Business Law Text and Cases 13th Edition PDF Free Download by Remy Durepos

Brief Contents Unit One

The Legal Environment of Business 1

Chapter Chapter Chapter Chapter Chapter

Law and Legal Reasoning 2 Courts and Alternative Dispute Resolution 28 Court Procedures 50 Business and the Constitution 74 Business Ethics 95

l 2 3 4 5

Unit Two

Torts and Crimes 117

Chapter Chapter Chapter Chapter Chapter

Torts 118 Strict Liability and Product Liability l41 Intellectual Property Rights 156 Internet Law, Social Media, and Privacy 177 Criminal Law and Cyber Crime 194

6 7 8 9 10

Unit Three Contracts and E-Contracts 223 Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter

11 12 13 14 15 16 17 18 19

Nature and Terminology 224 Agreement in Traditional and E-Contracts 240 Consideration 260 Capacity and Legality 273 Mistakes, Fraud, and Voluntary Consent 290 The Writing Requirement and Electronic Records 305 Third Party Rights 319 Performance and Discharge in Traditional and E-Contracts 333 Breach of Contract and Remedies 348

Unit Four

Domestic and International Sales and Lease Contracts 373

Chapter Chapter Chapter Chapter Chapter

The Formation of Sales and Lease Contracts 374 Title, Risk, and Insurable Interest 400 Performance and Breach of Sales and Lease Contracts 417 Warranties 439 International Law in a Global Economy 453

20 21 22 23 24

Unit Five

Negotiable Instruments 475

Chapter Chapter Chapter Chapter

The Function and Creation of Negotiable Instruments 476 Transferability and Holder in Due Course 493 Liability, Defenses, and Discharge 512 Banking in the Digital Age 531

25 26 27 28

iii Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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Brief Contents

Unit Six

Creditors’ Rights and Bankruptcy 557

Chapter 29 Chapter 30 Chapter 31

Creditors’ Rights and Remedies 558 Secured Transactions 574 Bankruptcy Law 598

Unit Seven AGENCY AND EMPLOYMENT 623 Chapter Chapter Chapter Chapter

32 33 34 35

Agency Formation and Duties 624 Agency Liability to Third Parties and Termination 639 Employment, Immigration, and Labor Law 658 Employment Discrimination and Diversity 681

UNIT EIGHT BUSINESS ORGANIZATIONS 705 Chapter Chapter Chapter Chapter Chapter Chapter Chapter

36 37 38 39 40 41 42

Sole Proprietorships and Franchises 706 Partnerships and Limited Liability Partnerships 720 Other Organizational Forms for Small Businesses 740 Corporate Formation and Financing 759 Corporate Directors, Officers, and Shareholders 780 Mergers and Takeovers 801 Securities Law and Corporate Governance 816

UNIT NINE

GOVERNMENT REGULATION 841

Chapter Chapter Chapter Chapter Chapter

Administrative Agencies 842 Consumer Law 861 Environmental Law 878 Antitrust Law 893 Professional Liability and Accountability 912

43 44 45 46 47

UNit Ten

PROPERTY AND ITS PROTECTION 935

Chapter Chapter Chapter Chapter

Personal Property and Bailments 936 Real Property and Landlord-Tenant Law 955 Insurance 978 Wills and Trusts 996

48 49 50 51

APPENDICES A B C D E F

How to Brief Cases and Analyze Case Problems A–l The Constitution of the United States A–4 The Uniform Commercial Code A–12 The Sarbanes-Oxley Act of 2002 (Excerpts and Explanatory Comments) A–l59 Answers to the Issue Spotters A–166 Sample Answers for Business Case Problems with Sample Answer A–175

GLOSSARY G–l TABLE OF CASES TC–1 INDEX 1–1

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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Business Law Text and Cases Thirteenth Edition Kenneth W. Clarkson University of Miami

Roger LeRoy Miller Institute for University Studies Arlington, Texas

Frank B. Cross Herbert D. Kelleher Centennial Professor in Business Law University of Texas at Austin

Australia • Brazil • Japan • Mexico • Singapore • United Kingdom • United States

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Unit One

The Legal Environment of Business Contents 1 Law and Legal Reasoning 2 Courts and Alternative Dispute Resolution 3 Court Procedures 4 Business and the Constitution 5 Business Ethics

