the defendant to demonstrate that he or she investigated the registration statement and had reasonable grounds to believe that the statement was accurate. Any defendant except the issuer can assert the due diligence defense. 57) D
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The 1934 Securities Exchange Act regulates the subsequent trading (resale) of securities. The act requires that certain issuers file periodic reports with the Securities and Exchange Commission (SEC), and it permits the SEC to monitor securities markets for fraud and market manipulation. 58) C One of the most important sections of the Securities Exchange Act of 1934 is Section 10(b), which prohibits the use of manipulative and deceptive devices to bypass Securities and Exchange Commission (SEC) rules. 59) C One of the most important sections of the Securities Exchange Act of 1934 is Section 10(b), which prohibits the use of manipulative and deceptive devices to bypass Securities and Exchange Commission (SEC) rules. Within this section, subsection 5 prohibits fraud associated with the purchase or sale of all securities. Even though securities may be exempt from registration, they are still subject to Rule 10b-5. 60) D If a material omission or misrepresentation occursduring a securities transaction, the individual has violated Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. Examples of material information include the following: 1.A change in the status of litigation against the company. 2.A change in dividends. 3.A contract for the sale of corporate assets or for the purchase of assets. 4.A new product, process, or discovery. 5.A significant change in the financial status of the company. 61) B Version 1
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When a company employee or executive uses material inside information to make a profit, he or she is engaging in insider trading. Insider trading is illegal because it gives the violator an important advantage over the general public and shareholders. 62) A Shareholders who purchased stock in corporations with high earnings forecasts often sued the corporations' directors if actual corporate earnings fell short of forecasted earnings, alleging that the directors violated Rule 10b-5 of the Securities Exchange Act of 1934 by disclosing misleading financial information. The United States Congress attempted to remedy this situation by passing the Private Securities Litigation Reform Act of 1995 (PSLRA). Among other things, the act provides a “safe harbor” from liability for publicly held issuers who make financial forecasts as long as the forecasts are “accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forwardlooking statement.” 63) E The Securities Litigation Uniform Standards Act of 1998 strictly limits shareholders' ability to bring class action suits against nationally-traded corporations. 64) A To prevent statutory insiders from using inside information for their personal gain, Section 16(b) of the Securities Exchange Act of 1934 requires statutory insiders to return all short-swing profits, or profits made from the sale of company stock within any six-month period by a statutory insider, to the company. 65) A
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To prevent the exploitation of small investors, the United States Congress passed the Investment Company Act of 1940, providing for Securities and Exchange Commission (SEC) regulation of investment companies. Congress later expanded the SEC’s power to regulate investment companies under the Investment Company Act Amendments of 1970 and the National Securities Markets Improvement Act of 1996. 66) B The Investment Company Act defines an investment company as an entity: a) that is engaged primarily in the business of investing, reinvesting, or trading in securities; or b) that is engaged in such business and in which more than 40 percent of the company’s assets are investment securities. The act excludes a number of institutions, however, including banks, insurance companies, savings and loans, and finance companies. 67) C The registration statement generally contains a) a description of the securities offered for sale, b) an explanation of how proceeds from the sale of the securities will be used, c) a description of the registrant's business and properties, d) information about the management of the company, e) a description of any pending lawsuits in which the registrant is involved, and f) financial statements certified by an independent public accountant. 68) B The prospectus is different from the registration statement because it is an advertising tool that issuers distribute to potential investors, who rely on the prospectus to help decide whether they should buy the securities. 69) D The private placement exemption allows firms to issue an unlimited number of securities to an unlimited number of accredited investors, but to only a limited number of unaccredited investors. Version 1
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70) E An accredited, as opposed to unaccredited, investor is a private investor who is allowed to accept private securities offerings under certain specific guidelines set by the Securities and Exchange Commission (SEC) and is defined as follows: 1.Any natural person who has a net worth of at least $1 million. 2.Any natural person whose annual income has been at least $200,000 for the two previous years and expects to make at least $200,000 in the current year. 3.Any corporation or partnership with total assets in excess of $5 million. 4.Insiders of the issuers, such as executive officers or directors. 5.Registered investment companies, colleges and universities, banks, and insurance companies. 71) C An accredited investor is a private investor who is allowed to accept private securities offerings under certain specific guidelines set by the Securities and Exchange Commission (SEC) and is defined as follows: 1.Any natural person who has a net worth of at least $1 million. 2.Any natural person whose annual income has been at least $200,000 for the two previous years and expects to make at least $200,000 in the current year. 3.Any corporation or partnership with total assets in excess of $5 million. 4.Insiders of the issuers, such as executive officers or directors. 5.Registered investment companies, colleges and universities, banks, and insurance companies. 72) C Version 1
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If the Securities and Exchange Commission (SEC) recommends criminal action, the United States Department of Justice prosecutes criminal charges against the violators, and criminal penalties include a fine up to $10,000, imprisonment for up to five years, or both. 73) E The due diligence defense requires the defendant to demonstrate that he or she investigated the registration statement and had reasonable grounds to believe that the statement was accurate and had no omission of material facts. Any defendant except the issuer can assert the due diligence defense. 74) E If a defendant sold securities before the effective date of registration, he or she will almost certainly be liable because the Securities Act of 1933 provides no defenses for this violation. 75) C A company charged with the first or second violation may claim that the omitted or false statement was immaterial to the sale of the security, and if the issuer can prove that the plaintiff was aware of the omission or false statement when she bought the security, the defendant can avoid liability. 76) A When a company employee or executive uses material inside information to make a profit, she or he is engaging in insider trading. Insider trading is illegal because it gives the violator an important advantage over the general public and shareholders. 77) A The tipper/tippee theory holds that any individual who acquires material inside information as a result of an insider’s breach of duty has engaged in insider trading. The insider who gives the inside tip is called the tipper. Version 1
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78) D The tipper/tippee theory holds that any individual who acquires material inside information as a result of an insider’s breach of duty has engaged in insider trading. This individual, one who has received a tip from an insider, is called a tippee. 79) A The tipper/tippee theory holds that any individual who acquires material inside information as a result of an insider’s breach of duty has engaged in insider trading. This individual, one who has received a tip from an insider, is called a tippee. The insider who gives the inside tip is called the tipper.This originaltippee who passes on insider information to another person now is acting as a tipper. 80) C A tipper is liable for his own profits, profits made by a tippee, and profits made by other tippees later in the chain of communication. 81) E A tippee is liable for the profits of his transactions if he knew or should have known that the material information was not public. 82) A A security is merely a piece of paper. But what it stands for is what is important. Investors view the security for what it represents. 83) D A prospectus is a written document filed with the Securities and Exchange Commission (SEC) that contains a description of a security and other financial information regarding the company offering the security. 84) E A tippee is liable for the profits of his transactions if he knew or should have known that the material information was not public. 85) C Version 1
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Blue-sky laws regulate the offering and sale of purely intrastate securities. Hence, although certain securities are exempt from federal securities regulation, they may be subject to state securities laws. 86) C The Investment Company Act of 1940 defines an investment company as an entity: a) that is engaged primarily in the business of investing, reinvesting, or trading in securities or b) that is engaged in such business and in which more than forty percent of the company's assets are investment securities. The act excludes a number of institutions, however, including banks, insurance companies, savings and loans, and finance companies. 87) Under the Howey test, a security is an a) investment in a common enterprise with the b) reasonable expectation of profit gained c) primarily or substantially from others' efforts. 88) The Securities and Exchange Commission (SEC) has the following responsibilities. 1.It is responsible for the enforcement of securities laws; 2.It interprets the securities acts and adopts rules to achieve the purposes of the acts; 3.It regulates the activities of securities brokers, dealers, and advisers; and 4.It regulates the trade of securities on securities exchanges.
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89) A registration statement filed with the Securities and Exchange Commission (SEC) generally contains the following: 1.A description of the securities offered for sale; 2.An explanation of how proceeds from the sale of the securities will be used; 3.A description of the registrant's business and properties; 4.Information about the management of the company; 5.A description of any pending lawsuits in which the registrant is involved; and 6.Financial statements certified by an independent public accountant. 90) Jason was incorrect. Rebecca has liability under the securities laws for insider trading. When a company employee or executive uses material inside information to make a profit, she or he is engaging in insider trading. Insider trading is illegal because it gives the violator an important advantage over the general public and shareholders. Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 define insiders as corporate officers, directors, employees, lawyers, consultants, accountants, majority shareholders, or any other individuals who receive private information regarding the trading of securities.
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91) A proxy is a writing signed by a shareholder that authorizes the individual named in the writing to exercise the shareholder’s votes (corresponding to his shares of stock) at a shareholders’ meeting. Corporate managers often contact shareholders to request them to give a certain manager authority to vote on their behalf in an upcoming meeting. This process of obtaining authority to vote on behalf of a shareholder is called proxy solicitation. Because the proxy solicitation process is potentially susceptible to fraud, the Securities and Exchange Commission (SEC) regulates the proxy solicitation process. Section 14(a) of the Securities Exchange Act of 1934 requires that an issuer making proxy solicitations must also furnish a written proxy statement to shareholders. This statement must disclose to the shareholder all facts pertinent to the voting that will occur in the meeting.
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CHAPTER 24 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) Today, an employee who is not employed under a contract for a set duration or under a collective bargaining agreement is considered an at-will employee. ⊚ true ⊚ false
2) In the United States, the concept of at-will employment is a relatively modern concept first recognized in the 1950s. ⊚ true ⊚ false
3)
At-will employment allows for an employee to quit with no notice to the employer. ⊚ true ⊚ false
4)
Employees are protected in the workplace by both state and federal laws. ⊚ true ⊚ false
5)
State laws may give employees more, but not less, protection than federal laws. ⊚ true ⊚ false
6) Title VII of the Civil Rights Acts of 1964 applies to all employers, regardless of the number of employees they have. ⊚ true ⊚ false
7) Disparate treatment occurs when an employerintentionally discriminates against an employee based upon the employee’s membership in a protected class. ⊚ true ⊚ false Version 1
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8) Both disparate treatment and disparate impact are relatively easy to prove against an employer. ⊚ true ⊚ false
9) Two (2) distinct forms of sexual harassment are recognized by law: per se sexual harassment and strict liability sexual harassment. ⊚ true ⊚ false
10) In Oncale v. Sundowner Offshore Services, Inc., the United States Supreme Court recognized same-sex sexual harassment. ⊚ true ⊚ false
11) Only sexual harassment, a form of gender discrimination, can constitute a hostile work environment. ⊚ true ⊚ false
12) The bona fide occupational qualification (BFOQ) defense allows an employer to discriminate in hiring based on sex, religion, or national origin when doing so is necessary for the performance of the job. ⊚ true ⊚ false
13) A plaintiff may seek legal, but not equitable, remedies for violations of Title VII of the Civil Rights Act of 1964. ⊚ true ⊚ false
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14) Filing a claim under Title VII of the Civil Rights Act of 1964 is procedurally similar to filing a civil lawsuit. ⊚ true ⊚ false
15) Under the Americans with Disabilities Act (ADA), employers must make reasonable accommodations for known physical or mental disabilities of an otherwise qualified person with a disability unless the necessary accommodations would impose an undue burden on the employer's business. ⊚ true ⊚ false
16) Remedies for Americans with Disabilities Act (ADA) violations are similar to those available under Title VII of the Civil Rights Act of 1964. ⊚ true ⊚ false
17) Currently, there is no federal or state legislation that prohibits discrimination based on sexual orientation. ⊚ true ⊚ false
18) The Family and Medical Leave Act (FMLA) guarantees all eligible employees up to 12 weeks of paid leave during any 12-month period of employment. ⊚ true ⊚ false
19) Workers' compensation laws ensure that covered workers who are injured on the job can receive financial compensation by suing their employer in civil court. ⊚ true ⊚ false
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20) Today, the percentage of workers belonging to a union in the United States is higher than the percentage of workers belonging to a union in the years immediately following World War II. ⊚ true ⊚ false
21) The Taft-Hartley Act was designed to expand some of the powers unions had acquired under the Wagner Act. ⊚ true ⊚ false
22) The primary function of the National Labor Relations Board (NLRB) is to engage in congressional lobbying efforts to ensure that both union and non-union workers receive a livable wage. ⊚ true ⊚ false
23) The National Labor Relations Board (NLRB) can order union and management to reach an agreement with respect to wages, hours, and other terms and conditions of work. ⊚ true ⊚ false
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 24) Which of the following was the result in Kumar v. Gate Gourmet, Inc., the case in the textbook in which the Supreme Court of Washington addressed the issue of whether an employer meal policy, which barred employees from brining in their own food for lunch (for security reasons) and left only employer-provided food for the employees to eat, constituted a failure to accommodate their religious practices reasonably and had a disparate impact on employees who adhered to certain religions?
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A) That both the disparate treatment and religious accommodation doctrines bar facially neutral employment policies that have disproportionate adverse effects on a protected class B) That both the disparate impact and religious accommodation doctrines bar facially neutral employment policies that have disproportionate adverse effects on a protected class C) That the disparate impact doctrine, not the religious accommodation doctrine, bars facially neutral employment policies that have disproportionate adverse effects on a protected class D) That the religious accommodation doctrine, not the disparate impact doctrine, bars facially neutral employment policies that have disproportionate adverse effects on a protected class E) That neither the religious accommodation doctrine nor the disparate impact doctrine bars facially neutral employment policies that have disproportionate adverse effects on a protected class
25) Which of the following was the result in Roe v. Teletech Customer Care Management, the case in the textbook in which the employee sued after being terminated for testing positive for marijuana she was taking for a medical condition? A) The appellate court affirmed the lower court’s decision to grant summary judgment, holding that Washington state’s Medical Use of Marijuana Act (MUMA) does not prohibit an employer from discharging an employee for medical marijuana use. B) The appellate court rejected the lower court’s decision to grant summary judgment, holding that MUMA is an invasion of an employee’s right to privacy. C) The appellate court ruled that MUMA is extended to cover workplace safety concerns, thus holding that the lower court was in error in granting the motion for summary judgment. D) The appellate court reversed and remanded the lower court’s decision on the basis that MUMA violates the First and Ninth Amendments. E) The appellate court ruled that the employee prevailed under the Employee Polygraph Protection Act.
26) Any employee who is not employed under a contract for a set duration or under a collective bargaining agreement is considered _____.
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A) an independent contractor B) an incidental beneficiary C) a common-law employee D) a statutory employee E) an at-will employee
27)
At-will employment applied in all states until _____. A) 1932 B) 1946 C) 1947 D) 1959 E) 1978
28) Which of the following legislation protects employees against discrimination and harassment based upon race, color, religion, national origin, and sex? A) Title VII of the Civil Rights Act of 1964 B) Title IX of the Civil Rights Act of 1981 C) The Age Discrimination in Employment Act of 1967 D) The American with Disabilities Act of 1990 E) The Equal Pay Act of 1963
29) Which of the following legislation expands the definition of sex discrimination based on gender? A) Title IV of the Civil Rights Act of 1984 B) The Pregnancy Discrimination Act of 1987 C) The Expectant Mother’s Protection Act of 1967 D) Title IX of the Civil Rights Act of 1991 E) The Family and Medical Leave Act of 1993
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30) The Age Discrimination in Employment Act (ADEA) prohibits employers from refusing to hire, discharging or discriminating in the terms and conditions of employment against employees or applicants age _____ or older. A) twenty-one (21) B) thirty (30) C) forty (40) D) fifty (50) E) sixty-two (62)
31)
Which title of the Civil Rights Act of 1964 deals with discrimination in employment? A) VII (seven) B) VI (six) C) V (five) D) IV (four) E) III (three)
32)
Which of the following classes does Title VII of the Civil Rights Act not protect? A) National origin B) Religion C) Sex D) Sexual Orientation E) Color
33) Through which of the following theories can an employee-plaintiff prove discrimination under Title VII of the Civil Rights Act of 1964? A) Disparate treatment B) Disparate impact C) Disparate equity D) Disparate treatment, disparate impact, and disparate equity E) Disparate treatment and disparate impact, but not disparate equity
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34) Which of the following organizations are covered by Title VII of the Civil Rights Act of 1964? A) Indian tribes B) Private clubs C) Unions D) Private clubs and unions, but not Indian tribes E) Indian tribes, private clubs, and unions
35) How many employees must an employer have in order to be subject to Title VII of the Civil Rights Act of 1964? A) One (1) or more B) Ten (10) or more C) Fifteen (15) or more D) Twenty (20) or more E) Fifty (50) or more
36) Which of the following is the first step in a three-step process of proving disparatetreatment discrimination in employment under Title VII of the Civil Rights Act of 1964? A) The employee-plaintiff must demonstrate a prima facie case of discrimination. B) The employer-defendant must articulate a legitimate, nondiscriminatory business reason for the action. C) The employer-defendant must articulate a legitimate, discriminatory business reason for the action. D) The employer-defendant must demonstrate a prima facie case of non-discrimination. E) The employee-plaintiff must show that the reason given by the employer-defendant is a mere pretext.
