TEST BANK for Business Law and the Legal Environment 9th Edition by Jeffrey Beatty, Susan Samuelson by welldoneassistant

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Chap 08_9e_Standard Indicate whether the statement is true or false. 1. Ahmi was a witness in a lawsuit. When asked why he fired Rana, Ahmi replied, "Rana was fired for willful misconduct." Indeed, Rana had not engaged in any misconduct. Rana will be able to successfully sue Ahmi for defamation based on what Ahmi said in court. a. True b. False 2. Public officials can win a defamation case only by proving the defendant's actual malice. a. True b. False 3. A witness testifying in a court or legislature may never be sued for defamation. a. True b. False 4. Working out some frustrations after a bad game, Jessica angrily hits a baseball and then sees it is flying toward the umpire. She yells, “Watch out!” The umpire ducks and the ball misses him. Since there was no physical contact, no assault or battery occurred. a. True b. False 5. The First Amendment guarantee of freedom of speech is an absolute right. a. True b. False 6. In an advertisement, FreshAir, Inc. stated that its air freshener lasted for 3 hours while the competitor's Smell Sweet lasted for only 36 minutes. In fact, Smell Sweet freshens the air for more than 2 hours. FreshAir has not violated the Lanham Act because the First Amendment's guarantee of freedom of speech applies. a. True b. False 7. Lori works for Big Corporation. The existing contract between Lori and Big Corporation can be terminated at will by either party. Richard, the owner of a small store, offers to pay Lori much more money if she will leave Big Corporation and work for his store. When Lori starts to work for Richard, Big Corporation correctly claims Richard is liable for tortious interference with a contract. a. True b. False 8. Dewayne sold a space heater to Vivian, telling her it would heat a 200-square-foot area, even though he knew it would effectively heat only about one-third of that space. Dewayne is liable for the intentional tort of fraud. a. True b. False

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Chap 08_9e_Standard 9. The single recovery principle requires a court to settle a matter once and for all by awarding a lump sum for past and future expenses. a. True b. False 10. There are four elements to a defamation case, and the plaintiff in any kind of lawsuit must prove one of the four elements to prevail. a. True b. False 11. Punitive damages are intended to punish the defendant for conduct that is extreme and outrageous. a. True b. False 12. A tort is a violation of a duty imposed by the civil law. a. True b. False 13. A salesclerk at Braybon's Department Store observed a customer remove a ring from a display case and put it in her purse. In most states, Braybon's will be able to detain the customer for suspicion of shoplifting. a. True b. False 14. If Gloria threw a rock that hit Merle, she is liable for an intentional tort of battery only if she intended to injure or harm Merle. a. True b. False 15. In order for a plaintiff to win a case involving intentional infliction of emotional distress, she must prove the defendant acted in an extreme and outrageous manner. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 16. Adam decided to play a practical joke on Linda, a coworker. As Linda was leaving the office one night, Adam, wearing a mask, stepped out from behind some bushes. He pointed a handgun made out of licorice at her and demanded her purse. He then pushed the candy gun to her head and told her if she told anybody he'd kill her. Linda was very scared during the whole incident. She did not think it was funny when Adam pulled the mask off and took a bite out of the gun as he gave her the purse back. Did Adam commit the tort of intentional infliction of emotional distress? a. Yes, as his conduct was intentional. b. Yes, but only if Adam intended to cause Linda serious emotional distress. c. No, since he was only playing a practical joke. d. No, since Linda was not physically hurt by Adam.