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Chapter 1

Law and Legal Reasoning

ne of the important functions of law in any society is to provide stability, predictability, and continuity so that people can know how to order their affairs. If any society is to survive, its citizens must be able to determine what is legally right and legally wrong. They must know what sanctions will be imposed on them if they commit wrongful acts. If they suffer harm as a result of others’ wrongful acts, they must know how they can seek compensation. By setting forth the rights, obligations, and privileges of citizens, the law enables individuals to go about their business with confidence and a certain degree of predictability.

Although law has various definitions, they are all based on the general observation that law consists of enforceable rules governing relationships among individuals and between individuals and their society. These “enforceable rules” may consist of unwritten principles of behavior established by a nomadic tribe. They may be set forth in a law code, such as the Code of Hammurabi in ancient Babylon (c. 1780 b.c.e.) or the law code of one of today’s European nations. They may consist of written laws and court decisions created by modern legislative and judicial bodies, as in the United States. Regardless of how such rules are created, they all have one thing in common: they establish rights, duties, and

SECTION 1

Business Activities and the Legal Environment Laws and government regulations affect almost all business activities—from hiring and firing decisions to workplace safety, the manufacturing and marketing of products, business financing, and more. To make good business decisions, a basic knowledge of the laws and regulations governing these activities is beneficial—if not essential. Realize also that in today’s business world, a knowledge of “black-letter” law is not enough. Businesspersons are also pressured to make ethical decisions. Thus, the study of business law necessarily involves an ethical dimension.

privileges that are consistent with the values and beliefs of their society or its ruling group. In this introductory chapter, we first look at an important question for any student reading this text: How does the legal environment affect business decision making? We next describe the major sources of American law, the common law tradition, and some basic schools of legal thought. We conclude the chapter with sections offering practical guidance on several topics, including how to find the sources of law discussed in this chapter (and referred to throughout the text) and how to read and understand court opinions.

Many Different Laws May Affect a Single Business Decision As you will note, each chapter in this text covers specific areas of the law and shows how the legal rules in each area affect business activities. Though compartmentalizing the law in this fashion promotes conceptual clarity, it does not indicate the extent to which a number of different laws may apply to just one decision.

Lessons from Facebook When Mark Zuckerberg started Facebook as a Harvard student, he probably did not imagine all the legal challenges his company would face as a result of his business decisions. • As you may know from the movie, The Social Network, shortly after Facebook was launched, others claimed that Zuckerberg had stolen their ideas for

2 Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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Chapter 1 Law and Legal Reasoning

a social networking site. Their claims involved alleged theft of intellectual property (see Chapter 8), fraudulent misrepresentation (see Chapter 15), partnership law and securities law. Facebook ultimately paid a significant amount ($65 million) to settle those claims out of court (see Chapter 2). • Facebook has also been sued repeatedly for violating users’ privacy (such as by disseminating private information to third parties for commercial purposes—see Chapters 4 and 9). • In 2012, a class-action lawsuit was filed against Facebook that seeks damages of $15 billion for violating users’ privacy (and federal wiretapping law) by tracking their Web site usage. • Facebook’s business decisions have also come under scrutiny by federal regulators, such as the Federal Trade Commission (FTC) and the Securities and Exchange Commission (SEC). • In 2011, the company settled a complaint filed by the FTC alleging that Facebook failed to keep “friends” lists and other user information private. • In 2012, Facebook conducted a much-anticipated initial public offering (IPO) of its stock. The IPO did not go well, however, and many investors suffered losses. Facebook is facing dozens of lawsuits (including class actions) related to business decisions made with regard to the IPO and alleged violations of securities laws. • The SEC is also investigating whether Facebook engaged in any wrongdoing with regard to its IPO and trading of stock.

Points to Consider A key to avoiding business disputes is to think ahead when starting or running a business or entering a contract. Learn what you can about the laws pertaining to that specific enterprise or transaction. Have some idea of the legal ramifications of your business decisions and seek the advice of counsel when in doubt. Exhibit 1–1 on the following page illustrates the various areas of law that may influence business decision making.