37) Under Title VII of the Civil Rights Act of 1964, which of the following occurs procedurally after an employee-plaintiff establishes a prima facie case in an action alleging disparate-treatment discrimination in employment in the form of an illegal discharge?
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A) The plaintiff wins by default judgment or by summary judgment. B) The burden of proof shifts to the employer-defendant to articulate a legitimate, nondiscriminatory business reason for the discharge. C) The burden of proof shifts to the employer-defendant to establish beyond reasonable doubt that the alleged discrimination did not occur. D) The burden of proof remains with the employee-plaintiff to prove discrimination beyond reasonable doubt, the standard of proof in a disparate-treatment case. E) The burden of proof remains with the employee-plaintiff to establish damages to a reasonable degree of evidentiary certainty.
38) Which of the following damages are not allowed under Title VII of the Civil Rights Act of 1964? A) Punitive damages B) Conciliatory damages C) Compensatory damages D) Back pay E) Remedial seniority
39) If there is a facially neutral policy that unintentionally discriminates against a group of individuals, this type of discrimination is known as _____. A) disparate treatment B) disparate impact C) nominal impact D) non-litigable E) statutorily exempt
40) In which of the following types of cases does a plaintiff attempt to prove that while an employer's policy or practice appears to apply to everyone equally, its actual effect is that it disproportionately limits employment opportunities for a protected class?
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A) Disparate treatment B) Disparate impact C) Disparate equity D) Differential equity E) Deleterious treatment
41) Which of the following was recognized by the United States Supreme Court in Oncale v. Sundowner Offshore Services, Inc., the case in the textbook addressing whether a plaintiff could prevail in a sexual harassment when the harassers were of the same sex? A) That same-sex sexual harassment constitutes a claim under Title VII of the Civil Rights Act of 1964, but only if the harasser is a homosexual. B) That same-sex sexual harassment does not constitute a claim under Title VII of the Civil Rights Act of 1964. C) That same-sex sexual harassment may constitute a claim with respect to a male aggressor and a male victim, but not in the context of a female aggressor and a female victim. D) That same-sex sexual harassment constitutes a claim under Title VII of the Civil Rights Act of 1964. E) That same-sex sexual harassment may constitute a claim under Title VII of the Civil Rights Act of 1964, but only if the harassment also involved at least one aggressor or victim of the opposite sex.
42) For a bona fide occupational qualification defense to be allowed, _____ must be based on actual qualifications, not stereotypes about one group's abilities. A) necessity B) merit C) disparate impact D) work habits E) disparate treatment
43) Which of the following can never be used as a defense to a bona fide occupational qualification?
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A) Sex B) Religion C) Religion or sex D) Race or religion E) Race or color
44) Which of the following is true regarding whether a customer’s sexual harassment of an employee may result in employer liability under Title VII of the Civil Rights Act of 1964? A) An employer cannot be held liable in such cases because the employer has no control over the customer. B) An employer is liable as a matter of law in such cases because the employer has an absolute duty to provide a work environment that is free of harassment. C) An employer may be held liable in such cases if the employer knew that the customer repeatedly harassed the employee, yet the employer did nothing to remedy the situation. D) An employer may be held liable in such cases, but only if quid pro quo harassment is involved. E) An employer may be held liable in such cases, but only if disparate-impact harassment is involved.
45) Which of the following is true regarding caps on punitive damages in Title VII cases based on discrimination other than race? A) Punitive damages are capped at $300,000 for employers of more than 500 employees. B) Punitive damages are capped at $50,000 for employers of between 100 and 200 employees. C) Punitive damages are capped at $25,000 for employers of between 25 and 50 employees. D) Punitive damages are capped at $300,000 for employers of more than 500 employees, $50,000 for employers of between 100 and 200 employees, and $25,000 for employers of between 25 and 50 employees. E) There is no cap on punitive damages in Title VII cases based on discrimination other than race.
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46)
Which of the following is true regarding an award of attorney fees under Title VII?
A) Attorney fees are always awarded to the prevailing party in Title VII cases. B) Attorney fees are never awarded to the prevailing party in Title VII cases. C) Attorney fees may be awarded to a successful plaintiff in a Title VII case and are typically denied only when special circumstances would render the award unjust, but attorney fees are not awarded to prevailing defendants. D) Attorney fees are not awarded to prevailing plaintiffs, but if it is determined that a plaintiff's action was frivolous, unreasonable, or without foundation, the courts may award attorney's fees to the prevailing defendant. E) Attorney fees may be awarded to a successful plaintiff in a Title VII case and are typically denied only when special circumstances would render the award unjust, and if it is determined that a plaintiff's action was frivolous, unreasonable, or without foundation, the courts may award attorney's fees to the prevailing defendant.
47) The Equal Employment Opportunity Commission (EEOC) has completed its investigation regarding Jeremiah’s discrimination case against his employer. If the EEOC decides not to sue his employer, it will issue Jeremiah a _____. A) summary judgment B) declaratory judgment C) right-to-sue letter D) interlocutory appeal E) judgment on the pleadings
48) The Age Discrimination in Employment Act (ADEA) was enacted to prohibit employers from _____ older workers. A) refusing to hire B) discharging C) discriminating in the terms and conditions of employment against D) refusing to hire or discharging, but not discriminating in the terms and conditions of employment against, E) refusing to hire, discharging, or discriminating in the terms and conditions of employment against
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49) The Age Discrimination in Employment Act (ADEA) applies to private employers with _____ or more employees. A) fifty (50) B) forty (40) C) thirty (30) D) twenty-five (25) E) fifteen (15)
50) The purpose of the _____ Act is to prevent employers from discriminating against employees and applicants with disabilities. A) Americans with Disabilities B) Disabled Americans Rehabilitation C) Handicapped Americans Rehabilitation and Employment D) Disabled Americans Support E) Access to Employment for Otherwise Qualified Workers
51) The primary purpose of the _____ is to eliminate situations in which women, working alongside men or replacing men, are paid lower wages for doing substantially the same job. A) Equal Wages Act B) Paycheck Fairness Act C) Equal Work for Equal Pay Act D) Equal Pay Act E) Employment Paycheck Reform Act
52) Men and women may be paid different wages under the Equal Pay Act when payment is made pursuant to a _____.
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A) seniority system B) merit system C) system which measures earnings by quantity or quality of production D) seniority system, a merit system, or a system that measures earnings by quantity or quality of production E) seniority system or a merit system, but not a system that measures earnings by quantity or quality of production
53)
Which of the following is true regarding discrimination based on sexual orientation?
A) Federal law specifically prohibits discrimination based on sexual orientation, providing back pay, attorney fees, and punitive damages as available remedies. B) Federal law specifically prohibits discrimination based on sexual orientation, but it is considered by most courts to be included within Title VII's ban of discrimination based on gender. C) Federal law specifically prohibits discrimination based on sexual orientation, but it only provides for back pay as an available remedy. D) No federal laws and no state laws specifically prohibit discrimination based on sexual orientation. E) While no federal law specifically prohibits discrimination based on sexual orientation, some states do have laws prohibiting discrimination based on sexual orientation.
54)
Which of the following is true regarding the rights of employees who smoke? A) There is a federal law specifically prohibiting employers from firing employees who
smoke. B) There is a federal law specifically prohibiting employers from firing or from refusing to hire employees who smoke. C) There is a federal law specifically prohibiting employers from firing employees who smoke and from refusing to hire employees who smoke, and it also requires that employers have a designated smoking area. D) There is no federal law prohibiting employers from firing employees who smoke. E) There are no state laws prohibiting employers from firing employees who smoke.
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55) Thomas is concerned about his employee rights when his supervisor asks him and others to work overtime. Which of the following could he consult to learn more about the overtime rules for workers? A) The Equal Pay Act B) The Fair Labor Standards Act C) The Labor-Management Relations Act D) The Wage Worker Protection Act E) The Restatement (Second) of Employment Law
56) Though states may have different minimum wages, what (as of 2009) is the current federal minimum wage? A) $6.75 per hour B) $7.25 per hour C) $8.00 per hour D) $9.25 per hour E) $12.25 per hour
57) The Fair Labor Standards Act (FLSA) mandates that employees who are not excluded from its coverage and who work more than _____ hours in a week be paid no less than one and one-half times their regular wage for all the hours beyond _____ that they work during a given week. A) 30; 35 B) 35; 40 C) 40; 40 D) 45; 45 E) 50; 50
58) The Fair Labor Standards Act (FLSA) excludes all of the following categories of employees from overtime rules except _____.
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A) executives B) administrative employees C) professional employees D) hourly workers E) route salespersons
59) Which of the following acts covers all public and private employers with fifty (50) or more employees if a person needs to take leave to care for a seriously ill spouse? A) The Family and Medical Leave Act B) The Family Preservation Act C) The Paternity Leave Act D) The Equal Pay Act E) Title VII of the Civil Rights Act
60) Under the Family and Medical Leave Act (FMLA), eligible employees are those who have worked at least _____ hours per week for each of _____ months prior to the leave. A) ten (10) ; twelve (12) B) fifteen (15); twelve (12) C) twenty-five (25); twelve (12) D) thirty (30); twelve (12) E) thirty-five (35); twenty-four (24)
61) The Family and Medical Leave Act (FMLA) guarantees all eligible employees up to _____ weeks of unpaid leave during any _____ month period for designated family-related occurrences. A) 4; 24 B) 12; 24 C) 12; 12 D) 20; 12 E) 20; 24
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62)
Which of the following is false regarding the Federal Unemployment Tax Act (FUTA)?
A) It provides a federal system to provide unemployment compensation to qualified employees who lose their jobs. B) Employers must pay taxes to the states which, in turn, deposit the money into the federal government's Unemployment Insurance Fund. C) Each state has an account from which it can access the money in the federal fund. D) States have different minimum standards for qualifying for unemployment compensation. E) Almost all states require that an applicant for unemployment compensation did not voluntarily quit his or her former job.
63) Which of the following legislations enables employees who lose their jobs or have their hours reduced to a level at which they are no longer eligible to receive medical, dental or optical benefits have the right to pay to continue receiving benefits for themselves and their dependents under the employer's policy? A) The Employee Income Security Act B) The Consolidated Omnibus Budget Reconciliation Act (COBRA) C) The Family and Medical Leave Act (FMLA) D) The Fair Labor Standards Act (FLSA) E) Workers' compensation law
64) How much must an employee pay in order to continue health benefits under the Consolidated Omnibus Budget Reconciliation Act (COBRA)? A) One-half the policy premiums B) All the policy premiums, plus up to a five (5) percent administrative fee C) The percentage of policy premiums the employee paid while he or she was employed D) All the policy premiums, plus up to a two (2) percent administration fee E) Nothing, since COBRA requires the employer to pay for all health insurance-related premiums
65) When is an employer not required to offer an employee the option to continue medical benefits under the Consolidated Omnibus Reconciliation Act (COBRA)? Version 1
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A) When the employee is fired for gross misconduct B) When the employer decides to eliminate benefits for all current employees C) When the employee quits without notice D) When the employee is fired for gross misconduct, the employer decides to eliminate benefits for all current employees, or the employee quits without notice E) When the employee is fired for gross misconduct or the employer decides to eliminate benefits for all current employees, but not when the employee quits without notice
66) Which of the following does the Employee Retirement Income and Security Act (FLSA) establish? A) Minimum standards for most voluntarily-established pension and health plans in private industry B) Payments that employers must make each month to their employees C) How much the labor unions are may withdraw from employee paychecks D) How much employees can withdraw from their pension plans each year E) How much employees must be reimbursed by the company each time they make contributions to a defined benefit plan
67) Employers are required to provide _____ to plan participants under the Employee Retirement Income Security Act (ERISA). A) plan information (i.e., features and funding) B) a grievance and appeals process for participants to get benefits from their plans C) the right to sue for benefits and breaches of fiduciary duty D) plan information (i.e., features and funding), a grievance and appeals process for participants to get benefits from their plans, and the right to sue for benefits and breaches of fiduciary duty E) plan information (i.e., features and funding) and a grievance and appeals process for participants to get benefits from their plans, but not the right to sue for benefits and breaches of fiduciary duty
68) Employers are required to provide a(n) _____ to employees under the Employee Retirement Income Security Act (ERISA) containing information as to how their benefit plan operates, the benefits under the plan, how to apply for such benefits, and other information. Version 1
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A) summary plan description B) benefits declaration statement C) ERISA benefits guide D) prospectus E) benefits offering
69) Which of the following legislation require(s) employers to furnish safe working conditions free from recognized hazards that are likely to cause serious harm or death? A) The Occupational Safety and Health Act (OSHA) B) State workers’ compensation acts C) The Federal Workers’ Compensation Act D) Title VII of the Civil Rights Act E) The Workplace Safety Enhancement Act
70) Which of the following is false under federal law regarding employer monitoring of employee telephone calls? A) Employers cannot listen to the private telephone conversations of employees. B) Employers cannot disclose the content of private telephone conversations of employees. C) Employers may ban personal calls during working time. D) To check for compliance, employers may monitor calls so long as they discontinue listening to any conversation once they determine it is personal. E) Employers must give employees access to a telephone and the ability to make personal phone calls at some point during the workday, and these personal calls may not be monitored.
71)
Which of the following laws govern(s) labor-management relations in the United States?
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A) The Wagner Act B) The Taft-Hartley Act and the Wagner Act C) The Landrum-Griffin Act and the Taft-Hartley Act D) The Wagner Act and the Landrum-Griffin Act E) The Wagner Act, the Taft-Hartley Act, and the Landrum-Griffin Act
72) Which of the following consists of negotiations between an employer and a group of employees to determine the conditions of employment? A) Collective bargaining B) Mediation C) Binding arbitration D) Non-binding arbitration E) Collusive bargaining
73)
The _____ interprets and enforces the National Labor Relations Act. A) Committee for Responsible Labor-Management Negotiations B) Senate Select Oversight Committee on Labor-Management Relations C) National Labor Relations Board (NLRB) D) Occupational Safety and Health Administration (OSHA) E) Federal Trade Commission (FTC)
74)
The _____ Act is also known as the Labor-Management Relations Act. A) Taft-Hartley B) Occupational Safety and Health C) Fair Labor Standards D) Wagner E) Landrum-Griffin
75)
The _____ primarily governs the internal operations of labor unions.
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A) Taft-Hartley Act B) National Labor Relations Board (NLRB) C) Fair Labor Standards Act (FLSA) D) Wagner Act E) Landrum-Griffin Act
76)
The National Labor Relations Board (NLRB) lacks jurisdiction over _____.
A) employees covered by the Railway Labor Act B) independent contractors C) agricultural workers D) independent contractors and agricultural employees, but has jurisdiction over employees covered by the Railway Labor Act E) employees covered by the Railway Labor Act, independent contractors, and agricultural workers
77)
For which of the following functions do companies now use social media? A) Recruiting and employee engagement, but not knowledge sharing and branding. B) Knowledge sharing and branding, but not recruiting and employee engagement. C) Recruiting and knowledge sharing, but not employee engagement and branding. D) Employee engagement and branding, but not recruiting and knowledge sharing. E) Recruiting, employee engagement, knowledge sharing, and branding.
78) Which of the following is correct regarding whether an employer may use social media in making hiring decisions?
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A) An employer is prohibited by federal law from using social media in making hiring decisions. B) An employer is prohibited by state law in twenty-one (21) states from using social media in making hiring decisions. C) An employer is prohibited by state law in seventeen (17) states from using social media in making hiring decisions. D) An employer may unconditionally and without reservation use social media in making hiring decisions. E) An employer may use social media in making hiring decisions, if it is done carefully.
79) Which of the following is correct regarding the extent to which the National Labor Relations Act (NLRA) protects the rights of employees to act together to address conditions at work? A) The National Labor Relations Act (NLRA) protects the rights of only union employees to act together to address conditions at work. B) The NLRA protects the rights of union employees to act together to address conditions at work, but this protection does not extend to work-related conversations conducted on social media. C) The NLRA protects the rights of employees to act together to address conditions at work, with or without a union, but this protection does not extend to work-related conversations conducted on social media. D) The NLRA protects the rights of only union employees to act together to address conditions at work, and this protection extends to certain work-related conversations conducted on social media. E) The NLRA protects the rights of employees to act together to address conditions at work, with or without a union, and this protection extends to certain work-related conversations conducted on social media.
80) The Immigration Reform and Control Act requires _____ to verify the identity and eligibility of all individuals hired in the United States after November 6, 1986.