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Chap 08_9e_Standard 17. Which of the following guarantees that a witness testifying in a court or legislature may never be sued for defamation? a. recovery principle b. protected right to slander c. defamation privilege d. absolute privilege 18. Which of the following statements is correct regarding the differences between contract, tort, and criminal law? a. Tort and criminal law both impose a punishment for the defendant including prison and/or a fine. b. Criminal law imposes duties of conduct on all persons. c. Contract law awards money damages for the plaintiff; tort and criminal law do not. d. Criminal law is prosecuted by the government. 19. Shortly after Brian started to work at Trevit, Inc., a coworker, Ann, began asking him out. Brian said no. Nevertheless, Ann persisted. One day Ann playfully but intentionally touched Brian “below the belt.” Which statement is correct? a. Ann defamed Brian. b. Ann committed the tort of trespass. c. Ann committed the tort of interference with a prospective advantage. d. Ann committed the tort of battery. 20. Soledad tells Marco that she believes he was cheating on a biology exam and calls him a "cheater" to his face. She did not tell anyone else about her suspicions. Marco did not, in fact, cheat on the exam. Has defamation occurred? a. No, because no one else received the defamatory message besides Marco. b. No, because Soledad did not put her accusation in writing. c. Yes, because Soledad's accusation was false. d. Yes, because Marco's feelings were hurt. 21. Which of the following is the general goal of compensatory damages? a. to find a way to help the defendant avoid jail time for his or her crime b. to restore the plaintiff to the position he or she was in before the injury c. to punish the defendant for extreme and outrageous conduct d. to make the defendant suffer as much as the plaintiff suffered 22. Taking or using someone's personal property without consent is referred to as a. fraud. b. negligence. c. conversion. d. trespassing.

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Chap 08_9e_Standard 23. The idea behind punitive damages is that a. torts that occur in a commercial setting are far more serious than torts affecting private individuals. b. certain behavior is so unacceptable that society must make an example of it. c. the right to free speech is not absolute and must sometimes be restricted. d. the defendant must be restored to the position he/she was in before the injury. 24. Wholesome Bread, Inc. advertised that its honey wheat bread had 25% fewer calories than a competing brand, Valley Grains. In fact, Wholesome's bread had the same amount of calories as Valley Grains' bread. Wholesome Bread's conduct a. does not violate the Lanham Act because of the First Amendment freedom of speech. b. does not violate the Lanham Act because Wholesome did not act with actual malice. c. does not violate the Lanham Act because comparative ads are exempt from the law. d. violates the Lanham Act. 25. Adam decided to play a practical joke on Linda, a coworker. As Linda was leaving the office one night, Adam, wearing a mask, stepped out from behind some bushes. He pointed a handgun made out of licorice at her and demanded her purse. He then pushed the candy gun to her head and told her if she told anybody he'd kill her. Linda was very scared during the whole incident. She did not think it was funny when Adam pulled the mask off and took a bite out of the gun as he gave her the purse back. Which statement is correct? a. Adam committed an assault but not a battery. b. Adam committed a battery but not an assault. c. Adam committed an assault and a battery. d. Adam committed neither an assault nor a battery since he used a candy gun and was only playing a joke on Linda. 26. The ruling in the landmark case of New York Times v. Sullivan was that a public official can win a defamation case a. without proving the defendant acted with reckless disregard of the truth. b. only by proving the defendant's actual malice. c. without proving the defendant knew his or her statement was false. d. only by proving the defendant has a history of reckless behavior. 27. In awarding punitive damages, a court considers all of the following EXCEPT a. the difference between the punitive award and any civil penalties used in similar cases. b. the ratio between the harm suffered and the award. c. the financial condition of the plaintiff. d. the reprehensibility of the defendant's conduct.

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Chap 08_9e_Standard 28. Jim told his manager, Lana, that a coworker, Diane, had been in prison for theft. Lana checked into the matter, and when she learned that Diane had served time in prison for theft, she fired her. a. Jim is liable to Diane for defamation. b. Jim is liable to Diane for defamation unless he can show a legitimate reason for having to tell Lana about Diane's prison history. c. Jim is liable to Diane for defamation only if she is a public figure. d. Jim is not liable to Diane for defamation. 29. Tipton Company makes a deal with Patton Company to purchase 100 canvas tarps. Patton's competitor, QC Industries, tells Tipton Company executives that Patton's goods are shoddy and Tipton cancels the contract with Patton. What will likely occur? a. Patton will sue Tipton for defamation. b. QC Industries will sue Patton for intentional infliction of emotional distress. c. Patton will sue QC Industries for tortious interference with a contract. d. Tipton will sue Patton for tortious interference with a prospective advantage. 30. An intentional tort involves conduct in which a. the defendant intended to harm the plaintiff. b. the defendant intended a certain physical act that ends up injuring someone. c. injuries are caused to someone because of the defendant’s neglect or oversight. d. there is resulting punishment, including prison, for the defendant. 31. Runyon was ready to sign a two-year agreement with Barnett Corp. to become Barnett’s sales representative for a three-state area. LaPrise, who wants to be the representative for that area, threatens Runyon with bodily harm if he takes the position. Runyon decides his physical well-being is more important to him than the job, so he does not accept the position. LaPrise a. committed tortious interference with a contract. b. committed tortious interference with a prospective advantage. c. committed a battery. d. caused a breach of contract and committed the tort of intrusion. 32. The elements in a defamation case are: a. defamatory statement; falsity; communication; and injury. b. a contract; knowledge of the contract; improper inducement; injury. c. false or misleading fact statements; statements in commercial advertising; likelihood of harm. d. duty; breach of duty; proximate causation; and damages. 33. Don was standing in a cafeteria line holding a plate. Tim was upset with Don. Tim turned Don around and grabbed the plate out of Don's hand. Tim then held the plate up and threatened to break it over Don's head. Tim has committed a. a battery, but not an assault. b. an assault, but not a battery. c. both an assault and a battery. d. neither an assault nor a battery. Copyright Cengage Learning. Powered by Cognero.