Ethics and Business Decision Making Merely knowing the areas of law that may affect a business decision is not sufficient in today’s business world. Businesspersons must also take ethics into account. As you will learn in Chapter 5, ethics generally is defined as the principles governing what constitutes right or wrong behavior.

Today, business decision makers need to consider not just whether a decision is legal, but also whether it is ethical. Often, as in several of the claims against Facebook discussed above, disputes arise in business because one party feels that he or she has been treated unfairly. Thus, the underlying reason for bringing some lawsuits is a breach of ethical duties (such as when a partner or employee attempts to secretly take advantage of a business opportunity). Throughout this text, you will learn about the relationship between the law and ethics, as well as about some of the types of ethical questions that often arise in business. For example, the unit-ending Focus on Ethics features are devoted solely to the exploration of ethical questions pertaining to topics treated within the unit. We have also included Ethical Dimension questions for selected cases that focus on ethical considerations in today’s business climate and Insight into Ethics features that appear in selected chapters. A Question of Ethics case problem is included at the conclusion of every chapter to introduce you to the ethical aspects of specific cases involving real-life situations. Additionally, Chapter 5 offers a detailed look at the importance of business ethics.

SECTION 2

Sources of American Law There are numerous sources of American law. Primary sources of law, or sources that establish the law, include the following: 1. The U.S. Constitution and the constitutions of the various states. 2. Statutory law—including laws passed by Congress, state legislatures, or local governing bodies. 3. Regulations created by administrative agencies, such as the Food and Drug Administration. 4. Case law and common law doctrines. We describe each of these important sources of law in the following pages. Secondary sources of law are books and articles that summarize and clarify the primary sources of law. Examples include legal encyclopedias, treatises, articles in law reviews, and compilations of law, such as the Restatements of the Law (which will be discussed shortly). Courts often refer to secondary sources of law for guidance in interpreting and applying the primary sources of law discussed here.

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Unit One The Legal Environment of Business

E x h i b i t 1–1 Areas of the Law That May Affect Business Decision Making

Contracts

Courts and Court Procedures

Sales

Environmental Law and Sustainability

Negotiable Instruments Business Decision Making

Business Organizations

Creditors’ Rights

Intellectual Property

Agency

Internet Law, Social Media, and Privacy

Torts

Product Liability

Constitutional Law

Statutory Law

The federal government and the states have separate written constitutions that set forth the general organization, powers, and limits of their respective governments. Constitutional law is the law as expressed in these constitutions. According to Article VI of the U.S. Constitution, the Constitution is the supreme law of the land. As such, it is the basis of all law in the United States. A law in violation of the Constitution, if challenged, will be declared unconstitutional and will not be enforced, no matter what its source. Because of its importance in the American legal system, we present the complete text of the U.S. Constitution in Appendix B and discuss it in depth in Chapter 4. The Tenth Amendment to the U.S. Constitution reserves to the states all powers not granted to the federal government. Each state in the union has its own constitution. Unless it conflicts with the U.S. Constitution or a federal law, a state constitution is supreme within the state’s borders.

Laws enacted by legislative bodies at any level of government, such as statutes passed by Congress or by state legislatures, make up the body of law known as statutory law. When a legislature passes a statute, that statute ultimately is included in the federal code of laws or the relevant state code of laws (discussed later in this chapter). Statutory law also includes local ordinances— statutes (laws, rules, or orders) passed by municipal or county governing units to govern matters not covered by federal or state law. Ordinances commonly have to do with city or county land use (zoning ordinances), building and safety codes, and other matters affecting the local community. A federal statute, of course, applies to all states. A state statute, in contrast, applies only within the state’s borders. State laws thus may vary from state to state. No federal statute may violate the U.S. Constitution, and no state statute or local ordinance may violate the U.S. Constitution or the relevant state constitution.