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A) state Industrial Commissions B) the Occupational Safety and Health Administration (OSHA) C) Immigration and Customs Enforcement (ICE) D) employers E) the Internal Revenue Service (IRS)
81) Which of the following is the form that verifies the identity and eligibility of all individuals hired in the United States? A) Immigration Compliance Certification Form P-6 B) Immigration Compliance Certification Form N-17 C) Employment Eligibility Verification Form M-7 D) Employment Eligibility Verification Form K-12 E) Employment Eligibility Verification Form I-9
82)
The federal agency responsible for immigration worksite enforcement is _____. A) the Central Intelligence Agency (CIA) B) the Federal Bureau of Investigation (FBI) C) the United States Department of Homeland Security D) the United States Department of the Interior E) Immigration Customs and Enforcement (ICE)
83) Employers are required to retain I-9 forms for a period of at least _____ from the date of hire or _____ after the employee is no longer employed, whichever is longer. A) 90 days; 30 days B) 180 days; 60 days C) one year; 30 days D) two years; 180 days E) three years; one year
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84) Civil penalties for employers who fail to comply with the laws regarding the hiring of foreign workers begin with a minimum of _____ per authorized worker for the first offense and range up to _____ or more per unauthorized worker for employers who engage in a “pattern and practice” of hiring undocumented workers. A) $3,000; $10,000 B) $2,000; $7,500 C) $1,275; $7,500 D) $875; $5,000 E) $375; $3,000
85) Styling Shenanigans. Candy, who operated a hair and nail salon called "Up Sweep," had a crush on Bruce, a stylist there. He paid her no attention. Finally, Candy told him that to get her approval of his new blow dryer request, he needs to take her on a date and give her a kiss. Bruce reluctantly did so. When they returned to work, Candy proceeded to make suggestive comments to Bruce in front of other employees and to request that he rub her shoulders. When she passed Bruce's station, she would caress him while he worked. Candy also decided that Robert was cute, and she showered him with the same type of attention. Robert enjoyed the attention, but Bruce was offended and filed a claim against Candy for sexual harassment. Bruce asked Robert to join in on the claim. Robert said that it personally never bothered him; but that if Bruce can collect, then he wants in on the action. Bruce told Robert that he is going to see a psychologist to substantiate his claim and that Robert should consider doing likewise. Robert tells him that he has no interest in seeing a psychologist but that his case is as strong as Bruce's. Robert says that while he found Candy entertaining, in all fairness, he should be able to recover if Bruce does so. What type of harassment was involved in Candy's indication to Bruce that if he wanted a new blow dryer, then he needed to take her out on a date? A) Quid pro quo B) Hostile work environment C) Sexual annoyance D) Quid pro quo, hostile work environment, and sexual annoyance E) Quid pro quo and hostile work environment, but not sexual annoyance
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86) Styling Shenanigans. Candy, who operated a hair and nail salon called "Up Sweep," had a crush on Bruce, a stylist there. He paid her no attention. Finally, Candy told him that to get her approval of his new blow dryer request, he needs to take her on a date and give her a kiss. Bruce reluctantly did so. When they returned to work, Candy proceeded to make suggestive comments to Bruce in front of other employees and to request that he rub her shoulders. When she passed Bruce's station, she would caress him while he worked. Candy also decided that Robert was cute, and she showered him with the same type of attention. Robert enjoyed the attention, but Bruce was offended and filed a claim against Candy for sexual harassment. Bruce asked Robert to join in on the claim. Robert said that it personally never bothered him; but that if Bruce can collect, then he wants in on the action. Bruce told Robert that he is going to see a psychologist to substantiate his claim and that Robert should consider doing likewise. Robert tells him that he has no interest in seeing a psychologist but that his case is as strong as Bruce's. Robert says that while he found Candy entertaining, in all fairness, he should be able to recover if Bruce does so. Of which of the following types of harassment were Candy's caresses and suggestive statements? A) Quid pro quo B) Hostile work environment C) Sexual annoyance D) Quid pro quo, hostile work environment, and sexual annoyance E) Quid pro quo and hostile work environment, but not sexual annoyance
87) Styling Shenanigans. Candy, who operated a hair and nail salon called "Up Sweep," had a crush on Bruce, a stylist there. He paid her no attention. Finally, Candy told him that to get her approval of his new blow dryer request, he needs to take her on a date and give her a kiss. Bruce reluctantly did so. When they returned to work, Candy proceeded to make suggestive comments to Bruce in front of other employees and to request that he rub her shoulders. When she passed Bruce's station, she would caress him while he worked. Candy also decided that Robert was cute, and she showered him with the same type of attention. Robert enjoyed the attention, but Bruce was offended and filed a claim against Candy for sexual harassment. Bruce asked Robert to join in on the claim. Robert said that it personally never bothered him; but that if Bruce can collect, then he wants in on the action. Bruce told Robert that he is going to see a psychologist to substantiate his claim and that Robert should consider doing likewise. Robert tells him that he has no interest in seeing a psychologist but that his case is as strong as Bruce's. Robert says that while he found Candy entertaining, in all fairness, he should be able to recover if Bruce does so. Which of the following is true regarding Robert's claim of sexual harassment?
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A) He will be able to prevail, but only if he visits a psychologist. B) He will not be able to prevail, because Candy did not require that he take any action toward her in order to receive a work-related benefit or avoid a work-related detriment. C) A recovery by Bruce does not establish that Robert should recover, because Robert would need to show that he subjectively found Candy's conduct unwelcome. D) Candy's actions would be reviewed only on an objective basis, and what Robert subjectively thought is irrelevant. E) Robert will be able to recover, but only if he can establish that he did not benefit by favors at work based upon Candy's actions.
88) Surprise Arrival. Gracie was surprised and pleased to find she was pregnant. She worked as a waitress at Good Food and was aware that Groucho, her employer, had allowed employees who were ill for reasons that were not work related to take paid time off. For example, her friend Craig was off with pay for two months after suffering a mild heart attack, and her friend Bonnie was off work for three months when she ran her personal watercraft into a dock and broke her leg. Gracie told her employer Groucho about her pregnancy. He very angrily told her that pregnancy was completely voluntary, that he was not paying her a dime when she was off work, and that she would be lucky if he even allowed her to continue working at all because she would not be as cute when she gained weight. He also said that he serves families, and he does not want the kids to ask embarrassing questions of their parents regarding Gracie's condition. Gracie was very angry and threatened to sue. Groucho told her, however, that he had business law back in 1980 and that discrimination based on pregnancy is not even covered by Title VII. The employee handbook did not address the issue. Which of the following is true regarding Groucho's comment that pregnancy-based discrimination is not covered by Title VII? A) He is correct, since federal law does not prohibit pregnancy-based discrimination. B) He is correct that Title VII does not prohibit pregnancy-based discrimination, but Title IV does prohibit it. C) He is incorrect, because Title VII was amended in 1980 to include pregnancy within its protection. D) He is incorrect, because Title VII was amended in 1987 to include pregnancy within its protection. E) He is incorrect, because Title VII was amended in 1997 to include pregnancy within its protection.
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89) Surprise Arrival. Gracie was surprised and pleased to find she was pregnant. She worked as a waitress at Good Food and was aware that Groucho, her employer, had allowed employees who were ill for reasons that were not work related to take paid time off. For example, her friend Craig was off with pay for two months after suffering a mild heart attack, and her friend Bonnie was off work for three months when she ran her personal watercraft into a dock and broke her leg. Gracie told her employer Groucho about her pregnancy. He very angrily told her that pregnancy was completely voluntary, that he was not paying her a dime when she was off work, and that she would be lucky if he even allowed her to continue working at all because she would not be as cute when she gained weight. He also said that he serves families, and he does not want the kids to ask embarrassing questions of their parents regarding Gracie's condition. Gracie was very angry and threatened to sue. Groucho told her, however, that he had business law back in 1980 and that discrimination based on pregnancy is not even covered by Title VII. The employee handbook did not address the issue. Which of the following is true regarding Gracie's entitlement to be paid for time she is medically required to be off for pregnancy? A) Gracie is not entitled to be paid because courts have ruled that while an employer cannot fire a pregnant employee based on the pregnancy, employers do not have to pay the employee for time off because pregnancy is a voluntary condition. B) Gracie is entitled to be paid because all employers covered by Title VII must pay employees for the time they are medically required to be off work for pregnancy. C) Gracie is entitled to some pay because employers covered by Title VII must pay employees one-half their pay for the time they are medically required to be off work for pregnancy. D) Gracie is entitled to be paid because employers under Title VII must treat temporary disability caused by pregnancy the same as any other temporary disability, and Groucho paid other employees who were off based upon temporary disabilities. E) Gracie is not entitled to be paid because courts have ruled that employers only have to pay employees for the time they are medically required to be off for pregnancy if the employee handbook provides for such payments.
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90) Surprise Arrival. Gracie was surprised and pleased to find she was pregnant. She worked as a waitress at Good Food and was aware that Groucho, her employer, had allowed employees who were ill for reasons that were not work related to take paid time off. For example, her friend Craig was off with pay for two months after suffering a mild heart attack, and her friend Bonnie was off work for three months when she ran her personal watercraft into a dock and broke her leg. Gracie told her employer Groucho about her pregnancy. He very angrily told her that pregnancy was completely voluntary, that he was not paying her a dime when she was off work, and that she would be lucky if he even allowed her to continue working at all because she would not be as cute when she gained weight. He also said that he serves families, and he does not want the kids to ask embarrassing questions of their parents regarding Gracie's condition. Gracie was very angry and threatened to sue. Groucho told her, however, that he had business law back in 1980 and that discrimination based on pregnancy is not even covered by Title VII. The employee handbook did not address the issue. What will be the likely result if Groucho defends on the basis that customers will object to Gracie's condition? A) If he can prove that is true, Groucho will prevail on the defense of a bona fide occupational qualification. B) Groucho will only prevail on the defense of a bona fide occupational qualification if he can prove that he has an established history of barring pregnant servers and that he did not single out Gracie. C) Groucho will only prevail on the defense of a bona fide occupational qualification if he can establish that Gracie was attempting to voluntarily get pregnant. D) Groucho will not prevail on the defense of a bona fide occupational qualification because such a defense is available only in cases involving religion or national origin discrimination. E) Groucho will lose on the defense of a bona fide occupational qualification because he will not be able to establish that only non-pregnant employees can perform as servers.
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91) Multiplication. Phyllis, who is 30 years old, works for We Add for You Accounting. Phyllis has worked there for a number of years and is considering quitting in order to spend more time with her three active triplets, Sunny, Fussy, and Perky. She asks her boss, Bolivar, about the pension plan at We Add for You. Her boss tells her that she is not entitled to that information until she is at least 60 years old. Phyllis also asks about retaining her medical insurance protection if she quits and is told that she would have no right to do so. Bolivar also throws in that he has been monitoring her conversations and that he particularly enjoys the conversations between her and her single female friends involving failed dating experiences. He asks her to keep those up. Phyllis tells him that her personal phone calls are none of his business. Bolivar says that he can listen if he wants because the phones are his. Phyllis ends up starting her own company called We Multiply for You, and makes much, much more money. (In answering the following questions, assume all federal laws apply and that any pension and medical plan qualifies for regulation under federal law.) Which of the following addresses the retention of medical benefits upon leaving a job? A) The Consolidated Omnibus Budget Reconciliation Act (COBRA) B) The Medical Benefits Retention Act (MBRA) C) The Health and Maintenance Act (HMA) D) The Comprehensive Medical Benefits Retention Act (CMBRA) E) The Americans with Disabilities Act (ADA)
92) Multiplication. Phyllis, who is 30 years old, works for We Add for You Accounting. Phyllis has worked there for a number of years and is considering quitting in order to spend more time with her three active triplets, Sunny, Fussy, and Perky. She asks her boss, Bolivar, about the pension plan at We Add for You. Her boss tells her that she is not entitled to that information until she is at least 60 years old. Phyllis also asks about retaining her medical insurance protection if she quits and is told that she would have no right to do so. Bolivar also throws in that he has been monitoring her conversations and that he particularly enjoys the conversations between her and her single female friends involving failed dating experiences. He asks her to keep those up. Phyllis tells him that her personal phone calls are none of his business. Bolivar says that he can listen if he wants because the phones are his. Phyllis ends up starting her own company called We Multiply for You, and makes much, much more money. (In answering the following questions, assume all federal laws apply and that any pension and medical plan qualifies for regulation under federal law.) Assuming Phyllis quits, which of the following rights does she have under federal law to retain benefits so long as the benefits are provided to employees who are still working?
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A) None B) The right to retain the medical benefits indefinitely, if she pays for them along with the allowable administrative fee C) The right to retain the benefits for at least twelve (12) months, with the cost assumed by the employer D) The right to retain the benefits for at least eighteen (18) months, with the cost assumed by the employer E) The right to retain the benefits for at least eighteen (18) months, if she pays for the benefits along with the allowable administrative fee
93) Multiplication. Phyllis, who is 30 years old, works for We Add for You Accounting. Phyllis has worked there for a number of years and is considering quitting in order to spend more time with her three active triplets, Sunny, Fussy, and Perky. She asks her boss, Bolivar, about the pension plan at We Add for You. Her boss tells her that she is not entitled to that information until she is at least 60 years old. Phyllis also asks about retaining her medical insurance protection if she quits and is told that she would have no right to do so. Bolivar also throws in that he has been monitoring her conversations and that he particularly enjoys the conversations between her and her single female friends involving failed dating experiences. He asks her to keep those up. Phyllis tells him that her personal phone calls are none of his business. Bolivar says that he can listen if he wants because the phones are his. Phyllis ends up starting her own company called We Multiply for You, and makes much, much more money. (In answering the following questions, assume all federal laws apply and that any pension and medical plan qualifies for regulation under federal law.) Which of the following is true regarding Bolivar's statement that Phyllis is not entitled to that information until she is at least 60 years old? A) He is incorrect, and Phyllis is entitled to a rights review description. B) He is incorrect, and Phyllis is entitled to an entitlement description. C) He is incorrect, and Phyllis is entitled to a summary plan description. D) He is incorrect, and Phyllis is entitled to a plan analysis description. E) He is correct.
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94) Multiplication. Phyllis, who is 30 years old, works for We Add for You Accounting. Phyllis has worked there for a number of years and is considering quitting in order to spend more time with her three active triplets, Sunny, Fussy, and Perky. She asks her boss, Bolivar, about the pension plan at We Add for You. Her boss tells her that she is not entitled to that information until she is at least 60 years old. Phyllis also asks about retaining her medical insurance protection if she quits and is told that she would have no right to do so. Bolivar also throws in that he has been monitoring her conversations and that he particularly enjoys the conversations between her and her single female friends involving failed dating experiences. He asks her to keep those up. Phyllis tells him that her personal phone calls are none of his business. Bolivar says that he can listen if he wants because the phones are his. Phyllis ends up starting her own company called We Multiply for You, and makes much, much more money. (In answering the following questions, assume all federal laws apply and that any pension and medical plan qualifies for regulation under federal law.) Which of the following is true regarding Bolivar's listening to the personal phone calls of Phyllis? A) Bolivar can listen to the phone calls for as long as he wants, so long as he is Phyllis' supervisor. B) Bolivar can listen to the phone calls for as long as he wants, but only if he is a sole proprietor and owns the phones himself. C) Bolivar can listen to the phone calls for as long as he wants, but only if he has a policy prohibiting the making of personal calls. D) Bolivar can listen to the phone calls for as long as he wants, but only if he notifies employees first that he is going to do so. E) Bolivar is prohibited from listening to the phone calls for as long as he wants, and only limited exceptions exist for the monitoring of calls.
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95) Dog and Formals. Paul owns a dog grooming business and needs patient people to work there. He gives all applicants a test he obtained from a management firm that has been proven to measure psychological traits such as patience. Penny alleges sex discrimination after she fails the test miserably and Paul refuses to hire her. Paul tells her that there is no way he is giving her a dime because he is entitled to protect his client's dogs. Upon learning that her state lacked a state office representing the Equal Opportunity Commission, Penny immediately sues him in federal court alleging a violation of Title VII. Paul, who is getting tired of the dog grooming business, also opens a new formal wear shop and needs to hire employees there as well. He wants to appeal to high school and college-age young ladies attending proms and formals. Paul decides that he does not want older sales clerks to assist in choosing formal dresses. He only wants young, attractive ones. Paul runs an ad in the local paper seeking applicants for sales clerks and stating that a qualification for the job is computer training while in high school. Tina, age 60, applies and tells Paul that while she sees no reason that computer training should be required, she attended computer training in adult education and has excellent computer and sales skills. Paul refuses to hire her, telling her that unless he follows the ad, he may be seen as practicing discrimination. Deciding that formal wear is more trouble than dogs, Paul shuts down the formal wear store. Which of the following is true regarding Paul's test for patience? A) Paul is entitled to test so long as the test is not designed, intended, or used to discriminate, and its construct validity references measure a psychological trait needed to perform the job. B) Paul is entitled to test so long as the test is not designed, intended, or used to discriminate, and its credited validity references measure a psychological trait needed to perform the job. C) Paul is prohibited from performing job testing for psychological traits although he would be allowed to test for other types of skills involving construct validity, such as word processing, so long as it could be shown that the skill was necessary for the job at issue. D) Paul is prohibited from performing job testing for psychological traits although he would be allowed to test for other types of skills involving credited validity, such as word processing, so long as it could be shown that the skill was necessary for the job at issue. E) Paul is prohibited by Title VII of the Civil Rights Act of 1964 from doing any testing at all.