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Chap 08_9e_Standard 34. John was driving home one night in a terrible snow storm when his car stalled. He managed to push the car onto a small shopping center's parking lot. The next day about noon he came to get the car and it had been towed away by the owner of the parking lot. The owner explained she had to remove the car to clean the snow off her lot and told John where the car had been towed. Which statement is correct? a. The owner of the parking lot is liable for conversion. She took John's car without his consent. b. The parking lot owner has absolute privilege for towing the car since it was a business necessity. c. Even though John left his car in the parking lot under emergency conditions, he still committed a trespass on the owner's property. d. All these are correct. 35. A national magazine published an article about a famous television star. The television personality is upset because the information contained in the story is not correct. If the actress sues the magazine, a. she will need to show that the magazine has a history of being "reckless" with facts on a regular basis. b. she will need to show that the magazine either knew the story was false or acted with reckless disregard of the facts. c. she will need to show that the magazine failed to attempt to verify the story by trying to contact her or her agent before the story was printed. d. she will need to show that the magazine could have discovered that the story was false but failed to do so. 36. Edith becomes ill at work, but her boss insists that she finish mopping the shop floor and cleaning the cabinets before she is allowed to leave. He physically prevents her from leaving the premises by watching over her until her work is finished. What tort has occurred? a. trespass b. conversion c. battery d. false imprisonment 37. Trein, Inc. entered into a one-year, $1 million contract with Mia, a sports celebrity, to promote Trein's products. E-presto Inc., a competitor of Trein, was interested in having Mia promote its products but knew of her contract with Trein. E-presto offered Mia a three-year, $5 million contract. Mia left Trein and signed with E-presto. If Trein sues E-presto for tortious interference with a contract, E-presto a. will be able to establish a justification since E-presto was acting to protect an existing economic interest. b. will be able to establish a justification because, in talking to Mia, E-presto was exercising its First Amendment freedom of speech. c. will be able to establish a justification because to decide otherwise would subject Mia to involuntary servitude. d. will not be able to establish a justification.

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Chap 08_9e_Standard 38. Rodney was employed by Deluxe Discount Store. Rodney's manager directed him to check the prices of dog food at Huge Savings Store. The manager of Huge Savings Store saw Rodney writing down prices and asked him to leave. Rodney, fearful that he would be fired by Deluxe, refused to leave. Rodney committed the tort of a. larceny. b. trespass. c. misrepresentation. d. conversion. 39. Written defamation is _____; oral defamation is _______. a. fraud; conversion b. conversion; fraud c. slander; libel d. libel; slander 40. Which of the following statements about torts is correct? a. A tortious act is always a criminal act. b. A criminal act is always a tortious act. c. A tortious act may also be a criminal act. d. A tortious act is the same as a contract dispute. 41. On its website, Otrex, Inc. claimed that its pain reliever was more effective than Nelton, a competing pain reliever. Discuss the elements that Nelton must prove to win a case against Otrex under the Lanham Act.

42. Tracy is an employee of Zebra Toy Company, and both parties are free to terminate her employment at will. One afternoon she has lunch with a friend who works in marketing for her company's biggest competitor, Tiger Toys. Over a period of about three months, Tiger Toy representatives convince Tracy to work with them. Tiger offers a larger base salary with bigger commissions than she had with Zebra. When Tracy leaves Zebra, the company sues Tiger Toys claiming it intentionally interfered with a contractual relationship. Will Zebra Toy Company be successful?