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Chapter 1 Law and Legal Reasoning

Uniform laws During the 1800s, the differences among state laws frequently created difficulties for businesspersons conducting trade and commerce among the states. To counter these problems, a group of legal scholars and lawyers formed the National Conference of Commissioners on Uniform State Laws (NCCUSL, www.uniformlaws.org) in 1892 to draft uniform laws (model statutes) for the states to consider adopting. The NCCUSL still exists today and continues to issue uniform laws. Each state has the option of adopting or rejecting a uniform law. Only if a state legislature adopts a uniform law does that law become part of the statutory law of that state. Note that a state legislature may adopt all or part of a uniform law as it is written, or the legislature may rewrite the law however the legislature wishes. Hence, even though many states may have adopted a uniform law, those states’ laws may not be entirely “uniform.” The earliest uniform law, the Uniform Negotiable Instruments Law, was completed by 1896 and adopted in every state by the 1920s (although not all states used exactly the same wording). Over the following decades, other acts were drawn up in a similar manner. In all, more than two hundred uniform acts have been issued by the NCCUSL since its inception. The most ambitious uniform act of all, however, was the Uniform Commercial Code. The Uniform Commercial Code One of the most important uniform acts is the Uniform Commercial Code (UCC), which was created through the joint efforts of the NCCUSL and the American Law Institute.1 The UCC was first issued in 1952 and has been adopted in all fifty states,2 the District of Columbia, and the Virgin Islands. The UCC facilitates commerce among the states by providing a uniform, yet flexible, set of rules governing commercial transactions. Because of its importance in the area of commercial law, we cite the UCC frequently in this text. We also present the full UCC in Appendix C. From time to time, the NCCUSL revises the articles contained in the UCC and submits the revised versions to the states for adoption.

Administrative Law Another important source of American law is administrative law, which consists of the rules, 1. This institute was formed in the 1920s and consists of practicing attorneys, legal scholars, and judges. 2. Louisiana has not adopted Articles 2 and 2A (covering contracts for the sale and lease of goods), however.

orders, and decisions of administrative agencies. An administrative agency is a federal, state, or local government agency established to perform a specific function. Administrative law and procedures constitute a dominant element in the regulatory environment of business. Rules issued by various administrative agencies now affect almost every aspect of a business’s operations. Regulations govern a business’s capital structure and financing, its hiring and firing procedures, its relations with employees and unions, and the way it manufactures and markets its products. Regulations enacted to protect the environment also often play a significant role in business operations.

Federal Agencies At the national level, the cabinet departments of the executive branch include numerous executive agencies. The U.S. Food and Drug Administration, for example, is an agency within the U.S. Department of Health and Human Services. Executive agencies are subject to the authority of the president, who has the power to appoint and remove their officers. There are also major independent regulatory agencies at the federal level, such as the Federal Trade Commission, the Securities and Exchange Commission, and the Federal Communications Commission. The president’s power is less pronounced in regard to independent agencies, whose officers serve for fixed terms and cannot be removed without just cause. State and Local Agencies There are administrative agencies at the state and local levels as well. Commonly, a state agency (such as a state pollution-control agency) is created as a parallel to a federal agency (such as the Environmental Protection Agency). Just as federal statutes take precedence over conflicting state statutes, federal agency regulations take precedence over conflicting state regulations.

Case Law and Common Law Doctrines The rules of law announced in court decisions constitute another basic source of American law. These rules include interpretations of constitutional provisions, of statutes enacted by legislatures, and of regulations created by administrative agencies. Today, this body of judge-made law is referred to as case law. Case law—the doctrines and principles announced in cases—governs all areas not covered by

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Chapter 51

Wills and Trusts

s the adage says, “You can’t take it with you. ” After you die, all of the real and personal property that you own will be transferred to others. A person can direct the passage of his or her property after death by will, subject to certain limitations imposed by the state. A person who dies without having created a valid will is said to have died intestate. In this situation, state intestacy laws prescribe the distribution of the property among heirs or next of kin. If no heirs or kin can be found,

the property will escheat1 (title will be transferred to the state). In addition, a person can transfer property through a trust. When a trust is created, the owner (who may be called the grantor or the settlor) of the property transfers legal title to a trustee. The trustee has a duty imposed by law to hold the property for the use or benefit of another (the beneficiary). Wills and trusts are two basic devices used in the process of estate 1. Pronounced is-cheet.