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96) Dogs and Formals. Paul owns a dog grooming business and needs patient people to work there. He gives all applicants a test he obtained from a management firm that has been proven to measure psychological traits such as patience. Penny alleges sex discrimination after she fails the test miserably and Paul refuses to hire her. Paul tells her that there is no way he is giving her a dime because he is entitled to protect his client's dogs. Upon learning that her state lacked a state office representing the Equal Opportunity Commission, Penny immediately sues him in federal court alleging a violation of Title VII. Paul, who is getting tired of the dog grooming business, also opens a new formal wear shop and needs to hire employees there as well. He wants to appeal to high school and college-age young ladies attending proms and formals. Paul decides that he does not want older sales clerks to assist in choosing formal dresses. He only wants young, attractive ones. Paul runs an ad in the local paper seeking applicants for sales clerks and stating that a qualification for the job is computer training while in high school. Tina, age 60, applies and tells Paul that while she sees no reason that computer training should be required, she attended computer training in adult education and has excellent computer and sales skills. Paul refuses to hire her, telling her that unless he follows the ad, he may be seen as practicing discrimination. Deciding that formal wear is more trouble than dogs, Paul shuts down the formal wear store. Which of the following is true regarding Penny’s lawsuit against Paul in federal court? A) Her lawsuit was improperly filed because she did not first file with the federal Equal Employment Opportunity Commission (EEOC) and she lacked a right to sue letter. B) Her lawsuit was improperly filed because she did not first insist on mediation. C) Her lawsuit was improperly filed because she did not first insist on arbitration. D) Her lawsuit was properly filed because her state had no state office representing the Equal Opportunity Commission. E) Her lawsuit was properly filed regardless of whether her state had a state office representing the Equal Opportunity Commission.
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97) Dogs and Formals. Paul owns a dog grooming business and needs patient people to work there. He gives all applicants a test he obtained from a management firm that has been proven to measure psychological traits such as patience. Penny alleges sex discrimination after she fails the test miserably and Paul refuses to hire her. Paul tells her that there is no way he is giving her a dime because he is entitled to protect his client's dogs. Upon learning that her state lacked a state office representing the Equal Opportunity Commission, Penny immediately sues him in federal court alleging a violation of Title VII. Paul, who is getting tired of the dog grooming business, also opens a new formal wear shop and needs to hire employees there as well. He wants to appeal to high school and college-age young ladies attending proms and formals. Paul decides that he does not want older sales clerks to assist in choosing formal dresses. He only wants young, attractive ones. Paul runs an ad in the local paper seeking applicants for sales clerks and stating that a qualification for the job is computer training while in high school. Tina, age 60, applies and tells Paul that while she sees no reason that computer training should be required, she attended computer training in adult education and has excellent computer and sales skills. Paul refuses to hire her, telling her that unless he follows the ad, he may be seen as practicing discrimination. Deciding that formal wear is more trouble than dogs, Paul shuts down the formal wear store. Which of the following is true involving Paul's plan to require computer training in high school in order to eliminate older workers? A) He is not guilty of any violation without additional evidence of intent to discriminate. B) He is not guilty of any violation because common sense tells us that younger people make better sales clerks. C) He is not guilty of any violation unless he can establish through a survey that most people prefer younger sales clerks. D) He is not guilty of any violation unless he can establish through a survey that most of the formal wear store's customers prefer younger sales clerks. E) He is guilty of violating the Age Discrimination in Employment Act.
98) Business owners need to understand the extent to which they can monitor employees’ telephone conversations, read their email, and listen to their voice mail. Questions related to such monitoring primarily involve the common law tort of _____. A) invasion of privacy B) defamation C) seclusion of private facts D) sedition E) wire-tapping
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99) Which law expanded the definition of discrimination based on gender to include discrimination based on pregnancy? A) The Focus on the Family Act of 2002 B) The Family Planning Act of 2004 C) The Pregnancy Discrimination Act of 1987 D) The Woman’s Suffrage and Rights Act of 1971 E) The Pregnancy, Birth, and Newborn Rights Act of 1984
100)
When the Equal Pay Act (EPA) was enacted, the average wages of women were _____. A) roughly equal to those of men B) less than sixty (60) percent of those of men C) approximately seventy (70) percent of those of men D) equal to those of men in the “learned professions” (for example, law) E) more than men due to the Vietnam war
101)
What does the FUTA stand for? A) The Federal Uninsured Tax Act B) The Federal Underwriters Tax Act C) The Federal Unemployment Tax Act D) The Federal Unintended Torts Act E) The First Under Treatment Act
102) The exception to the at-will rule is that an employer may not fire an employee for a(n) _____ reason. A) articulable B) illegal C) personal D) personnel E) financial
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103) To sue for disparate treatment under Title VII of the Civil Rights Act, the plaintiff must be a member of a(n) _____. A) union shop B) protected class C) closed shop D) religious institution E) agency shop
104) Which of the following consists of negotiations between an employer and a group of employees to determine the conditions of employment? A) Collective bargaining B) Court-imposed binding arbitration C) National Labor Relations Board (NLRB) hearings D) Court-imposed binding mediation E) Independent bargaining
105) Employers should keep in mind that background screening companies that use social media sites are subject to the provisions of the _____ Act, under which the applicants must give permission for pre-employment investigations. A) Privacy in Working B) Fair Credit Reporting C) National Defamation D) Fairness in Social Media E) Employment Security
106) Which of the following federal agencies is responsible for immigration worksite enforcement?
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A) The Federal Trade Commission (FTC) B) The Interstate Commerce Commission (ICC) C) The Occupational Safety and Health Administration (OSHA) D) Immigration Customs and Enforcement (ICE) E) A federal agency is not responsible for immigration worksite enforcement, since this responsibility has been delegated to the individual states.
ESSAY. Write your answer in the space provided or on a separate sheet of paper. 107) Define sexual harassment as established by the Equal Employment Opportunity Commission (EEOC) and accepted by the United States Supreme Court.
108) List the family-related occurrences that are covered under the Family and Medical Leave Act (FMLA).
109) From an ethical perspective, discuss whether you believe the employment-at-will doctrine should continue to be recognized and applied in the United States, and indicate whether you believe the various employment laws currently in place excessively restrict employers in their ability to fire employees. In your answer, specifically reference at least three (3) federal laws impacting the employment-at-will doctrine and whether you believe the laws are necessary and appropriate.
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110) Mona is a state representative. She believes that her state should pass a law mandating that all employees receive at least one (1) week of vacation per year. Nick, one of her fellow representatives, tells her that the state legislature cannot do so because only federal law may increase employment rights. He tells her that only the United States Congress could pass a law increasing benefits. Nick wants to pass a law repealing the federal Age Discrimination in Employment Act (ADEA) to result in the hiring of younger workers. When Mona disagrees and challenges him, he tells her that state legislatures may reduce federal rights, but not increase them. Who is right on the issues involving vacation and the FMLA, and why?
111) What must a union and employer do once a union has been elected, and what duties does an employer have regarding increasing benefits at that time?
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Answer Key Test name: Chap 24_5_The Essentials_Kubasek 1) TRUE Today, an employee who is not employed under a contract for a set duration or under a collective bargaining agreement is considered an atwill employee. An employer may fire an at-will employee at any time, with no notice, for almost any reason. 2) FALSE In the United States, the concept of at-will employment was recognized during the eighteenth and nineteenth centuries, when employees had no protection in the workplace. 3) TRUE An at-will employee may quit at any time for any reason or no reason at all, with no required notice to the employer. 4) TRUE Employees are protected in the workplace by a number of both federal and state laws. 5) TRUE Employees are protected in the workplace by a number of both federal and state laws. Federal laws apply to everyone in the United States. Federal law may be described as a minimum level of protection for all workers. State laws may give employees more, but not less, protection than federal laws. 6) FALSE Title VII of the Civil Rights Acts of 1964 applies to employers who have 15 or more employees for 20 consecutive weeks within one year and who are engaged in a business that affects commerce. 7) TRUE Version 1
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To sue for disparate treatment under Title VII of the Civil Rights Act of 1964, the plaintiff must be a member of a protected class as listed in the act. In other words, the employee must have been discriminated against on the basis of race, color, national origin, religion, or sex (i.e., gender). If the employee has been refused work, fired, denied a promotion, or the like, based on membership in a protected class, this is a form of intentional discrimination and qualifies the employee to sue for disparate-treatment discrimination. 8) FALSE Although it is very difficult to prove disparate treatment discrimination, it is even more difficult to prove disparate-impact discrimination. Disparate-impact cases arise when a plaintiff attempts to establish that although an employer’s policy or practice appears to apply to everyone equally, its actual effect is that it disproportionally limits employment opportunities for a protected class. 9) FALSE Two distinct forms of sexual harassment are recognized: quid pro quo sexual harassment and hostile work environment sexual harassment. 10) TRUE According to the United States Supreme Court in the 1998 case Oncale v. Sundowner Offshore Services, Inc., sex discrimination consisting of same-sex sexual harassment is actionable under Title VII of the Civil Rights Act of 1964. 11) FALSE Hostile-environment issues have also been used in cases of discrimination based on religion and race. 12) TRUE
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The bona fide occupational qualification (BFOQ) defense allows an employer to discriminate in hiring on the basis of sex, religion, or national origin (but not race or color) when doing so is necessary for the performance of the job. 13) FALSE A plaintiff may seek both legal and equitable remedies for violations of Title VII of the Civil Rights Act of 1964. 14) FALSE Filing a claim under Title VII of the Civil Rights Act of 1964 is much more complicated than filing a civil lawsuit. Failure to follow the proper procedures within the strict time framework may result in the plaintiff losing his or her right to file a lawsuit under Title VII. 15) TRUE The goal of the Americans with Disabilities Act (ADA) is preventing employers from discriminating against employees and applicants with disabilities. Under the ADA, employers must make reasonable accommodations for known physical or mental disabilities of an otherwise qualified person with a disability unless the necessary accommodations would impose an undue burden on the employer's business. 16) TRUE Remedies for Americans with Disabilities Act violations are similar to those available under Title VII of the Civil Rights Act of 1964. A successful plaintiff may recover reinstatement, back pay, and injunctive relief. In cases of intentional discrimination, limited compensatory and punitive damages are also available. An employer who has repeatedly violated the act may be subject to fines of up to $100,000. 17) FALSE
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No federal legislation currently prohibits discrimination based on sexual orientation. However, at the time of this publication there are twentytwo states and one district with laws prohibiting such discrimination. 18) FALSE The Family and Medical Leave Act (FMLA) guarantees all eligible employees (those who have worked at least 25 hours a week for each of 12 months prior to the leave) up to 12 weeks of unpaid leave during any 12-month period of employment for any of the following family-related occurrences: a) the birth of a child; b) the adoption of a child; c) the placement of a foster child in the employee’s care; d) the care of a seriously ill spouse, parent, or child; or e) a serious health condition that renders the employee unable to perform any of the essential functions of his or her job. 19) FALSE Workers' compensation laws ensure that covered workers who are injured on the job can receive financial compensation through an administrative procedure rather than having to sue their employer. 20) FALSE During the post-World War II period, more than one-third of American workers were organized. In 2016, the percentage of workers belonging to a union in the United States was 10.7 percent. 21) FALSE The Taft-Hartley Act, also known as the Labor-Management Relations Act, was designed to curtail some of the powers unions had acquired under the Wagner Act. 22) FALSE
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The National Labor Relations Board (NLRB) is the administrative agency that interprets and enforces the National Labor Relations Act (NLRA). The NLRB’s three primary functions are to: a) monitor the conduct of the employer and the union during an election to determine whether workers want to be represented by a union; b) prevent and remedy unfair labor practices by employers or unions; and c) establish rules interpreting the NLRA. 23) FALSE Once a union has been certified, union and management must begin to bargain in good faith about wages, hours, and other terms and conditions of work. The National Labor Relations Board can only order union and management to bargain in good faith; it cannot order them to reach an agreement with respect to any contract term. 24) B According to the Court, both the disparate impact and religious accommodation doctrines bar facially neutral employment policies that have disproportionate adverse effects on a protected class. 25) A The Washington Court of Appeals affirmed the lower court’s decision to grant summary judgment, holding that MUMA does not prohibit an employer from discharging and employee for medical marijuana use. 26) E Today, any employee who is not employed under a contract for a set duration or under a collective bargaining agreement is considered an atwill employee. This means that the employee may quit at any time for any reason or no reason at all, with no required notice to the employer. Similarly, an employer may fire the employee at any time, with no notice, for almost any reason. 27) D
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During the eighteenth and nineteenth centuries in the United States, employees had no protection in the workplace. An employer could fire a worker for no reason at all. This concept came to be known as at-will employment. At-will employment applied in all states until 1959. 28) A Title VII of the Civil Rights Act of 1964 protects employees against discrimination and harassment based upon race, color, religion, national origin, and sex. 29) B In 1987, Title VII of the Civil Rights Act of 1964 was amended by the Pregnancy Discrimination Act (PDA). This law expanded the definition of discrimination based on gender to include discrimination based on pregnancy. 30) C The Age Discrimination in Employment Act of 1967 was enacted to prohibit employers from refusing to hire, discharging or discriminating in terms and conditions of employment against employees or applicants age 40 or older. The language describing the prohibited conduct is virtually the same as that of Title VII of the Civil Rights Act of 1964, except that age is the prohibited basis for discrimination. 31) A Title VII of the Civil Rights Act of 1964 deals with discrimination in employment. 32) D Title VII of the Civil Rights Act of 1964 prohibits segregating employees in a manner that would affect their employment opportunities based on their race, color, religion, sex, or national origin. 33) E
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There are two ways to prove discrimination under Title VII of the Civil Rights Act of 1964—disparate treatment and disparate impact. Disparate treatment is a form of intentional discrimination in which an employee is hired, fired, denied a promotion or the like based on membership in a protected class. Disparate impact is a form of discrimination that arises when an employer's policy or practice appears to apply to everyone equally, but its actual effect is to disproportionately limit employment opportunities for a protected class. 34) E Title VII of the Civil Rights Act of 1964 covers the United States government, corporations owned by the government, agencies of the District of Columbia, Indian tribes, private clubs, unions, and employment agencies. 35) C Title VII of the Civil Rights Act of 1964 applies to employers who have 15 or more employees for 20 consecutive weeks within one year and who are engaged in a business that affects commerce. 36) A Proving disparate-treatment discrimination in employment under Title VII is a three-step process, and initially the employee-plaintiff must demonstrate a prima facie case of discrimination. 37) B Proving disparate-treatment in employment under Title VII of the Civil Rights Act of 1964 is a three-step process. After the employee-plaintiff demonstrates a prima facie case of discrimination, the burden of proof shifts to the employer-defendant, who must then articulate a legitimate, nondiscriminatory business reason for the action. 38) B
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Damages under Title VII of the Civil Rights Act of 1964 include up to two years of back pay, compensatory damages, punitive damages (limited in some cases), attorney fees, court costs, court orders (including reinstatement), and remedial seniority. 39) B Disparate-impact cases are sometimes called unintentional discrimination cases. 40) B Disparate-impact cases arise when a plaintiff attempts to establish that while an employer's policy or practice appears to apply to everyone equally, its actual effect is to disproportionately limit employment opportunities for a protected class. 41) D In the 1998 case Oncale v. Sundowner Offshore Services, Inc., the United States Supreme Court ruled that same-sex sexual harassment is actionable under Title VII of the Civil Rights Act of 1964. 42) A The bona fide occupational qualification defense allows an employer to discriminate in hiring on the basis of sex, religion, or national origin if doing so is necessary for the performance of the job. Necessity must be based on actual qualifications, not stereotypes about one group’s abilities. 43) E The bona fide occupational qualification (BFOQ) defense allows an employer to discriminate in hiring on the basis of sex, religion, or national origin (but not race or color) when doing so is necessary for the performance of the job. 44) C
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Employers may be held liable for sexual harassment of their employees by nonemployees under very limited circumstances. If an employer knows that a customer repeatedly harasses an employee yet the employer does nothing to remedy the situation, the employer may be liable. 45) A In Title VII cases based on discrimination other than race, punitive damages are capped at $300,000 for employers of more than 500 employees, $100,000 for firms with 101 to 200 employees, and $50,000 for firms with 100 or fewer employees. 46) E Attorney fees may be awarded to a successful plaintiff in Title VII cases. They are typically denied only when special circumstances would render the award unjust. If it is determined that the plaintiff's action was frivolous, unreasonable, or without foundation, the courts may award attorney fees to the prevailing defendant. 47) C If the Equal Employment Opportunity Commission decides not to sue, it notifies the plaintiff of his or her right to file an action and issues the plaintiff a right-to-sue letter, which is not intended to be anything other than a statement that the plaintiff has followed the proper initial procedures and therefore may file a lawsuit. 48) E The Age Discrimination in Employment Act of 1967 (ADEA) was enacted to prohibit employers from refusing to hire, discharging, or discriminating in the terms and conditions of employment against employees or applicants age 40 or older. 49) D The Age Discrimination in Employment Act (ADEA) applies to employers having 20 or more employees. Version 1