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Chap 08_9e_Standard 43. As assistant manager of a discount department store, you have been asked to review the store's policy concerning shoplifters. (a) Discuss the legal standard used in most states governing the detention of suspected shoplifters. (b) In reviewing the store's policy, discuss some of the items that you will consider.

44. Discuss the four elements that must be proven in order to win a defamation case.

45. Wilma’s arm is broken when Paula knocks her down during an argument. If Wilma sues Paula for battery, what damages is Wilma likely to receive?

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Chap 08_9e_Standard Answer Key 1. False 2. True 3. True 4. False 5. False 6. False 7. False 8. True 9. True 10. False 11. True 12. True 13. True 14. False 15. True 16. a 17. d 18. d 19. d 20. a 21. b 22. c 23. b 24. d 25. c 26. b

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Chap 08_9e_Standard 27. c 28. d 29. c 30. b 31. b 32. a 33. c 34. c 35. b 36. d 37. d 38. b 39. d 40. c 41. Nelton must prove that: (a) Otrex made false or misleading fact statements about Nelton's product; (b) Otrex used the statements in commercial advertising or promotion; and (c) the statements created the likelihood of harm to Nelton. 42. No. The existing contract could be terminated at will by either party, meaning that although Zebra Toy Company had a contract with Tracy, Zebra Toy had no long-term assurances because both Tracy and Zebra Toy could end the contract "at will" at any time. 43. a)

Generally, a store may detain a customer for alleged shoplifting provided there is a reasonable basis for the suspicion and the detention is done reasonably.

Some of the items that should be considered include: what is a "reasonable" suspicion of shoplifting; what is "reasonable" detention; how private should the detention be; how can bias and prejudice be avoided; and how much questioning should the store do.

44. Defamatory statement. This is a factual statement that is likely to harm another person’s reputation. Because opinions are not factual, they do not generally count as defamatory statements. Falsity. The statement must be false. Making a true statement, no matter how mean, is not defamation. Communicated. The statement must be communicated to at least one person other than the plaintiff. Injury. The plaintiff must show some injury.

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Chap 08_9e_Standard 45. A successful plaintiff usually receives compensatory damages, which are supposed to place the plaintiff in the position she was in before the defendant’s conduct caused injury. Wilma can receive money for medical expenses she proves by producing bills from her medical providers. If a doctor testifies that she will need future treatment, she may also be awarded the expected cost. Under the single recovery principle, the court awards a lump sum for past and future expenses, and any unexpected expenses that arise in the future cannot be recovered. Paula is liable for Wilma’s lost wages caused by the battery. Also, Wilma may receive payment for pain and suffering. Punitive damages, intended to punish the defendant for conduct that is extreme and outrageous, are awarded in relatively few cases.

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Chap 09_9e_Standard Indicate whether the statement is true or false. 1. Most states recognize some form of comparative negligence. a. True b. False 2. The duty of care that each of us must follow is to behave as a reasonable person. a. True b. False 3. Tort issues are firmly ingrained in law and do not change. a. True b. False 4. A defendant engaging in an ultrahazardous activity is almost always liable for any harm that results. a. True b. False 5. In a strict liability case, the defendant is only liable if the product is defective when it leaves his hands. a. True b. False 6. A sports fan, injured by a hockey puck that flew into the stands during an NHL game, would be subject to the defense of assumption of the risk in a suit to recover for her injuries. a. True b. False 7. The doctrine of contributory negligence is followed in most states. a. True b. False 8. In strict liability, the injured person need not prove that the defendant’s conduct was unreasonable. a. True b. False 9. While hunting, Roger enters Adele’s property without permission and is injured by falling into a ditch that was obscured by the underbrush. Under the common law, Adele is liable for Roger’s injuries. a. True b. False 10. Kenneth was exposed to radiation on his job in an environmental cleanup. In a lawsuit against his employer, the court must decide the full extent of both present and future damages rather than allowing Kenneth to return to court years later if medical problems develop at that time. a. True b. False