SECTION 1

Wills A will is the final declaration of how a person desires to have her or his property disposed of after death. It is a formal instrument that must follow exactly the requirements of state law to be effective. A will can serve other purposes besides the distribution of property. It can appoint a guardian for minor children or incapacitated adults. It can also appoint a personal representative to settle the affairs of the deceased. Exhibit 51–1 on the following page presents excerpts from the will of Michael Jackson, the “King of Pop,” who died from cardiac arrest in 2009 at the age of fifty. Jackson held a substantial amount of tangible and intangible property, including the publishing rights to most of the Beatles’ music catalogue. The will is a “pour-over” will, meaning that it transfers all of his property (that is not already held in the name of the trust) into the Michael Jackson Family

planning—determining in advance how one’s property and obligations should be transferred on death. Estate planning may also involve powers of attorney and living wills, which we discuss at the conclusion of this chapter. It might even involve decisions concerning social media and one’s online identity, as discussed in a feature later in this chapter. Other estate-planning devices include life insurance (discussed in Chapter 50) and joint-tenancy arrangements (described in Chapter 49).

Trust (trusts will be discussed later in this chapter). Jackson’s will also appoints his mother, Katherine Jackson, as the guardian of his three minor children.

Terminology of Wills A person who makes a will is known as a testator (from the Latin testari, “to make a will”). A will is referred to as a testamentary disposition of property, and one who dies after having made a valid will is said to have died testate. The court responsible for administering any legal problems surrounding a will is called a probate court, as mentioned in Chapter 2. When a person dies, a personal representative administers the estate and settles all of the decedent’s (deceased person’s) affairs. An executor is a personal representative named in a will. An administrator is a personal representative appointed by the court for a decedent who dies without a will. The court will also appoint a representative if the will does not name an executor or if the named person lacks the capacity to serve as an executor.

996 Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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Chapter 51 Wills and Trusts

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E X H I B I T 51 – 1 Excerpts from Michael Jackson’s Will Last Will of Michael Joseph Jackson I, MICHAEL JOSEPH JACKSON, a resident of the State of California, declare this to be my last Will, and do hereby revoke all former wills and codicils made by me. I. I declare that I am not married. My marriage to DEBORAH JEAN ROWE JACKSON has been dissolved. I have three children now living, PRINCE MICHAEL JACKSON, JR., PARIS MICHAEL KATHERINE JACKSON and PRINCE MICHAEL JOSEPH JACKSON, II. I have no other children, living or deceased. II. It is my intention by this Will to dispose of all property which I am entitled to dispose of by will. I specifically refrain from exercising all powers of appointment that I may possess at the time of my death. III. I give my entire estate to the Trustee or Trustees then acting under that certain Amended and Restated Declaration of Trust executed on March 22, 2002 by me as Trustee and Trustor which is called the MICHAEL JACKSON FAMILY TRUST, giving effect to any amendments thereto made prior to my death. All such assets shall be held, managed and distributed as a part of said Trust according to its terms and not as a separate testamentary trust. If for any reason this gift is not operative or is invalid, or if the aforesaid Trust fails or has been revoked, I give my residuary estate to the Trustee or Trustees named to act in the MICHAEL JACKSON FAMILY TRUST, as Amended and Restated on March 22, 2002, and I direct said Trustee or Trustees to divide, administer, hold and distribute the trust estate pursuant to the provisions of said Trust * * * .

* * * *

IV. I direct that all federal estate taxes and state inheritance or succession taxes payable upon or resulting from or by reason of my death (herein “Death Taxes”) attributable to property which is part of the trust estate of the MICHAEL JACKSON FAMILY TRUST, including property which passes to said trust from my probate estate shall be paid by the Trustee of said trust in accordance with its terms. Death Taxes attributable to property passing outside this Will, other than property constituting the trust estate of the trust mentioned in the preceding sentence, shall be charged against the taker of said property. V. I appoint JOHN BRANCA, JOHN McCLAIN and BARRY SIEGEL as co-Executors of this Will. In the event of any of their deaths, resignations, inability, failure or refusal to serve or continue to serve as a co-Executor, the other shall serve and no replacement need be named. The co-Executors serving at any time after my death may name one or more replacements to serve in the event that none of the three named individuals is willing or able to serve at any time. The term “my executors” as used in this Will shall include any duly acting personal representative or representatives of my estate. No individual acting as such need past a bond. I hereby give to my Executors, full power and authority at any time or times to sell, lease, mortgage, pledge, exchange or otherwise dispose of the property, whether real or personal comprising my estate, upon such terms as my Executors shall deem best, to continue any business enterprises, to purchase assets from my estate, to continue in force and pay any insurance policy * * * . VI. Except as otherwise provided in this Will or in the Trust referred to in Article III hereof, I have intentionally omitted to provide for my heirs. I have intentionally omitted to provide for my former wife, DEBORAH JEAN ROWE JACKSON.