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50) A The goal of the Americans with Disabilities Act (ADA) is preventing employers from discriminating against employees and applicants with disabilities. 51) D The primary purpose of the Equal Pay Act is to eliminate situations in which women, working alongside men or replacing men, are paid lower wages for doing substantially the same job. 52) D The Equal Pay Act of 1963 prohibits any employer from discriminating within any "establishment . . . between employees on the basis of sex by paying wages to employees in such establishment at a rate less than the rate at which he pays wages to employees of the opposite sex . . . for equal work on jobs the performance of which requires equal skill, effort, and responsibility, and which are performed under similar working conditions, except where payment is made pursuant to (i) a seniority system; (ii) a merit system; (iii) a system which measures earnings by quantity or quality of production; or (iv) differential based on any factor other than sex. 53) E No federal legislation prohibits discrimination based on sexual orientation. However, state laws prohibiting such discrimination exist in twenty-one states and one district. 54) D Barring a state law to the contrary, refusal to hire or discharge based on smoking is legal. 55) B The Fair Labor Standards Act (FLSA) regulates the payment of wages and overtime. 56) B Version 1
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In the summer of 2009, the federal minimum wage was raised to $7.25. 57) C The Fair Labor Standards Act (FLSA) requires that a minimum wage of a specified amount be paid to all employees in covered industries and mandates that employees who work more than 40 hours in a week be paid no less than one and one-half times their regular wage for all hours beyond 40 worked in a given week. 58) D The Fair Labor Standards Act mandates employees who work more than 40 hours in a week be paid no less than one and one-half times their regular wage for all the hours beyond 40 that they work during a given week. Four categories of employees are excluded: a) executives; b) administrative employees; c) professional employees; and d) outside salespersons. 59) A The Family and Medical Leave Act (FMLA) covers all public and private employers with fifty (50) or more employees. It guarantees all eligible employees (those who have worked at least 25 hours a week for each of 12 months prior to the leave) up to 12 weeks of unpaid leave during any 12-month period for a seriously ill spouse or parent. 60) C Under the Family and Medical Leave Act (FMLA), eligible employees are those who have worked at least 25 hours a week for each of 12 months prior to the leave. 61) C The Family and Medical Leave Act (FMLA) guarantees all eligible employees (those who have worked at least 25 hours a week for each of 12 months prior to the leave) up to 12 weeks of unpaid leave during any 12-month period for certain family-related occurrences. 62) A Version 1
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The Federal Unemployment Tax Act (FUTA), passed in 1935, created a state system to provide unemployment compensation to qualified employees who lose their jobs. 63) B The Consolidated Omnibus Budget Reconciliation Act (COBRA) ensures that employees who lose their jobs or have their hours reduced to a level at which they are no longer eligible to receive medical, dental, or optical benefits have the right to pay to continue receiving benefits for themselves and their dependents under the employer's policy. 64) D The employee must pay the premiums for the policy, plus up to a two (2) percent administration fee, which is often quite expensive. 65) E Generally, an employer is required to offer an employee the option to continue medical benefits under the Consolidated Omnibus Reconciliation Act (COBRA). This obligation does not arise, however, under either of two conditions: a) the employee is fired for gross misconductor b) the employer decides to eliminate benefits for all current employees. 66) A The Employee Retirement Income Security Act (ERISA) is a federal law that sets minimum standards for most voluntarily established pension and health plans in private industry to provide protection for individuals in these plans. 67) D
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Under the Employee Retirement Income Security Act (ERISA) of 1974, employers must provide participants with the following rights: a) plan information (i.e., features and funding); b) assurances of the fiduciary responsibility of those in charge of managing and controlling the plan assets; c) a grievance and appeals process for participants to get benefits from their plans; and d) the right to sue for benefits and breaches of fiduciary duty. 68) A Employers are required to provide to employees, free of charge, a summary plan description (SPD), which provides information on how the plan operates, the benefits under the plan, how to apply for such benefits, when such benefits vest, and when benefits may be paid out. 69) A The federal government regulates workplace safety primarily through the Occupational Safety and Health Act (OSHA) of 1970, which requires every employer to “furnish to each of his employees . . . employment . . . free from recognized hazards that are likely to cause death or serious physical harm.” 70) E Employers may ban personal calls. 71) E Labor-management relations in the United States today are governed by three major pieces of legislation: a) the Wagner Act of 1935; b) the Taft-Hartley Act of 1947; and c) the Landrum-Griffin Act of 1959. 72) A
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Collective bargaining consists of negotiations between an employer and a group of employees to determine the conditions of employment. 73) C The Wagner Act created an administrative agency, the National Labor Relations Board (NLRB), to interpret and enforce the National Labor Relations Act. 74) A The Taft-Hartley Act is also known as the Labor-Management Relations Act. 75) E The Landrum-Griffin Act primarily governs the internal operations of labor unions. This act, which was a response to evidence of certain undesirable internal labor union practices, requires certain financial disclosures by unions and establishes civil and criminal penalties for financial abuses by union officials. “Labor’s Bill of Rights,” contained in the act, protects employees from their own unions. 76) E The National Labor Relations Board (NLRB) has jurisdiction over all employees except those who work in federal, state, and local government and those covered by the Railway Labor Act (employees in the transportation industry); independent contractors; agricultural workers; household domestics; persons employed by a spouse or parent; and supervisors, managerial employees, and confidential employees. 77) E The growth of social media has changed how the world communicates, and this includes the business world. Companies now use social media for recruiting, employee engagement, knowledge sharing, branding, and more. 78) E
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An employer may use social media in making hiring decisions, if it is done carefully. Probably the biggest concern is discrimination. When accessing a potential employee’s social media (for example, Facebook), the employer may gain access to information in protected categories such as age, race, ethnicity, religious affiliations, and disabilities. Such information must be ignored when making hiring decisions. 79) E The National Labor Relations Act (NLRA) protects the rights of employees to act together to address conditions at work, with or without a union. This protection extends to certain work-related conversations conducted on social media, such as Facebook and Twitter. 80) D Until 1986, there was virtually no risk for employers who hired undocumented immigrants. But, beginning that year, the United States Congress passed the Immigration Reform and Control Act. This act is an amendment to the Immigration and Nationality Act (INA) and requires employers to verify the identity and eligibility of all individuals hired in the United States after November 6, 1986. 81) E Until 1986, there was virtually no risk for employers who hired undocumented immigrants. But, beginning that year, the United States Congress passed the Immigration Reform and Control Act. This act is an amendment to the Immigration and Nationality Act (INA) and requires employers to verify the identity and eligibility of all individuals hired in the United States after November 6, 1986. The INA designates Employment Eligibility Verification Form I-9 (Form I-9) as the means of documenting this verification. 82) E Immigration Customs and Enforcement (ICE) is the federal agency responsible for immigration worksite enforcement. Version 1
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83) E Employers are required to confirm “work authorization,” which means that every new employee, at the time of hire, must fill out Form I-9. Employers are required to retain I-9 forms for a period of at least three years from the date of hire or one year after the employee is no longer employed, whichever is longer. 84) E Employers who fail to comply with the laws regarding the hiring of foreign workers risk criminal and civil sanctions. Civil penalties begin with a minimum of $375 per authorized worker for the first offense and range up to $3,000 or more per unauthorized worker for employers who engage in a “pattern and practice” of hiring undocumented workers. 85) A Quid pro quo sexual harassment occurs when a supervisor makes a sexual demand on someone and this demand is reasonably perceived as a term or condition of employment. 86) B Two distinct forms of sexual harassment are recognized. The first, and generally easiest to prove, is quid pro quo, which occurs when a supervisor makes a sexual demand on someone and this demand is reasonably perceived as a term or condition of employment. The second form of sexual harassment involves the creation of a hostile work environment. 87) C In Teresa Harris v. Forklift Systems, Inc., the United States Supreme Court recognized that if the victim does not subjectively perceive the environment to be abusive, the conduct has not actually altered the conditions of the victim's employment, and no Title VII violation has occurred. 88) D Version 1
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In 1987, Title VII of the Civil Rights Act of 1964 was amended by the Pregnancy Discrimination Act (PDA). This law expanded the definition of discrimination based on gender to include discrimination based on pregnancy. According to the PDA, "discrimination on the basis of pregnancy, childbirth or related medical conditions constitutes unlawful sex discrimination under Title VII." 89) D Under Title VII of the Civil Rights Act of 1964 as amended by the Pregnancy Discrimination Act (PDA) of 1987, temporary disability caused by pregnancy must be treated the same as any other temporary disability. 90) E The bona fide occupational qualification (BFOQ) defense allows an employer to discriminate in hiring on the basis of sex, religion, or national origin (but not race or color) when doing so is necessary for the performance of the job, and employer arguments about customer preferences have not been persuasive in the courts. 91) A The Consolidated Omnibus Budget Reconciliation Act (COBRA) ensures that employees who lose their jobs or have their hours reduced to a level at which they are no longer eligible to receive medical, dental, or optical benefits have the right to pay to continue receiving benefits for themselves and their dependents under the employer's policy. 92) E Under the Consolidated Omnibus Reconciliation Act (COBRA), the employee must pay the premiums for the policy plus up to a 2 percent administration fee to maintain the coverage for up to 18 months, or 29 months for a disabled worker. 93) C
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Employers are required to provide to employees, free of charge, a summary plan description (SPD), which provides information on how the plan operates, the benefits under the plan, how to apply for such benefits, when such benefits vest, and when benefits may be paid out. 94) E Under the Omnibus Crime Control and Safe Streets Act of 1968, employers cannot listen to the private telephone conversations of employees or disclose the contents of these conversations. They may, however, ban personal calls and monitor calls for compliance as long as they discontinue listening to any conversation once they determine it is personal. 95) A Professionally developed ability tests that are not designed, intended, or used to discriminate may be used; and a type of validation that is acceptable is construct validity wherein a psychological trait needed to perform a job is measured. 96) A The first step in initiating a Title VII action is the aggrieved party's filing of a charge with the state Equal Opportunity Commission or, if no such agency exists, the federal EEOC. A right to sue letter is needed for a plaintiff to proceed in court. 97) E The Age Discrimination in Employment Act (ADEA) of 1967 was enacted to prohibit employers from refusing to hire, discharging, or discriminating in terms and conditions of employment against employees or applicants age 40 or older. 98) A
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Business owners need to understand the extent to which they can monitor employees’ telephone conversations, read their email, and listen to their voice mail. Questions related to such monitoring primarily involve the common law tort of invasion of privacy. 99) C In 1987, Title VII was amended by the Pregnancy Discrimination Act (PDA). This law expanded the definition of discrimination based on gender to include discrimination based on pregnancy. 100) B We generally think of Title VII as the primary means of protecting women from discrimination, an earlier law actually was designed specifically to protect women from wage discrimination: the Equal Pay Act (EPA) of 1963. When EPA was passed, the average wages of women were less than 60 percent of those of men. 101) C The Federal Unemployment Tax Act (FUTA), passed in 1935, created a state system to provide unemployment compensation to qualified employees who lose their jobs. 102) B The exception to the at-will rule is that an employer may not fire an employee for an illegal reason. 103) B To sue for disparate treatment under Title VII, the plaintiff must be a member of a protected class. 104) A Collective bargaining “consists of negotiations between an employer and a group of employees so as to determine the conditions of employment.” 105) B
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Employers should keep in mind, however, that background screening companies that use social media sites are subject to the provisions of the Fair Credit Reporting Act, under which the applicants must give permission for pre-employment investigations. 106) D The federal agency responsible for immigration worksite enforcement is Immigration Customs and Enforcement (ICE). 107) The definition of sexual harassment stated by the Equal Employment Opportunity Commission (EEOC) and accepted by the United States Supreme Court is "unwelcome sexual advances, requests for sexual favors, and other verbal or physical conduct of a sexual nature" that implicitly or explicitly makes submission a term or condition of employment; makes employment decisions related to the individual dependent on submission to or rejection of such conduct; or has the purpose or effect of creating an intimidating, hostile, or offensive work environment. 108) Leave is available under the Family and Medical Leave Act (FMLA) for any of the following family-related occurrences: 1.The birth of a child; 2.The adoption of a child; 3.The placement of a foster child in the employee's care; 4.The care of a seriously ill spouse, parent, or child; or 5.A serious health condition that renders the employee unable to perform any of the essential functions of his or her job. 109) Student responses will vary but will be related to the three (3) federal laws they choose to discuss as impacting the employment-at-will doctrine.
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110) Mona is right. Federal law may be described as a minimum level of protection for workers. State laws may give employees more, but not less, protection than federal laws. 111) Once the union has been elected, the union and the employer must begin to bargain in good faith about wages, hours, and other terms and conditions of work. The parties only have to bargain in good faith; the law does not require them to reach an agreement.
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CHAPTER 25 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) A consumer law is a statute or an administrative rule serving to protect consumer interests. ⊚ true ⊚ false
2) The two (2) ways the Federal Trade Commission (FTC) protects consumers is through consumer education and online advertising campaigns. ⊚ true ⊚ false
3) A consent order is a Federal Trade Commission (FTC) order requiring that a company stop its illegal behavior. ⊚ true ⊚ false
4)
Deceptive advertising is also known as puffing. ⊚ true ⊚ false
5) The Federal Trade Commission (FTC) decides whether an advertisement is deceptive on a case-by-case basis. ⊚ true ⊚ false
6) If Timothy’s Television and Appliance, L.L.C. advertises information that is true but incomplete, it has not violated any laws. ⊚ true ⊚ false
7) Ad substantiation requires advertisers to have a reasonable basis for the claims made in their advertisements.
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⊚ ⊚
true false
8) The existence of deceptive advertisements alone is sufficient to prove damages for recovery when individual civil suits are filed for deceptive advertising. ⊚ true ⊚ false
9) Similar to the standard recognized in the United States, China accepts puffery as an acceptable form of advertising. ⊚ true ⊚ false
10) When sellers advertise a low price for an item generally unavailable to the consumer and then push the consumer to buy a more expensive item, they are engaging in “bait-and-switch” advertising. ⊚ true ⊚ false
11) A multiple-product order is a form of cease-and-desist order the Federal Trade Commission (FTC) issues that applies not only to the product that was the subject of its action against a company for deceptive advertising, but to other products produced by competing companies as well. ⊚ true ⊚ false
12) Federal regulations prohibit the advertising of cigarettes on radio and television, but allow such advertising for smokeless tobacco. ⊚ true ⊚ false
13) The Nutrition Labeling and Education Act of 1990 requires standard nutrition information (i.e., calories and fat) to be provided on food labels.
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⊚ ⊚
true false
14) The Federal Hazardous Substances Act of 1960 requires all items containing dangerous substances to carry warning labels. ⊚ true ⊚ false
15) The Federal Trade Commission’s(FTC’s) Cooling-Off Rule gives consumers up to twenty-four (24) hours to cancel purchases they make from salespeople who come to their homes. ⊚ true ⊚ false
16)
Consumer protection laws against fraud in used car sales are uniform from state-to-state. ⊚ true ⊚ false
17) The purpose of the Truth in Lending Act is to ensure that a consumer receives the lowest interest rate available at the time of her credit or loan transaction. ⊚ true ⊚ false
18) The Equal Credit Opportunity Act allows a creditor to deny credit if the applicant receives public assistance benefits. ⊚ true ⊚ false
19) If a credit bureau issues a consumer credit report for a reason not specified by the Fair Credit Reporting Act, the credit bureau may be subject to a cease-and desist order; it may not, however, be held liable for damages. ⊚ true ⊚ false
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20) Although the Consumer Product Safety Commission (CPSC) sometimes works with companies that are voluntarily issuing recalls for dangerous products, the CPSC usually issues product recalls on its own. ⊚ true ⊚ false
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 21) Which of the following was the result on appeal in Crawford v. LVNV Funding. LLC., the case in the textbook involving whether the Fair Debt Collection Practices Act disallows the attempt to collect a debt when the claim is time-barred? A) The Eleventh Circuit Court of Appeals ruled that the Fair Debt Collection Practices Act allows the attempt to collect a debt when the claim in time-barred using the “leastsophisticated consumer” standard. B) The Eleventh Circuit Court of Appeals ruled that the Fair Debt Collection Practices Act allows the attempt to collect a debt when the claim is time-barred using the “reasonable consumer” standard. C) The Eleventh Circuit Court of Appeals dismissed the appeal due to the appeal having not been timely filed. D) The Eleventh Circuit Court of Appeals ruled that the Fair Debt Collection Practices Act disallows the attempt to collect a debt when the claim is time-barred using the “leastsophisticated consumer” standard. E) The Eleventh Circuit Court of Appeals ruled that the Fair Debt Collection Practices Act disallows the attempt to collect a debt when the claim is time-barred using the “reasonable consumer” standard.
22) Which of the following was the ruling by the Ninth Circuit in United States vs. Kaplan the case in the textbook involving whether a physician can be charged under the Food, Drug, and Cosmetic Act (FDCA) when the doctor reused needles that he argued where not ‘held for sale’ but instead were ‘held for use.’