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Chap 09_9e_Standard 11. Res ipsa loquitur shifts the burden of proof from the plaintiff to the defendant. a. True b. False 12. A defendant set off fireworks at a fully licensed Fourth of July show. The result of the activity caused harm to the plaintiff. In order for the plaintiff to win a case of negligence, he or she need only prove that it was foreseeable that the defendant's conduct might cause harm. a. True b. False 13. Palsgraf v. Long Island Railroad addressed the issue of furnishing alcohol to minors. a. True b. False 14. Silas asks his friend Shelby to come to his property to go fishing at his pond. If he fails to warn her that the pier has a rotten spot and she falls through and is injured, Silas would be held liable in most states. a. True b. False 15. A landowner's highest duty is owed to licensees. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 16. One morning, Miles accidentally dropped a thumbtack on the chair of the office manager where he worked. The office manager sat on the tack and, two days later, was hospitalized with an infection caused by the tack. Which of the following is correct? a. Miles's actions were negligent. b. No tort has been committed. c. Miles committed an intentional tort. d. Miles is strictly liable. 17. Annette drove through an intersection without looking and hit Vincent's car that he had driven into the intersection without obeying a stop sign. Annette sued Vincent. The jury found that Annette’s fault contributed 20 percent to the collision and determined that her total loss was $100,000. Under comparative negligence, the jury should award Annette a. $20,000. b. $80,000. c. $100,000. d. nothing.

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Chap 09_9e_Standard 18. As it applies to landowners, which of the following statements regarding liability to a licensee is correct? a. Whether the landowner is responsible for injury depends on whether the licensee is an adult or a child. b. The landowner is liable to a licensee for injuries caused by hidden dangers only. c. Since the licensee is a trespasser on the landowner's property, the landowner is not responsible for injury. d. Since a licensee has permission to be on the landowner's property, the landowner is responsible for all injury whether hidden or obvious. 19. Kyle was eating clam chowder soup in a restaurant when a very small piece of bone lodged in his throat. Fortunately, he was able to remove the bone with his fingers. However, he was upset by the incident and sued the restaurant for negligence. What is the most likely result in this case? a. Kyle will not collect any damages since he did not sustain any harm. b. Kyle will collect damages because the restaurant committed negligence per se. c. Kyle will collect damages if he proves it was possible to prevent tiny fish bones from being present in clam chowder. d. Kyle will collect damages, as res ipsa loquitur applies. 20. Phillip was waiting for a bus at a bus stop. Across the street and down the block, a mechanic negligently overinflated a tire he was intending to put onto Marsha’s pickup truck. The exploding tire injured Marsha and frightened a neighborhood dog, which ran down the street and knocked Phillip down, injuring his knee. Phillip sued the mechanic. In applying the Palsgraf v. Long Island Railroad decision to this case, Phillip would a. win because the mechanic was negligent in overinflating the tire, which led to Phillip’s injury. b. win based on negligence per se. c. lose because the court would apply the doctrine of res ipsa loquitur. d. lose because, although the mechanic’s conduct was negligent toward Marsha, it was not a wrong in relation to Phillip, who was far away. The mechanic could not have foreseen injury to Phillip and therefore had no duty to him. 21. A plaintiff sues in negligence but has no proof of factual cause and foreseeable type of harm. Which of the following is most likely to help the plaintiff? a. res judicata b. stare decisis c. res ipsa loquitur d. mens rea 22. For the defendant to be liable in a negligence case, it must be proven that the defendant's conduct actually caused the injury. This is referred to as a. factual cause. b. duty of due care. c. proximate cause. d. breach.