* * * *

VIII. If any of my children are minors at the time of my death, I nominate my mother, KATHERINE JACKSON as guardian of the persons and estates of such minor children. If KATHERINE JACKSON fails to survive me, or is unable or unwilling to act as guardian, I nominate DIANA ROSS as guardian of the persons and estates of such minor children. * * * *

Laws Governing Wills Probate is the court process by which a will is proved valid or invalid. Probate laws vary from state to state. The National Conference of Commissioners on Uniform State Laws issued the Uniform Probate Code (UPC) to promote more uniformity among the states. The UPC codifies general principles and procedures for the resolution of conflicts in settling estates.

The UPC also relaxes some of the requirements for a valid will contained in earlier state laws. Almost half of the states have enacted some part of the UPC and incorporated it into their own probate codes. Nonetheless, succession and inheritance laws still vary widely among the states, and one should always check the particular laws of the state involved.2 2. For example, California law differs substantially from the UPC.

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Unit Ten Property and Its Protection

Gifts by Will A gift of real estate by will is generally called a devise, and a gift of personal property under a will is called a bequest, or legacy. The recipient of a gift by will is a devisee or a legatee, depending on whether the gift was a devise or a legacy.

Types of Gifts Whether they are devises or bequests, gifts in a will can be specific, general, or residuary. Specific. A specific devise or bequest (legacy) describes particular property (such as “Eastwood Estate” or “my Cartier watch”) that can be distinguished from the rest of the testator’s property.

General. A general devise or bequest (legacy) uses less restrictive terminology. For instance, “I devise all my lands” is a general devise. A general bequest often specifies a sum of cash instead of a particular item of property, such as a watch or an automobile. For instance, “I give to my nephew, Carleton, $30,000” is a general bequest. If a testamentary gift is conditioned on the commission of an illegal act or an act that is legally impossible to fulfill, the condition will be invalid. ▶ Case in Point 51.1 A testator made a charitable bequest of $29 million to a nursing home on the condition that the funds be used only to help white patients. Because this condition was impossible to fulfill without violating laws prohibiting discrimination, the court ruled that the illegal portion of the gift was invalid. Essentially, the court invalidated the condition (that the funds be used for only white patients) and allowed the nursing home to receive the funds without any conditions on their use.3 ◀

Residuary. If any assets remain after specific gifts have been made and debts have been paid, they are called the residuary (or residuum) of the estate. A will may provide that these assets are to be given to the testator’s spouse, distributed to the testator’s descendants, or disposed of in some other way. If the testator has not indicated what party or parties should receive the residuary of the estate, the residuary passes according to state laws of intestacy.

3. Home for Incurables of Baltimore City v. University of Maryland Medical System Corp., 369 Md. 67, 797 A.2d 746 (2002). Note that the same rule applies to testamentary trusts (see page 1009) that include conditions that are illegal or against public policy. See, for example, In re Estate of Robertson, 859 N.E.2d 772 (Ind.App. 2007).