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A) The court found that Kaplan knowingly endangered public health in his practices and that the FDCA does apply. B) The court found that Kaplan did not knowingly endanger public health in his practices and that the FDCA does not apply. C) The court held that the Food and Drug Administration has jurisdiction over all products but medical products and thus the physician could not be charged. D) The court held that a physician can only be held civilly liable for negligence and malpractice under the FDCA not criminal charges. E) The court held that the American Medical Association is the ruling entity to make a determination as to liability, not a court.
23)
Which of the following is true regarding the legal protection of consumer interests?
A) Consumer laws are in the form of statutes, not administrative rules. B) Consumer laws are in the form of administrative rules, not statutes. C) State laws protect consumers from the unfair trade practices of sellers, while federal laws protect consumers from unsafe products. D) State laws protect consumers from unsafe products, while federal laws protect consumers from the unfair trade practices of sellers. E) Various state and federal consumer laws protect consumers from the unfair trade practices of sellers, as well as from unsafe products.
24) The United States Congress created the Federal Trade Commission (FTC) through the Federal Trade Commission Act of _____. A) 1900 B) 1914 C) 1929 D) 1934 E) 1976
25)
What type of agency is the Federal Trade Commission (FTC)?
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A) Executive B) Independent C) Collateral D) Bifurcated E) Sua sponte
26)
How many commissioners does the Federal Trade Commission (FTC) have? A) Three (3) B) Five (5) C) Seven (7) D) Ten (10) E) Fifteen (15)
27) Who is responsible for appointing commissioners to serve on the Federal Trade Commission (FTC)? A) The United States (U.S.) House of Representatives B) The U.S. Senate C) The U.S. president D) The U.S. Supreme Court E) Both the U.S. House and the U.S. Senate, through a joint resolution
28) Tamara’s Tiki Torches, L.L.C. (Tamara’s) receives a complaint from the Federal Trade Commission (FTC) alleging a violation of consumer law. If Tamara’s settles with the FTC, a(n) _____ will be issued indicating that it will stop the disputed behavior, but admitting no fault. A) summary judgment B) judgement on the pleadings C) consent order D) restraining order E) temporary injunction
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29) Tamara’s Tiki Torches, L.L.C. (Tamara’s) receives a complaint from the Federal Trade Commission (FTC) alleging a violation of consumer law. If Tamara’s refuses to enter into a consent agreement, the FTC may then decide to issue a formal administrative complaint to be heard before an administrative law judge. If the judge decides that the company has violated the law, the FTC will then issue a _____ against Tamara’s. A) summary judgment B) directed verdict C) judgment on the pleadings D) preliminary injunction E) cease-and-desist order
30) Which of the following is the practice of advertising with claims that mislead or could mislead a reasonable consumer? A) Constructive fraud B) Ad substantiation C) Corrective advertising D) Deceptive advertising E) Promotional conversion
31) Gregory is a used car salesperson trying to sell Michael a vehicle. As Michael test-drives the car, Gregory, who accompanies him, tells Michael that he “looks like a million bucks” driving it. This is an example of _____. A) fraud B) puffing C) bait-and-switch advertising D) deceptive advertising E) constructive fraud
32)
When an advertisement is true but incomplete, it is _____.
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A) constructive fraud B) fraud in the factum C) a Rule 10b(5) violation D) a Rule 10b(6) violation E) a half-truth
33) Which of the following is the requirement that advertisers have a reasonable basis for claims made in their advertisements? A) Ad substantiation B) Ad verification C) Puffing D) Ad subrogation E) Ad vilification
34) According to the Federal Trade Commission (FTC), a company should not refer to its product as “Made in the USA” unless_____. A) all, or virtually all, of the product’s components and labor are of United States (U.S.) origin B) 100 percent of the product’s components and labor are of North American origin C) at least 75 percent of the product’s components and labor are of U.S. origin D) at least 50 percent of the product’s components and labor are of U.S. origin E) at least 55 percent of the product’s components and labor are from Canada, Mexico, or the U.S.
35) Tarkanian’s Television and Appliance, L.L.C. (Tarkanian’s) advertises a 72 inch flatscreen television for sale knowing that it only has two (2) in stock. The advertisement advertises the flat screen for an extremely low price. When consumers come in to purchase the television, Tarkanian’s sales personnel guide them to a much more expensive make and model. This is an example of _____.
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A) puffery B) bait-and-switch advertising C) fraud in the inducement D) caveat emptor E) material nondisclosure
36) If the Federal Trade Commission (FTC) requires a company to run advertisements explicitly stating that the formerly advertised claims made by the company were untrue, this is known as _____. A) corrective advertising B) bait-and-switch notification C) cease and desist D) an advertising correction order E) remedial marketing
37) Which of the following is false regarding the Telephone Consumer Protection Act of 1991? A) It forbids telephone solicitation using an automatic telephone dialing system. B) It forbids telephone solicitation using a prerecorded voice. C) It makes it illegal to transmit advertisements via fax unless the recipient agrees to the fax transmission. D) Only the Federal Communications Commission (FCC) can take action to enforce the act. E) If a telemarketer willfully violates the act, the court can decide to triple the amount owed to the consumer.
38) The Federal Trade Commission (FTC) considers _____ an abusive action by a telemarketer.
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A) using profane or obscene language toward a customer B) calling a person who has previously requested to be removed from the seller's calling list C) calling a residence before 8 a.m. D) using profane or obscene language toward a customer, calling a person who has previously requested to be removed from the seller's calling list, and calling a residence before 8 a.m. E) using profane or obscene language toward a customer and calling a person who has previously requested to be removed from seller's calling list, but not calling a residence before 8 a.m.,
39) For how long does a “Do Not Call” phone number registration last according to Federal Trade Commission (FTC) regulation? A) Six (6) months B) One (1) year C) Three (3) years D) Five (5) years E) For as long as the consumer has the phone number registered in her name
40) Which of the following is true regarding government regulation of tobacco industry advertising? A) The federal government does not regulate cigarette advertising. B) The federal government does not regulate smokeless tobacco advertising. C) The tobacco industry’s advertising is regulated through one act: the Public Health Cigarette Smoking Act of 1970. D) The tobacco industry’s advertising is regulated through two acts: the Public Health Cigarette Smoking Act of 1970 and the Smokeless Tobacco Health Education Act of 1986. E) The federal government does not regulate cigarette or smokeless tobacco advertising; instead, tobacco advertising is subject to regulation by the individual states.
41) Which of the following is not a federal law referenced in the textbook that regulates product labeling?
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A) The Wool Products Labeling Act B) The Fur Products Labeling Act C) The Flammable Fabrics Act D) The Nutrition Labeling and Education Act E) The Conspicuous and Comprehensive Product Labeling Act
42) The Federal Trade Commission's (FTC’s) _____ gives consumers three (3) days to cancel purchases they make from salespeople who come to their homes. A) Cooling-Off Rule B) Due Diligence Rule C) Consumer Buyback Rule D) Negotiated Settlement Rule E) Consumer Scam Prohibition Act
43) According to the Postal Reorganization Act of 1970, any unsolicited merchandise sent by mail is free to be used at the recipient’s discretion, _____. A) unless the merchandise has a value of over $500 B) with no obligation owed by the recipient to the sender C) but she must pay the shipping expenses D) unless the merchandise has a value of over $1,000 E) unless the Inspector General of the United States Postal Service (U.S.P.S.) requires the merchandise to be returned
44) Which of the following is true regarding consumer protection laws against used-car fraud?
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A) They are known as “prune” laws due to the consumer’s distaste in purchasing a defective, non-performing vehicle. B) They are known as caveat emptor laws. C) They vary widely from state to state. D) Known as its “three strikes” law, Minnesota presumes that three (3) unsuccessful efforts to repair a used car demonstrates non-repairability. E) They are codified in a comprehensive federal law known as the Restatement (Second) of Consumer Protection.
45) Which of the following is not a requirement of the Federal Trade Commission’s (FTC’s) 1984 Used Motor Vehicle Registration Rule? A) A dealer must attach a buyer’s guide label to any used car he or she is attempting to sell. B) The buyer’s guide label must state that the car is being sold as is. C) The buyer’s guide label must warn the customer that the seller is not guaranteeing anything at all about the performance of the car. D) The buyer’s guide label must include a suggestion for the buyer to obtain an inspection of the used car before any decision to purchase. E) The buyer’s guide label must include notice of a 30-day or 3,000-mile (whichever comes first) warranty on the car.
46)
Which of the following is/are federal law(s) regulating the credit industry?
A) The Truth in Lending Act B) The Fair Credit Reporting Act C) The Fair Debt Collection Practices Act D) The Truth in Lending Act, the Fair Credit Reporting Act, and the Fair Debt Collection Practices Act E) The Truth in Lending Act and the Fair Credit Reporting Act, but not the Fair Debt Collection Practices Act
47)
The Truth in Lending Act only applies to _____.
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A) loans made to a natural person, not to a legal entity B) loans made to a legal entity, not to a natural person C) commercial loans D) business start-up loans E) payday loans
48) In order for the Truth in Lending Act to apply, the loan must be for $25,000 or less unless the _____. A) borrower is married B) borrower can prove he has been employed for the last three (3) consecutive years C) borrower has a cosigner D) loan is secured by a mortgage on real estate E) borrower agrees to wage garnishment if she defaults on the loan
49) In order for a loan to come within the scope of the Truth in Lending Act, the credit or loan must _____. A) be subject to a finance charge B) have repayments of more than four (4) installments C) have an interest rate of over five (5) percent D) be subject to a finance charge, have repayments of more than four (4) installments, and have an interest rate of over five (5) percent E) be subject to a finance charge or have repayments of more than four (4) installments, but need not have an interest rate of over five (5) percent
50)
The Truth in Lending Act regulates _____.
A) open-end credit B) closed-end credit C) credit card applications and solicitations D) open-end credit, closed-end credit, and credit card applications and solicitations E) open-end credit and closed-end credit, but not credit card applications and solicitations
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51) What type of credit permits consumers repeated transactions and then assesses a finance charge on any unpaid balances? A) Accelerated credit B) A closed-end credit line C) An open-end credit line D) Pre-approved credit E) Lending of last resort
52) According to the Truth in Lending Act, a credit card application or solicitation must include which of the following? A) The annual percentage rate (APR) B) Annual fees C) The grace period for paying without a finance charge D) The APR, annual fees, and the grace period for paying without a finance charge E) The APR and annual fees, but not the grace period for paying without a finance charge
53) Monica was on a trip abroad when her credit card was stolen. She immediately notified her credit card company before any unauthorized charges were made; nevertheless, $500 was still mistakenly allowed to be charged. What is Monica’s liability? A) $500 B) $500, plus associated administrative costs C) $250 D) $250, plus associated administrative costs E) Nothing
54) Paul’s next-door neighbor Sheridan stole an unsolicited credit card from Paul’s mailbox that was sent to Paul with his name on it. Sheridan charged $5,000 on the card. What is Paul’s liability?
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A) $5,000 B) $5,000, plus a reasonable fee to deactivate the card C) $2,500 D) $2,500, plus a reasonable fee to deactivate the card E) Nothing
55) A credit card company may not bill a consumer for a damaged item that is unknowingly purchased with the card if the consumer _____. A) purchased the item in the same state as the consumer's home or within 100 miles of the consumer's home B) purchased the item in the same state as the consumer's home or within 100 miles of the consumer's home, and the item cost more than $50 C) purchased the item in the same state as the consumer's home or within 100 miles of the consumer's home; the item cost more than $50; and the consumer made a good-faith effort to resolve the dispute, such as asking the store for a refund D) purchased the item in the same state as the consumer's home or within 100 miles of the consumer's home; the item cost more than $50; the consumer made a good-faith effort to resolve the dispute, such as asking the store for a refund; and the seller has a history of selling defective merchandise E) has used the item for personal reasons and/or in the ordinary course of the consumer's business
56) The Equal Credit Opportunity Act (ECOA) makes it illegal for creditors to deny credit to individuals based on all but which of the following characteristics? A) Race B) National Origin C) Sex D) Age E) Employment
57) Because _____ influence consumers' ability to make purchases and secure loans, the United States Congress passed the Fair Credit Reporting Act (FCRA) of 1970 to ensure accurate credit reporting. Version 1
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A) employers B) credit bureaus C) banks D) government agencies E) sales and marketing professionals
58)
General credit information is considered obsolete after _____ years. A) three (3) B) four (4) C) five (5) D) seven (7) E) eight (8)
59) Which of the following debt collection practices is/are prohibited by the Fair Debt Collection Practices Act? A) Contacting a debtor at work if the debtor's employer objects B) Misrepresenting the collection agency as a lawyer or police officer C) Contacting a debtor before 8 a.m. or after 9 p.m. D) Contacting a debtor at work if the debtor's employer objects, misrepresenting the collection agency as a lawyer or police officer, and contacting a debtor before 8 a.m. or after 9 p.m. E) Contacting a debtor at work if the debtor's employer objects and misrepresenting the collection agency as a lawyer or police officer are prohibited, but not contacting a debtor before 8 a.m. or after 9 p.m.
60) By federal law, major credit reporting agencies are required to provide consumers with a free copy of their credit report every _____.
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A) 36 months B) 24 months C) 12 months D) 6 months E) 30 days
61)
Which of the following was the first federal legislation regulating food and drugs? A) The Applied Food, Drug, and Cosmetic Act B) The Pure Food and Drugs Act C) The Food and Drug Safety Act D) The Consumer Product Safety Act E) The Unadulterated Food and Drug Act
62) Which of the following is the agency responsible for enforcing the Federal Food, Drug, and Cosmetic Act? A) The United States Food and Drug Administration (FDA) B) The Federal Trade Commission (FTC) C) The Consumer Product Safety Commission (CPSC) D) The Uniform Commerce Commission (UCC) E) The United States Department of the Interior
63) Which of the following is false regarding the Consumer Product Safety Commission (CPSC)? A) It enforces mandatory standards regarding product safety. B) It has no authority to require a recall of products. C) It conducts research regarding potentially hazardous products. D) It educates consumers about product safety. E) It can ban consumer products from the market.
64)
The _____ conducts investigations into the safety of motor vehicles.
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A) American Automobile Association (AAA) B) United States Department of Motor Vehicles (DMV) C) National Highway Traffic Safety Administration (NHTSA) D) Motorized Vehicle Safety Administration (MVSA) E) Transportation Security Administration (TSA)
65) Miracle Pill. Katie advertised that she had developed a pill for women that would result in weight loss, wrinkle loss, and improved vitality; and for men would result in all those things, plus hair growth. Her television advertisement showed miracle results allegedly obtained by consumers. Katie cautioned, however, that ingestion of the pill for six months was required before results would be evident. The pill was wildly popular. The Federal Trade Commission, however, investigated and determined that Katie had failed to have a reasonable basis for the claims she made in advertisements. Katie claimed that she was merely involved in the use of generalities and clear exaggerations. The Federal Trade Commission disagreed and issued a formal administrative complaint against her. After a hearing, the Federal Trade Commission issued an order requiring that Katie stop advertising and selling the pills. After losing all appeals, Katie continued selling the pills until she was fined by the Federal Trade Commission. She has since left the country and cannot be located. Which of the following are generalities and clear exaggerations allowed by the Federal Trade Commission? A) Bait-and-switch advertising B) Puffing C) Hook-and-ladder advertising D) Huffing E) None of these, because the Federal Trade Commission does not allow generalities and clear exaggerations in advertisements.
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66) Miracle Pill. Katie advertised that she had developed a pill for women that would result in weight loss, wrinkle loss, and improved vitality; and for men would result in all those things, plus hair growth. Her television advertisement showed miracle results allegedly obtained by consumers. Katie cautioned, however, that ingestion of the pill for six months was required before results would be evident. The pill was wildly popular. The Federal Trade Commission, however, investigated and determined that Katie had failed to have a reasonable basis for the claims she made in advertisements. Katie claimed that she was merely involved in the use of generalities and clear exaggerations. The Federal Trade Commission disagreed and issued a formal administrative complaint against her. After a hearing, the Federal Trade Commission issued an order requiring that Katie stop advertising and selling the pills. After losing all appeals, Katie continued selling the pills until she was fined by the Federal Trade Commission. She has since left the country and cannot be located. Which of the following is the term for the order issued by the Federal Trade Commission requiring Katie to stop advertising and selling the pills? A) Stop-gap order B) Subpoena duces tecum C) Stand-and-deliver order D) Temporary injunction E) Cease-and-desist order
67) Miracle Pill. Katie advertised that she had developed a pill for women that would result in weight loss, wrinkle loss, and improved vitality; and for men would result in all those things, plus hair growth. Her television advertisement showed miracle results allegedly obtained by consumers. Katie cautioned, however, that ingestion of the pill for six months was required before results would be evident. The pill was wildly popular. The Federal Trade Commission, however, investigated and determined that Katie had failed to have a reasonable basis for the claims she made in advertisements. Katie claimed that she was merely involved in the use of generalities and clear exaggerations. The Federal Trade Commission disagreed and issued a formal administrative complaint against her. After a hearing, the Federal Trade Commission issued an order requiring that Katie stop advertising and selling the pills. After losing all appeals, Katie continued selling the pills until she was fined by the Federal Trade Commission. She has since left the country and cannot be located. Who would have presided over the hearing involving the administrative complaint filed against Katie by the Federal Trade Commission?