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Chap 09_9e_Standard 23. Wayne worked in an office. He had no criminal record, had never had a complaint made against him about his work or his conduct, and had been a faithful employee for nearly 20 years. One day, Wayne followed his supervisor to his home and fatally shot him. The estate of the supervisor sued the company, claiming it should have been aware of Wayne's growing frustration with work. The company's best defense will be that a. there was no way to foresee that the incident would happen. b. the incident occurred away from the office. c. the killing was the result of a personal conflict between Wayne and the supervisor. d. even if the company had been aware of Wayne's difficulty with his supervisor, Wayne did not have any criminal history. 24. In a negligence case, the plaintiff must establish a. duty, strict liability, causation, and injury. b. mens rea, breach, foreseeable harm, and injury. c. duty, actus reus, foreseeable harm, and causation. d. duty of due care, breach, factual cause, proximate cause, and damages. 25. Anders suffered a shock when his electric radio dropped into the bathtub while he was taking a bath. Anders argued that he did not realize it was dangerous to operate an electric radio near his bathtub. If he sues the radio manufacturer for damages, which claim is he most likely to make? a. res ipsa loquitur b. negligent manufacture c. failure to warn d. negligent design 26. Tommie, a six-year-old child, was seriously injured when he stuck a fork into an electrical outlet at a restaurant. His parents sued the restaurant where the incident occurred, claiming it should have had child protective guards on the outlets even though no law required the restaurant to do so. Whether the restaurant is liable will be dependent upon whether a. the incident was reasonably foreseeable. b. the court views Tommie as a licensee or a trespassing child. c. this is negligence per se. d. this is an ultrahazardous activity. 27. Don was driving his truck when a board fell out of the truck bed and onto the road. Alice, who was driving closely behind Don's truck, tried to avoid the board, swerved, and struck a telephone pole, causing her severe injuries. Which of the following is correct? a. Don is strictly liable to Alice for her injuries. b. In a comparative negligence state, the actions of Don and Alice will be weighed to determine liability. c. Don was not negligent in allowing the board to fall out of his truck. d. Don is engaging in ultrahazardous activity.

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Chap 09_9e_Standard 28. Kelley went ice skating on a neighbor’s pond, but she fell through a thin area into icy waters. Kelley did not have permission to be on the property, and the neighbor did not even know that she was there. Is the neighbor liable for Kelley’s injuries? a. Yes. The neighbor should have posted “thin ice” notices. b. No. Kelley was a trespasser, and the neighbor can only be held liable for intentionally injuring her or for gross misconduct. c. It may depend on Kelley’s age. d. Yes, the neighbor is strictly liable. 29. Bob, a weak swimmer, ignored warning signs in a recreational swimming area and went into deep water. He soon grew tired and realized that he could not make it back to shore. Seeing Kelly, he cried out for help. Kelly, however, ignored the pleas. Bob was finally saved by Dorothy but suffered brain damage from being submerged during the ordeal. Bob now sues Kelly for negligence for failing to try to save him. Bob will a. prevail because society places a duty on people to help each other and Kelly breached this duty, resulting in Bob's injury. b. lose because Kelly had no legal duty to rescue him. c. lose even though Kelly had a legal duty to save him, since Bob will not be able to prove that Kelly's failure to act was the proximate cause of his injuries. d. lose because a reasonable person could not have foreseen that someone in a recreation area could not swim well. 30. Negligence concerns harm that a. is unforeseeable. b. arises intentionally. c. arises by accident. d. is always substantial. 31. A branch of tort law that imposes a much higher level of liability when harm results from ultrahazardous acts or defective products is referred to as a. res ipsa loquitur. b. strict liability. c. heightened liability. d. strict negligence. 32. Which of the following is true about res ipsa loquitur? a. It shifts the burden of proof from plaintiff to the defendant. b. The harm ordinarily would not occur without the defendant’s participation. c. The plaintiff had mostly a contributory role in causing the harm. d. The defendant did not have exclusive control of the thing that caused the harm.

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Chap 09_9e_Standard 33. . If the defendant successfully proves __________, no matter how slight the plaintiff's negligence, the plaintiff will be denied any recovery of damages. a. contributory negligence b. comparative negligence c. res ipsa loquitur d. negligence per se 34. Which of the following acts resulting in injury would be negligence per se? a. Joe sold fireworks from his Indiana store (a legal activity) to Steve, an Illinois resident (a state where owning fireworks is illegal). b. June, while driving the speed limit, sideswiped the car next to her. c. A retailer sold glue containing benzene to a 14-year-old boy in violation of state law. d. Tammy accidentally dropped a heavy carton on Sasha's foot while at work. 35. Evaluate the following scenarios and determine which one represents Micha's highest liability? a. Rose is lost and pulls her car into Micha's driveway for a moment to get her bearings. b. Oscar is a twelve-year-old neighbor of Micha's who has snuck into Micha's backyard to swim in his pool. c. Juanita is a customer having a latte in the coffee shop Micha owns and operates. d. Ron is Micha's friend whom Micha has invited to his home to watch the Super Bowl. 36. The test of “foreseeability” is generally used to determine the existence of which element of a negligence case? a. duty of due care b. Breach c. factual cause d. negligence per se 37. Under a state law, a dog owner is absolutely liable to any person who is injured by the dog. This is an example of a. negligence per se. b. strict liability. c. res ipsa loquitur. d. negligence. 38. A customer in a restaurant would be considered ________ to whom the restaurant owner owes a duty ________. a. a licensee; to warn of known dangers. b. an invitee; of reasonable care. c. a social guest; only to avoid intentionally injuring him. d. a licensee; of strict liability