Abatement If the assets of an estate are insufficient to pay in full all general bequests provided for in the will, an abatement takes place. An abatement means that the legatees receive reduced benefits. ▶ Example 51.2 Julie’s will leaves $15,000 to each of her children, Tamara and Lynn. On Julie’s death, only $10,000 is available to honor these bequests. By abatement, each child will receive $5,000. ◀ If bequests are more complicated, abatement may be more complex. The testator’s intent, as expressed in the will, controls. Lapsed Legacies If a legatee dies before the death of the testator or before the legacy is payable, a lapsed legacy results. At common law, the legacy failed. Today, the legacy may not lapse if the legatee is in a certain blood relationship to the testator (such as a child, grandchild, brother, or sister) and has left a child or other surviving descendant. Note that if the testator has included a provision in the will addressing lapsed legacies, courts generally will enforce the provision in the way the testator intended. ▶ Case in Point 51.3 Katherine Hagan executed a will in 1994 that left the residuary of her estate, including all lapsed legacies, to various organizations, such as the Humane Society. In 2001, Hagan inherited $830,000 from a relative. At this time, Hagan did not have the mental capacity to revise or modify her will. When she died in 2005, her residuary estate was worth $1.48 million. Hagan’s relatives, including Janice Benjamin, tried to invalidate the will’s provisions regarding the residuary estate so that the funds would pass to them by intestacy laws. The court, however, found that Hagan’s intent controlled. She had not intended to give any portion of her estate to her relatives. Because the will specifically stated that lapsed legacies should go into the residuary estate and be distributed to the charities, the court enforced these provisions (and Hagan’s relatives received nothing).4 ◀

Requirements for a Valid Will A will must comply with statutory formalities designed to ensure that the testator understood his or her actions at the time the will was made. These formalities are intended to help prevent fraud. Unless they are followed, the will is declared void, and the decedent’s property is distributed according to the laws of intestacy of that state. 4. Benjamin v. JPMorgan Chase Bank, N.A., 305 S.W.3d 446 (Ky.App. 2010).

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Chapter 51 Wills and Trusts

Although the required formalities vary among jurisdictions, most states uphold certain basic requirements for executing a will. We now look at the basic requirements for a valid will, including references to the UPC when appropriate.

Testamentary Capacity and Intent For a will to be valid, the testator must have testamentary capacity—that is, the testator must be of legal age and sound mind at the time the will is made. The legal age for executing a will varies, but in most states and under the UPC, the minimum age is eighteen years [UPC 2–501]. Thus, the will of a twenty-one-yearold decedent written when the person was sixteen is invalid if, under state law, the legal age for executing a will is eighteen. The concept of “being of sound mind” refers to the testator’s ability to formulate and to comprehend a personal plan for the disposition of property. Persons who have been declared incompetent in a legal proceeding do not meet the sound mind requirement. A valid will is one that represents the maker’s intention to transfer and distribute her or his property. Generally, a testator must: 1. Know the nature of the act (intend to make a will). 2. Comprehend and remember the people to whom the testator would naturally leave his or her estate (such as family members and friends).

999

3. Know the nature and extent of her or his property. 4. Understand the distribution of assets called for by the will.

Undue Influence. When it can be shown that the decedent’s plan of distribution was the result of fraud or undue influence, the will is declared invalid. A court may sometimes infer undue influence when the named beneficiary was in a position to influence the making of the will. A presumption of undue influence might arise if the testator ignored blood relatives and named as a beneficiary a nonrelative who was in constant close contact with the testator. ▶ Example 51.4 Frieda is a nurse who was responsible for caring for Julie, the testator, during the last years of her life. After Julie’s death, her family discovers that her will names Frieda as sole beneficiary and excludes all family members. If Julie’s family challenges the validity of the will, which was executed a year before her death, the court might infer that Frieda unduly influenced Julie and declare the will invalid. ◀ In the following case, a testator’s children and grandchildren claimed that his third wife had unduly influenced him to create a new will that did not provide for them. After a jury trial, the court declared the will invalid. An appellate court had to determine if there was sufficient evidence of undue influence to support the jury’s verdict.