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A) A state circuit court judge B) A federal district court judge C) An administrative law judge D) A panel of commissioners of the Federal Trade Commission E) The full commission of the Federal Trade Commission
68) Miracle Pill. Katie advertised that she had developed a pill for women that would result in weight loss, wrinkle loss, and improved vitality; and for men would result in all those things, plus hair growth. Her television advertisement showed miracle results allegedly obtained by consumers. Katie cautioned, however, that ingestion of the pill for six months was required before results would be evident. The pill was wildly popular. The Federal Trade Commission, however, investigated and determined that Katie had failed to have a reasonable basis for the claims she made in advertisements. Katie claimed that she was merely involved in the use of generalities and clear exaggerations. The Federal Trade Commission disagreed and issued a formal administrative complaint against her. After a hearing, the Federal Trade Commission issued an order requiring that Katie stop advertising and selling the pills. After losing all appeals, Katie continued selling the pills until she was fined by the Federal Trade Commission. She has since left the country and cannot be located. If a company violates a cease-and-desist order issued by the Federal Trade Commission and upheld by the courts, which of the following is the fine that the Federal Trade Commission may impose? A) Up to $3,000 per violation B) Up to $5,000 per violation C) Up to $10,000 per violation D) Up to $50,000 per violation E) Up to $100,000 per violation
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69) Convertibles. Barry, a new car dealer, advertised that a new brand of convertible called Wind would be available at his dealership for the price of $10,000 each. He had only three Wind vehicles, however, and when those were sold, he tried to convince shoppers to purchase a much more expensive new convertible at a price of $25,000. Kathy, a customer who decided to purchase one of the more expensive vehicles, needed financing in order to do so. She had $10,000 to pay on the car and sought a loan from ABC Bank for the remainder. She wanted the loan for a specific amount of time. ABC Bank offered her the loan and she agreed. The only information she received from ABC Bank was confirmation that she borrowed $15,000 at an 8% interest rate. After receiving several complaints, the Federal Trade Commission disapproved of Barry's action in regard to the Wind vehicles. Claiming that his advertisement was misleading, the Federal Trade Commission proceeded to issue a cease-and-desist order prohibiting deceptive advertising involving Wind vehicles and any other vehicles Barry offered for sale. What kind of objectionable advertising, if any, was Barry engaged in when he offered convertibles for sale for $10,000 but only had three and then tried to convince customers to purchase a much more expensive vehicle? A) Stand-and-deliver B) Hook-and-ladder C) Bait-and-switch D) Ad trickery E) He was not engaged in any objectionable advertising, so long as he had at least one vehicle in stock at a price of $10,000.
70) Convertibles. Barry, a new car dealer, advertised that a new brand of convertible called Wind would be available at his dealership for the price of $10,000 each. He had only three Wind vehicles, however, and when those were sold, he tried to convince shoppers to purchase a much more expensive new convertible at a price of $25,000. Kathy, a customer who decided to purchase one of the more expensive vehicles, needed financing in order to do so. She had $10,000 to pay on the car and sought a loan from ABC Bank for the remainder. She wanted the loan for a specific amount of time. ABC Bank offered her the loan and she agreed. The only information she received from ABC Bank was confirmation that she borrowed $15,000 at an 8% interest rate. After receiving several complaints, the Federal Trade Commission disapproved of Barry's action in regard to the Wind vehicles. Claiming that his advertisement was misleading, the Federal Trade Commission proceeded to issue a cease-and-desist order prohibiting deceptive advertising involving Wind vehicles and any other vehicles Barry offered for sale. What type of loan was Kathy seeking from ABC Bank?
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A) An open-end credit line B) A closed-end credit line C) An approved line D) A line of credit E) A direct line
71) Convertibles. Barry, a new car dealer, advertised that a new brand of convertible called Wind would be available at his dealership for the price of $10,000 each. He had only three Wind vehicles, however, and when those were sold, he tried to convince shoppers to purchase a much more expensive new convertible at a price of $25,000. Kathy, a customer who decided to purchase one of the more expensive vehicles, needed financing in order to do so. She had $10,000 to pay on the car and sought a loan from ABC Bank for the remainder. She wanted the loan for a specific amount of time. ABC Bank offered her the loan and she agreed. The only information she received from ABC Bank was confirmation that she borrowed $15,000 at an 8% interest rate. After receiving several complaints, the Federal Trade Commission disapproved of Barry's action in regard to the Wind vehicles. Claiming that his advertisement was misleading, the Federal Trade Commission proceeded to issue a cease-and-desist order prohibiting deceptive advertising involving Wind vehicles and any other vehicles Barry offered for sale. Under the Truth in Lending Act what type of information should Kathy have received from ABC Bank? A) The total amount financed; and the number, amount, and due dates of payments B) The total amount financed; the number, amount, and due dates of payments; and the bank policy in the event of a delinquency C) The total amount financed; the number, amount, and due dates of payments; and the bank's policy regarding selling loans to other financial institutions D) The total amount financed; the number, amount, and due dates of payments; the bank policy in the event of a delinquency; and the bank's policy regarding selling loans to other financial institutions E) Only the information she received
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72) Convertibles. Barry, a new car dealer, advertised that a new brand of convertible called Wind would be available at his dealership for the price of $10,000 each. He had only three Wind vehicles, however, and when those were sold, he tried to convince shoppers to purchase a much more expensive new convertible at a price of $25,000. Kathy, a customer who decided to purchase one of the more expensive vehicles, needed financing in order to do so. She had $10,000 to pay on the car and sought a loan from ABC Bank for the remainder. She wanted the loan for a specific amount of time. ABC Bank offered her the loan and she agreed. The only information she received from ABC Bank was confirmation that she borrowed $15,000 at an 8% interest rate. After receiving several complaints, the Federal Trade Commission disapproved of Barry's action in regard to the Wind vehicles. Claiming that his advertisement was misleading, the Federal Trade Commission proceeded to issue a cease-and-desist order prohibiting deceptive advertising involving Wind vehicles and any other vehicles Barry offered for sale. Which of the following terms references the cease-and-desist order entered by the Federal Trade Commission involving not only Barry's sales of Wind but also his sales of all other vehicles? A) A multiple cease-and-desist order B) A multiple-product order C) A combined order D) A superlative order E) An exceptional order
73) The Burial Emporium. Fred operates a funeral home called Fred's Burial Emporium. Fred likes to keep things simple. He has one flat price with no itemization and requires that customers purchase a complete package from him if they want any services whatsoever. Fred also goes door-to-door selling funeral packages. He tries to visit neighborhoods in which a recent death has occurred because residents in the neighborhood will have final arrangements on their minds. He believes and informs customers that once customers sign a contract for burial services, there is no backing out. Fred also obtains a good deal of business from phone solicitation. He enjoys calling late at night, between 10 p.m. and 11 p.m., when people are tired but before they go to bed. He believes that if people do not feel well, they are more likely to consider funeral arrangements. After some pesky consumer complaints, the Federal Trade Commission and other federal agencies investigate Fred. He hires a good lawyer with his profits in an attempt to stay out of trouble. Which of the following is true regarding Fred's door-to-door solicitation and his practice of informing customers that there is no backing out of contracts entered into for funeral services?
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A) Fred's actions are legal so long as he truly gives specific notice that he will not agree to any cancellations. B) Fred must give customers at least 24 hours within which to cancel such a contract, but that is only because funeral services are involved. C) Fred's actions are legal even if he does not give specific notice that he will not agree to any cancellations. D) Because door-to-door sales are involved, Fred must give consumers 24 hours within which to cancel. E) Because door-to-door sales are involved, Fred must give consumers three days within which to cancel.
74) The Burial Emporium. Fred operates a funeral home called Fred's Burial Emporium. Fred likes to keep things simple. He has one flat price with no itemization and requires that customers purchase a complete package from him if they want any services whatsoever. Fred also goes door-to-door selling funeral packages. He tries to visit neighborhoods in which a recent death has occurred because residents in the neighborhood will have final arrangements on their minds. He believes and informs customers that once customers sign a contract for burial services, there is no backing out. Fred also obtains a good deal of business from phone solicitation. He enjoys calling late at night, between 10 p.m. and 11 p.m., when people are tired but before they go to bed. He believes that if people do not feel well, they are more likely to consider funeral arrangements. After some pesky consumer complaints, the Federal Trade Commission and other federal agencies investigate Fred. He hires a good lawyer with his profits in an attempt to stay out of trouble. Which of the following is true regarding Fred's practice of making telephone solicitations late at night after people are tired? A) Under federal law this practice is legal because any consumer who does not want to talk to him can simply hang up. B) According to a Federal Trade Commission rule, if a telemarketer calls a residence after 9 p.m., the telemarketer is engaging in abusive behavior; therefore, Fred is in violation. C) According to a Federal Trade Commission rule, if a telemarketer calls a residence before 11 p.m., the telemarketer is not engaging in abusive behavior; therefore, Fred is not in violation. D) According to a Federal Trade Commission rule that is specific to funeral home directors, direct phone solicitation may not be made; therefore, Fred is in violation. E) According to a Federal Trade Commission rule that is specific to funeral home directors, direct phone solicitation may not be made after 7 p.m.; therefore, Fred is in violation.
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75) The Burial Emporium. Fred operates a funeral home called Fred's Burial Emporium. Fred likes to keep things simple. He has one flat price with no itemization and requires that customers purchase a complete package from him if they want any services whatsoever. Fred also goes door-to-door selling funeral packages. He tries to visit neighborhoods in which a recent death has occurred because residents in the neighborhood will have final arrangements on their minds. He believes and informs customers that once customers sign a contract for burial services, there is no backing out. Fred also obtains a good deal of business from phone solicitation. He enjoys calling late at night, between 10 p.m. and 11 p.m., when people are tired but before they go to bed. He believes that if people do not feel well, they are more likely to consider funeral arrangements. After some pesky consumer complaints, the Federal Trade Commission and other federal agencies investigate Fred. He hires a good lawyer with his profits in an attempt to stay out of trouble. Which of the following is true regarding Fred's practice of offering one flat price for funeral services with no itemization? A) Federal law does not prohibit this practice. B) This practice is prohibited under federal law in funeral home situations. C) This practice is prohibited under federal law in funeral home situations, but only if no other funeral home is located within 20 miles. D) This practice is prohibited under federal law in funeral home situations, but only if no other funeral home is located within 10 miles. E) This practice is prohibited by federal law unless consumers receive a 10percent discount compared to the average price of funeral services in his state.
76) The Burial Emporium. Fred operates a funeral home called Fred's Burial Emporium. Fred likes to keep things simple. He has one flat price with no itemization and requires that customers purchase a complete package from him if they want any services whatsoever. Fred also goes door-to-door selling funeral packages. He tries to visit neighborhoods in which a recent death has occurred because residents in the neighborhood will have final arrangements on their minds. He believes and informs customers that once customers sign a contract for burial services, there is no backing out. Fred also obtains a good deal of business from phone solicitation. He enjoys calling late at night, between 10 p.m. and 11 p.m., when people are tired but before they go to bed. He believes that if people do not feel well, they are more likely to consider funeral arrangements. After some pesky consumer complaints, the Federal Trade Commission and other federal agencies investigate Fred. He hires a good lawyer with his profits in an attempt to stay out of trouble. Which of the following is true regarding Fred's practice of requiring a complete package purchase from him if the consumer desires any funeral services?
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A) This practice is legal under federal law. B) This practice is legal under federal law, so long as Fred informs customers of his requirement prior to entering into any sales talk and negotiation. C) This practice is prohibited by federal law. D) This practice is prohibited by federal law unless Fred gives a 10 percent discount compared to the average price of funeral services in his state. E) This practice is prohibited by federal law unless Fred gives a 20percent discount compared to the average price of funeral services in his state.
77)
For how long does a commissioner on the Federal Trade Commission (FTC) serve? A) Life B) One (1) year C) Three (3) years D) Five (5) years E) Seven (7) years
78) Which of the following is a form of cease-and-desist order the Federal Trade Commission (FTC) issues that applies not only to the product that was the subject of the action, but to other products produced by the same firm as well? A) A multiple-product order B) Ad substantiation C) Corrective advertising D) A universal cease-and-desist order E) A company-wide cease-and-desist order
79) Which of the following amended the 1975 Mail-Order Rule to extend protections to consumer who purchase goods over computers or fax machines?
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A) The Digital Millennium Consumer Act of 1998 B) The Home-Solicited Sales Protection Act of 2002 C) The Mail or Telephone Order Merchandise Rule of 1993 D) The Virtual Consumer Protection Act of 2004 E) The Retailing Modernization Act of 1996
80) Under the Consumer Leasing Act and its controlling regulation, Regulation _____, anyone leasing goods must disclose up front and in writing all the material terms and conditions of the lease. A) B B) L C) M D) 10.2 E) 2(a)
81)
Who is responsible for administering the Federal Food, Drug, and Cosmetic Act? A) The United States (U.S.) Congress B) The U.S. president C) The U.S. Food and Drug Administration (FDA) D) The U.S. Food, Drug and Cosmetic Agency (FDCA) E) The various states
ESSAY. Write your answer in the space provided or on a separate sheet of paper. 82) Describe the rights of appeal a company has if the Federal Trade Commission issues it a cease-and-desist order.
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83) How can the Federal Trade Commission(FTC) protect consumers if most companies within an industry are using the same unfair or deceptive practices?
84) Mona markets a bell she claims will automatically quiet a crying baby. She advertises on television that the bell has a certain tone babies love and shows a baby suddenly stop crying when the bell is rung. She charges consumers $50 for each bell, although the bell costs her only $1 to produce. The bell was very popular for a few months, but she has started to receive complaints, and the Federal Trade Commission (FTC) has investigated her bell advertisement. Mona claims that her advertisement is not deceptive. The FTC, however, claims that the advertisement satisfies the three (3) elements required to constitute a deceptive claim. What are those elements?
85)
Describe the Telemarketing Sales Rule of 1995?
86) What three (3) key guidelines regarding mail-order sales were established by the Mail or Telephone Order Merchandise Rule of 1993?
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87) Sam, who is elderly, is very annoyed because he continues to receive magazines and books in the mail from a publisher. He had not requested the publications and has no idea why they started coming. The letters that come with the publications instruct him to return any magazines or books that he does not want. Understandably, postage is becoming expensive for Sam. What law protects him and what option does he have, if any?