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Chap 09_9e_Standard 39. If a court applies res ipsa loquitur a. the plaintiff needs to prove the case by a preponderance of the evidence. b. the plaintiff must prove the case by clear and convincing evidence. c. the defendant has the burden of proving they are not liable. d. the defendant is strictly liable. 40. What is a principal factor in the risk-utility test? a. the value of the product b. the gravity of the danger c. the likelihood that danger will occur d. All of these are correct. 41. A contractor used dynamite to loosen a rocky hillside. The blast from the dynamite caused a house foundation to crack. The house was located over a half-mile away from the dynamite site. The contractor was careful when using the dynamite, and no allegation of negligence is made. However, the house owner claims the contractor is liable for damage to the foundation. Is the house owner correct? Explain.

42. List and discuss the elements necessary to establish negligence.

43. Discuss the concepts of contributory negligence and comparative negligence.

44. Mavrex, Inc. received an application from Larry, and since his written qualifications seemed to meet a pressing current need, they hired him without checking his references or prior records. Actually, Larry had been in prison for murder several years earlier. Tom, a long-time Mavrex employee, angered Larry when he tried to tell Larry how to do his job. Larry attacked and injured Tom. If Tom sues Mavrex, what would his cause of action be, and what elements would Tom need to prove to win his case?

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Chap 09_9e_Standard 45. On Monday, Travis took his four-wheeler to Reppart’s Equipment & Service for repair because the steering was not working properly. On Friday, he called Reppart’s to see if his four-wheeler was ready because he wanted it for a weekend trip. Reppart’s said they had done the major repairs but that the steering system still needed some work and they needed another few days to finish the repairs. Travis told them he would pick the four-wheeler up and use it for the weekend and then bring it back to have them finish their work. While riding with friends on the weekend, Travis ran into someone because the steering stuck and he couldn’t swerve to avoid them. Discuss how a court would determine causation in a negligence suit against Travis.

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Chap 09_9e_Standard Answer Key 1. True 2. True 3. False 4. True 5. True 6. True 7. False 8. True 9. False 10. True 11. True 12. False 13. False 14. True 15. False 16. a 17. b 18. b 19. a 20. d 21. c 22. a 23. a 24. d 25. c 26. a

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Chap 09_9e_Standard 27. b 28. c 29. b 30. c 31. b 32. a 33. a 34. c 35. c 36. a 37. b 38. b 39. c 40. d 41. Yes. The contractor is liable under the concept of strict liability. Generally speaking, strict liability, also known as liability without fault, applies if a person engages in dangerous activity that results in damage to property or personal injury. The homeowner does not have to prove duty, breach, or foreseeable harm. The fact that a person was very careful in carrying out the dangerous activity is not relevant. The only issue is whether the dangerous activity was the direct cause of the property damage or personal injury. In essence, strict liability is a trade-off, allowing for people to engage in dangerous activity but at the same time requiring them to be totally responsible if a person sustains damages as a result of that activity. It is incumbent on the person to obtain sufficient liability insurance if he is going to engage in dangerous activity so he will be able to provide proper compensation to any person damaged by the activity. 42. For there to be a successful lawsuit for negligence, five elements must be established: duty of due care, breach, factual cause, proximate cause, and damages. Duty of due care is the responsibility to use reasonable care not to injure others around you. If the defendant could foresee that his misconduct would injure a certain person, he has a duty to that person. Normally, there is no duty to avoid the injury of others through nonconduct, unless there is a special relationship. Breach is conduct that fails to meet the standard of reasonable care imposed if there is a duty to the injured party. Factual cause requires that the defendant's conduct, at least in part, actually caused the injury. Proximate cause requires that the risk of harm was reasonably foreseeable and not so remote or bizarre that a reasonable person would never have expected it to happen. And finally, for damages, the plaintiff must have actually been hurt or has actually suffered a measurable loss. The injury must be genuine, not speculative.