Case 51.1 In re Estate of Johnson Court of Appeals of Texas, San Antonio, 340 S.W.3d 769 (2011).

background and FACTS Belton Kleberg Johnson was a descendant of the founders of the King Ranch, a famous ranch in Texas that dates back to the 1850s. He was married three times and had three children from his first marriage, as well as eight grandchildren. Johnson executed a will in 1991, when he was married to his second wife. That will provided for her during her lifetime and left the remainder of his estate in a trust for his grandchildren and children. When his second wife died in 1994, he changed the will to give each grandchild $1 million and to give the remainder to five charities. His children were provided for in a separate trust. Johnson met his third wife, Laura, shortly after the death of his second wife, and they were married in 1996. In 1997, Johnson executed a will that left $1 million to each grandchild and the remainder to Laura. In 1999, Johnson executed a new will that left his entire estate in trust to Laura for her life and then to a foundation that she controlled. After Johnson died in 2001, his attorney submitted the will from 1999 to probate. Johnson’s children and grandchildren (the plaintiffs) challenged the will in court. A jury concluded that the will was invalid as a result of undue influence by Laura. She appealed, claiming that there was insufficient evidence to support the jury’s finding. CASE 51.1 CONTINUES •

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in the language of the court Opinion by Catherine STONE, Chief Justice. * * * * Not every influence exerted by a person on the will of another is undue. Influence is not undue unless the free agency of the testator was destroyed and a testament produced that expresses the will of the one exerting the influence. [Emphasis added.] The exertion of undue influence is usually a subtle thing, and by its very nature usually involves an extended course of dealings and circumstances. Undue influence may be shown by direct or circumstantial evidence, but will usually be established by the latter. [Emphasis added.] * * * The evidence established that B [throughout the opinion, the court refers to the testator as B, which stands for Belton, his first name] was an alcoholic, and psychological and medical tests showed that the alcohol had an adverse effect on his mental state. Although B received both in-patient and out-patient alcohol rehabilitation services several times before his marriage to Laura, the record contains no evidence that Laura made any effort to stop B’s drinking, which he admitted was on-going when he was hospitalized in 2000 and diagnosed with pancreatic cancer. * * * Ceci [B’s daughter] testified that B would disappear for weeks when he was on a binge and could wind up in a different county, state, or country. Testimony was introduced that any flight B chartered was stocked with vodka, and in a nine-month period in 1999, B spent almost $7,000 on liquor and wine. Evidence was also introduced about B’s mental abilities while intoxicated. For example, several witnesses testified that B would call late at night or early in the morning after he had been drinking and want to have long, rambling conversations. * * * One time B ordered an employee to purchase tickets to Santiago, Chile, but when the employee called B about going to the airport, B had no recollection of requesting the trip. In contrast to this evidence of B’s significant drinking and its effect on his conduct, Laura denied that B had a drinking problem or was ever intoxicated in her presence. [Emphasis added.] * * * * Appellees contend the evidence also established a habitual subjection of B to Laura’s control. Although B had a prenuptial agreement with his second wife, Lynne, Laura refused to consider a prenuptial agreement * * * . * * * * Prior to B and Laura’s marriage, one note by Copley [Johnson’s attorney] stated that Laura wanted to know what the children were getting under the estate plan. One letter summarizing certain estate planning documents had writing in the brown felt tip pen B traditionally used, but also had writing in a red pen. The jury could infer from the evidence and testimony that Laura had reviewed the document and made comments. On a few occasions, B requested that Copley investigate whether the King Ranch royalties and a house in Cabo San Lucas could be left to his children, but subsequently called and stated that he changed his mind. The jury could infer that B changed his mind after discussions with Laura. * * * With regard to the King Ranch royalties, evidence was presented that B stated in a conversation with his children in 1999 that the King Ranch royalties were to be kept in the family, and that Laura, who overheard the discussion, stated she would never take a family heirloom. By 1999, however, the King Ranch royalties had been transferred to BKJ Interests, and under the estate plan, the King Ranch royalties would not remain in the family but would eventually be controlled by the foundation. Evidence was presented that in 2000 B again broached Copley with the idea of leaving the King Ranch royalties to the children. [Emphasis added.] * * * * Considering whether the disposition was unnatural, we must consider evidence of B’s stated desires and actions. The evidence established that B made several comments about the interest in the Hyatt being passed to the children/grandchildren. Similarly, evidence established that B was very proud of his heritage and wanted his descendants to inherit the King Ranch royalties. The majority interest in both of those assets, however, was not inherited by the grandchildren. Instead, Laura initially would benefit from the income from those assets during her life, and the interest would then pass to the foundation. [Emphasis added.]

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