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Answer Key Test name: Chap 25_5_The Essentials_Kubasek 1) TRUE Because the United States Congress recognizes the opportunities for sellers to take advantage of buyers, it creates laws that regulate consumer purchase transactions. A consumer law is a statute or an administrative rule serving to protect consumer interests. 2) FALSE The Federal Trade Commission is an independent federal agency whose goal is to protect consumers.It does so through two methods: a) consumer education and b) legal action. 3) FALSE A consent order is a statement in which a company agrees to stop disputed behavior but does not admit that it broke the law. A cease-anddesist order is a Federal Trade Commission (FTC) order requiring that a company stop its illegal behavior. 4) FALSE The practice of advertising with claims that mislead or could mislead a reasonable consumer is deceptive advertising.Puffing, the use of generalities and clear exaggerations, is permissible. 5) TRUE The Federal Trade Commission (FTC) decides whether an advertisement is deceptive on a case-by-case basis. Deceptive claims have three (3) elements: a) a material misrepresentation, omission, or practice that is b) likely to mislead c) a reasonable consumer. 6) FALSE If an advertisement is a half-truth—that is, the information presented is true but incomplete—the advertiser is deceiving the consumer. Version 1
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7) TRUE To combat deceptive advertisements and half-truths, the Federal Trade Commission requires ad substantiation, which mandates advertisers to have a reasonable basis for the claims made in their advertisements. 8) FALSE The existence of deceptive advertisements is not enough alone to prove damages for recovery when individual civil suits are filed. Reliance on the deceptive advertisements is a crucial element in establishing liability. 9) FALSE Although puffery is allowed in advertising in the United States, not all countries universally accept puffery as an acceptable form of advertising. For example, China has greater restrictions on advertising than the United States. Specifically, in China a statutory ban on puffery exists due to its deceptive nature. 10) TRUE When sellers advertise a low price for an item generally unavailable to the consumer and then push the consumer to buy a more expensive item, they are engaging in “bait-and-switch” advertising.The low advertised price baits the consumer. Then the salesperson switches the consumer to a higher-priced item. In 1968, the Federal Trade Commission prohibited bait-and-switch advertising. 11) FALSE A multiple-product order is a form of cease-and-desist order the Federal Trade Commission(FTC) issues that applies not only to the product that was the subject of its action against a company for deceptive advertising, but also to other products produced by the same firm. 12) FALSE
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The Public Health Cigarette Smoking Act of 1970 prohibits radio and television cigarette advertisements, and the Smokeless Tobacco Health Education Act of 1986 imposes the same restrictions for smokeless tobacco advertisements. 13) TRUE The Nutrition Labeling and Education Act of 1990 requires standard nutrition information (i.e., calories and fat) to be provided on food labels. 14) TRUE The United States Congress has passed several laws that require information about the potential harms associated with a product. For example, the Federal Hazardous Substances Act of 1960 requires all items containing dangerous substances to carry warning labels. 15) FALSE The Federal Trade Commission’s Cooling-Off Rule gives consumers three days to cancel purchases they make from salespeople who come to their homes. 16) FALSE Consumer protections against fraud in used-car sales vary widely from state to state. Some states provide minimum protection, whereas other states, such as Minnesota, presume that one unsuccessful effort to repair a used car demonstrates non-repairability. 17) FALSE The purpose of the Truth in Lending Act is to require sellers to disclose the terms of the credit or loan to help consumers compare a variety of credit lines or loans. 18) FALSE The Equal Credit Opportunity Act prohibits creditors from denying credit on the basis of whether the applicant receives public assistance benefits. Version 1
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19) FALSE The Fair Credit Reporting Act regulates the issuance of credit reports for limited business purposes, such as a determination of credit or insurance eligibility, employment, and licensing. If a credit bureau issues a consumer credit report for a reason not specified by the Fair Credit Reporting Act, it may be held liable for damages and additional fines. 20) FALSE Although the Consumer Product Safety Commission (CPSC) has the authority to issue product recalls on its own, the CPSC usually works with companies that are voluntarily issuing recalls for dangerous products. 21) D The Eleventh Circuit Court of Appeals ruled that the Fair Debt Collection Practices Act disallows the attempt to collect a debt when the claim is time-barred using the “least-sophisticated consumer” standard. 22) A The Court held that when a physician uses a single-use medical device on a patient and the device is then disposed of, the device is “held for sale” provided that there is a commercial relationship between the doctor and the patient. The court found that Kaplan knowingly endangered public health in his practices and that the FDCA does apply. 23) E Consumer laws are statutes or administrative rules serving to protect consumer interests. Various state and federal consumer laws protect consumers from unfair trade practices of sellers as well as from unsafe products. 24) B In 1914, the United States Congress created the Federal Trade Commission (FTC) through the Federal Trade Commission Act. 25) B Version 1
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The Federal Trade Commission (FTC) is an independent federal agency. 26) B The Federal Trade Commission (FTC) has five (5) commissioners, and each commissioner serves a seven-year term. 27) C The president appoints commissioners to serve on the Federal Trade Commission (FTC), subject to confirmation by the United States Senate. 28) C If, after its investigation, the Federal Trade Commission (FTC) believes that a company violated the law, the FTC sends a complaint to the alleged violator. At that time, the FTC may settle the complaint through a consent order with the company. A consent order is a statement in which the company agrees to stop the disputed behavior but does not admit that it broke the law. If the company violates the consent order, it will usually be forced to pay a fine. 29) E If a company refuses to enter into a consent agreement, the Federal Trade Commission (FTC) may then decide to issue a formal administrative complaint. Issuance of this complaint leads to a hearing before an administrative law judge. If the judge decides that the company has violated the law, the FTC issues a cease-and-desist order, requiring the company to stop its illegal behavior. 30) D The practice of advertising with claims that mislead or could mislead a reasonable consumer is known as deceptive advertising. 31) B Deceptive advertising is the practice of advertising with claims that mislead or could mislead a reasonable consumer. Puffing, the use of generalities and clear exaggerations, is permissible. 32) E Version 1
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If an advertisement is a half-truth—that is, the information presented is true but incomplete—the advertiser is deceiving the consumer. 33) A To combat deceptive advertisements and half-truths, the Federal Trade Commission (FTC) requires ad substantiation, which mandates that advertisers have a reasonable basis for the claims made in their advertisements. 34) A The Federal Trade Commission (FTC) has long held that a company should not refer to its product as "Made in the USA" unless all, or virtually all, of the product’s components and labor are of U.S. origin. In 1997, the FTC decided to continue enforcing the "all or virtually all" standard. 35) B When sellers advertise a low price for an item generally unavailable to the consumer and then push the consumer to buy a more expensive item, they are engaging in bait-and-switch advertising. The low advertised price baits the consumer. Then the salesperson switches the consumer to a higher-priced item. In 1968, the Federal Trade Commission prohibited bait-and-switch advertising. 36) A The Federal Trade Commission (FTC) may require that a company engage in corrective advertising (or counter-advertising), which requires the company to run advertisements explicitly stating that the formerly advertised claims were untrue. 37) D The Telephone Consumer Protection Act of 1991 allows consumers to pursue legal action, giving consumers the right to recover for their losses. 38) D Version 1
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The Federal Trade Commission (FTC) has established that certain telemarketing behaviors are abusive, such as using profane or obscene language toward a customer; calling a person who has requested previously to be taken off the particular seller's calling list; and calling a residence before 8 a.m. or after 9 p.m. 39) D The Federal Trade Commission (FTC) states that the purpose of the "Do Not Call" registry is to give consumers a choice regarding telemarketing calls. The registry makes it illegal for telemarketers to call any number that has been registered for more than 31 days. The registration lasts for five years, and it can be completed online through the FTC’s website. 40) D The tobacco industry’s advertising is regulated through two acts: the Public Health Cigarette Smoking Act of 1970 and the Smokeless Tobacco Health Education Act of 1986. The Public Health Cigarette Smoking Act prohibits radio and television cigarette advertisements, and the Smokeless Tobacco Health Education Act imposes the same restrictions for smokeless tobacco ads. 41) E The Wool Products Labeling Act of 1939 requires accurate labeling of wool products, the Fur Products Labeling Act of 1951 requires the accurate labeling of fur products, the Flammable Fabrics Act of 1953 makes it illegal to produce or distribute clothing "so highly flammable as to be dangerous when worn," and the Nutrition Labeling and Education Act of 1990 requires that standard nutrition information (i.e., calories and fat) be provided on food labels. There is no Imported Canine and Feline Fur Act. 42) A
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The Federal Trade Commission’s (FTC’s) Cooling-Off Rule gives consumers three (3) days to cancel purchases they make from salespeople who come to their homes. The salesperson must notify the consumer, both verbally and in writing, that the sales transaction may be canceled, and the consumer must be notified in writing in the same language in which the oral negotiations were conducted. 43) B Anyone who receives unsolicited merchandise may treat the item as a gift.The recipient may keep or dispose of the merchandise without any obligation to the sender. In accordance with the Postal Reorganization Act of 1970, any unsolicited merchandise sent by mail is free to be used by the recipient as he or she sees fit with no obligation by the recipient to the sender. 44) C The consumer protection laws against used-car fraud are also known as "lemon laws."Consumer protections against fraud in used-car sales vary widely from state to state. Some states provide minimum protection, whereas other states, such as Minnesota, presume that one unsuccessful effort to repair a used car demonstrates non-repairability. 45) E To protect used-car buyers, the United States Congress passed the Odometer Act of 1973, which protects against odometer fraud in usedcar sales. The Federal Trade Commission extended the act’s protection through the 1984 Used Motor Vehicle Registration Rule. Under this rule, a dealer must attach a buyer’s guide label to any used car he or she is attempting to sell. The label must state that the car is being sold as is. This label is a warning to the customer that the seller is not guaranteeing anything at all about the performance of the car. Furthermore, the label must include a suggestion for the buyer to obtain an inspection of the used car before any decision to purchase. Version 1
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46) D Three federal laws that regulate the credit industry in order to protect consumers are the Truth in Lending Act, the Fair Credit Reporting Act, and the Fair Debt Collection Practices Act. 47) A The Truth in Lending Act only applies to loans made to a natural person, not to a legal entity. 48) D In order for the Truth in Lending Act to apply, the credit or loan must be in the amount of $25,000 or less, unless the loan is secured by a mortgage on real estate. 49) E In order for the Truth in Lending Act to apply, the credit or loan must be subject to a finance charge or must have repayments of more than four (4) installments. 50) D The Truth in Lending Act regulates three (3) categories of loans: openend credit, closed-end credit, and credit card applications and solicitations. 51) C An open-end credit line permits repeated transactions and assesses a finance charge on unpaid balances. 52) D The Truth in Lending Act requires credit card applications and solicitations to include the annual percentage rate (APR), annual fees, and the grace period for paying without a finance charge. 53) E According to the Truth in Lending Act, if your credit card is stolen and you notify the credit card company before unauthorized charges are made, you cannot be held liable for any of the charges. Version 1
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54) E According to the Truth in Lending Act, if a credit card company sends you an unsolicited card in the mail and the card is stolen, you cannot be held liable for any of the charges. 55) C If three requirements are met, consumers will not be obligated to pay for a damaged good unknowingly purchased through the use of a credit card: a) the consumer must purchase the item near her home [i.e., the business is in the same state as the consumer's home or within 100 miles of the home], b) the item must cost more than $50, and c) the consumer must make a good-faith effort to resolve the dispute, such as asking the store for a refund. 56) E The United States Congress passed the Equal Credit Opportunity Act (ECOA) as a 1974 amendment to the Truth in Lending Act. The ECOA makes it illegal for creditors to deny credit to individuals on the basis of race, religion, national origin, color, sex, marital status, or age. 57) B Because credit bureaus influence consumers’ ability to make purchases and secure loans, the United States Congress passed the Fair Credit Reporting Act (FCRA) of 1970 to ensure accurate credit reporting. 58) D According to the Fair Credit Reporting Act (FCRA), a credit bureau cannot report obsolete information. General credit information is considered obsolete after seven years. 59) D
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The following debt collection behaviors are expressly prohibited by the Fair Debt Collection Practices Act (FDCPA): a) contacting a debtor at work if the debtor's employer objects; b) contacting a debtor who has notified the collection agency that he or she wants no contact with the agency; c) contacting a debtor before 8 a.m. or after 9 p.m.; d) contacting third parties about the debt [exceptions: contacting the debtor’s parents, spouse, or financial advisor]; and e) using obscene or threatening language when communicating with the debtor. 60) C Pursuant to the Fair and Accurate Credit Transactions Act, major credit reporting agencies are required to provide consumers with a free copy of their credit reports every 12 months. 61) B In 1906, Congress created the first federal legislation regulating food and drugs, the Pure Food and Drugs Act. 62) A The United States Food and Drug Administration (FDA) is the agency responsible for administering the Federal Food, Drug, and Cosmetic Act (FFDCA). Specifically, the FDA must ensure that food, drugs, cosmetics, and medical devices meet specific safety standards. 63) B The Consumer Product Safety Commission (CPSC) can arrange for a recall of products. Although the CPSC has the authority to issue product recalls on its own, the CPSC usually works with companies that are voluntarily issuing recalls for dangerous products. 64) C The National Highway Traffic Safety Administration (NHTSA) is similar to the Consumer Product Safety Commission (CPSC) in that it also conducts investigations about the safety of potentially hazardous products; the NHTSA, however, focuses primarily on motor vehicles. Version 1
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65) B Deceptive advertising is the practice of advertising with claims that mislead or could mislead a reasonable consumer. Puffing, the use of generalities and clear exaggerations, is permissible. 66) E A cease-and-desist order is an order issued by the Federal Trade Commission (FTC) requiring a company to stop its illegal behavior. 67) C If a company refuses to enter into a consent agreement, the Federal Trade Commission (FTC) may then decide to issue a formal administrative complaint. Issuance of this complaint leads to a hearing before an administrative law judge. If the judge decides that the company has violated the law, the FTC issues a cease-and-desist order, requiring that the company stop the illegal behavior. 68) C If a company violates a cease-and-desist order upheld by the courts, the Federal Trade Commission (FTC) can seek an injunction against the company or fine the company up to $10,000 per violation. 69) C When sellers advertise a low price for an item generally unavailable to the consumer and then push the consumer to buy a more expensive item, they are engaging in bait-and-switch advertising. The low advertised price baits the consumer. Then the salesperson switches the consumer to a higher-priced item. In 1968, the Federal Trade Commission prohibited bait-and-switch advertising. 70) B A closed-end credit line is one for a loan given for a specific amount of time. 71) A
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A closed-end credit line is one for a loan given for a specific amount of time. The creditor of a closed-end credit line must disclose the total amount financed and the number, amount, and due dates of payments. 72) B A multiple-product order is a form of cease-and-desist order issued by the Federal Trade Commission (FTC) that applies not only to the product that was the subject of the action but also to other products produced by the same firm. 73) E In most door-to-door sales, the consumer does not have a chance to compare products and services to find the best service for his or her money. In addition, many consumers find it difficult to escape a salesperson in their homes. It is much easier to walk out of a store. Because the consumer is in a particularly vulnerable position in a doorto-door sale, the Federal Trade Commission (FTC) has created special rules for such sales. The FTC created the Cooling-Off Rule, giving consumers three days to cancel purchases they make from salespeople who come to their homes. Moreover, the salesperson must notify the consumer, both verbally and in writing, that the sales transaction may be canceled. The FTC rule also requires the consumer to be notified in writing in the same language in which the oral negotiations were conducted, thereby preventing unscrupulous businesses from taking advantage of nonEnglish speakers. 74) B The Federal Trade Commission considers it abusive if a telemarketer calls a residence before 8 a.m. or after 9 p.m. 75) B
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The Federal Trade Commission created the 1984 Funeral Rule and revised it in 1994. The rule requires those who operate funeral homes to provide customers with itemized price information about funeral goods and services. 76) C To prevent funeral homes from taking advantage of customers, the FTC created the 1984 Funeral Rule and revised it in 1994. The rule prohibits funeral homes from requiring that the customer buy certain funeral goods and services as a condition for receiving other funeral goods and services. 77) E The Federal Trade Commission (FTC) is an independent federal agency with five (5) commissioners appointed by the United States (U.S.) president and confirmed by the U.S. Senate. Each commissioner serves a seven-year term. 78) A A multiple-product order is a form of cease-and-desist order the FTC issues that applies not only to the product that was the subject of the action but also to other products produced by the same firm. 79) C The Mail or Telephone Order Merchandise Rule of 1993 amended the 1975 Mail-Order Rule to extend protections to consumers who purchase goods over phone lines, including through computers and fax machines. 80) C Under the Consumer Leasing Act and its controlling regulation, Regulation M, anyone leasing goods must disclose up front, in writing, all the material terms and conditions of the lease. 81) C
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The United States Congress amended the Pure Food and Drugs Act when it created the Federal Food, Drug, and Cosmetic Act (FFDCA) in 1938 to protect consumers against misbranded or adulterated food, drugs, medical devices, or cosmetics. The U.S. Food and Drug Administration (FDA), the agency responsible for administering FFDCA, creates standards to regulate food and drugs, thus protecting consumers. 82) The company may appeal the decision to the five commissioners of the Federal Trade Commission (FTC). If the commissioners uphold the ruling, the company may appeal to the United States Court of Appeals and, finally, to the United States Supreme Court. 83) When most companies within one industry are using the same unfair or deceptive practices, bringing actions against all of the companies would be costly and time-consuming. An alternative method of addressing the practices is through trade regulation rules. If the Federal Trade Commission (FTC) finds that deception is pervasive in an industry, the FTC can recommend rule-making. An administrative rule has the effect of law. Furthermore, the FTC can bring legal action against those who violate FTC rules. 84) The Federal Trade Commission (FTC) decides whether an advertisement is deceptive on a case-by-case basis. Deceptive claims have three elements: a) a material misrepresentation, omission, or practice that is b) likely to mislead c) a reasonable consumer.
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85) To give consumers more protection against deceptive and abusive telemarketing practices, the United States Congress enacted the Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994. Through this act, Congress asked the Federal Trade Commission (FTC) to define “deceptive and abusive” telemarketing practices and required the FTC to create and enforce rules governing telemarketing that would prohibit such practices. Consequently, the FTC created the Telemarketing Sales of Rule of 1995, which requires telemarketers to: a) identify the call as a sales call; b) identify the product name and seller; c) tell the total cost of goods being sold; d) notify the listener or reader of whether the sale is nonrefundable; and e) remove the consumer's name from the potential contact list if the consumer so requests. 86) The Federal Trade Commission (FTC) originally addressed problems with mail-order sales through the 1975 Mail-Order Rule. The Mail or Telephone Order Merchandise Rule of 1993 amended the 1975 Mail-Order Rule to extend protections to consumers who purchase goods over phone lines, including through computers and fax machines. The 1993 rule established three key guidelines. First, sellers must ship items within the time promised. If they do not specify a time, the seller is limited to 30 days from receipt of the order. Second, if the seller cannot ship the item within the promised time, the seller must notify the customer in writing and offer an opportunity to cancel. Third, if a customer decides to cancel the order, the seller must refund the customer's money within a specified period of time. 87) Anyone who receives unsolicited merchandise may treat the item as a gift. The recipient may keep or dispose of the merchandise without any obligation to the sender. In accordance with the Postal Reorganization Act of 1970, any unsolicited merchandise sent by mail is free to be used by the recipient as he or she sees fit with no obligation by the recipient to the sender. Version 1
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