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Chap 09_9e_Standard 43. Contributory negligence is a defense that can be used by a defendant to avoid liability. Most states have discarded this concept; however, if allowed, even if the plaintiff were 1 percent responsible for an accident, she cannot recover from the defendant. Comparative negligence is used to pro rate each party's fault in a negligence case. So, if the plaintiff is 50 percent or less responsible, she is allowed to collect relative to her degree of fault. Thus, if the plaintiff were 30 percent responsible for her accident and sustained $100,000 worth of injuries, she could recover $70,000 (70 percent) from the defendant. 44. Tom’s cause of action would be negligent hiring. Companies can be liable for hiring or retaining violent employees. The company should check records, including criminal records, and contact personal references before hiring employees. To win a case in negligence, Tom would need to prove five elements: a duty of care on the part of Mavrex to Tom, a breach of this duty, factual cause, foreseeable harm, and injury. The test for a duty of care is generally “foreseeability.” If the defendant could have foreseen injury to a particular person, there is a duty to him. To prove the second element of negligence, breach of duty, courts apply a reasonable person standard. The third element, factual cause, means that Mavrex’s conduct actually caused Tom’s injury. The fourth element, foreseeable harm, means it was foreseeable that conduct like Mavrex’s might cause the type of harm that did result. The fifth element, injury, means that Tom actually has been hurt. 45. Courts look at two issues to determine causation: Was the defendant’s behavior the factual cause of the harm, and was this type of harm foreseeable? If Travis’s breach of duty physically led to the ultimate harm, it is the factual cause. Since Travis knew the repairs were not completed, his unreasonable behavior in using the four-wheeler was the factual cause of the harm to the plaintiff. For Travis to be liable, the type of harm must have been reasonably foreseeable. Travis could easily foresee that a bad steering system could cause an accident while he was riding. He need not have foreseen the exact results, but he could foresee the general type of harm involving defective steering. Therefore, in this case the factual cause and foreseeable harm elements of a negligence suit against Travis would have been met.

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Chap 10_9e_Standard Indicate whether the statement is true or false. 1. At its inception, the Communications Decency Act of 1996 created broad immunity for internet service providers (ISPs) and websites. a. True b. False 2. The tort of public disclosure of private facts prohibits the unjustifiable revelation of truthful, but secret,

information. a. True b. False 3. The Electronic Communications Privacy Act (ECPA) of 1986 is a federal statute that regulates email. a. True b. False 4. The internet was started in the 1960s as a project to link military contractors and universities. The World Wide Web was created as a subnetwork of the internet. a. True b. False 5. The federal government has preempted the field of online privacy, so states may not pass their own online privacy statutes. a. True b. False 6. Under the Electronic Communications Privacy Act (ECPA), any intended recipient has the right to disclose the content of an email. a. True b. False 7. The European Union (EU) does not view privacy as a fundamental right of its citizens, and the EU's policies toward privacy are limited. a. True b. False 8. When you shop online, most retailers collect personal information about you. a. True b. False 9. The internet of things gathers, sends, and receives data. a. True b. False

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Chap 10_9e_Standard 10. In 2018, the European Union (EU) implemented the European General Data Protection Regulation (GDPR). a. True b. False 11. After Jan's boyfriend broke up with her, she posted sexually explicit pictures of him on her Facebook page and wrote about how he was a terrible boyfriend. Jan's actions are protected by the First Amendment to the Constitution. a. True b. False 12. Rachel works for the Internal Revenue Service and keeps some personal information on her computer at work. There has been suspicion that Rachel has not been keeping tax return information confidential. The Fourth Amendment to the Constitution, prohibiting unreasonable searches and seizures, protects Rachel from having the government review the personal information she has on her computer. a. True b. False 13. Jorgeson Co., on its website, promised the company would not give a customer's personal information to third parties without the customer’s consent, but then gave out such information anyway. This practice violates Section 5 of the FTC Act. a. True b. False 14. Spam is illegal per se. a. True b. False 15. The Foreign Intelligence Surveillance Act (FISA) requires government agencies to delete irrelevant and personally identifying data before providing it to other agencies. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 16. Sherry, a 12-year-old, visited a website that wanted to know her family size, her parents' educational level, and her weekly allowance. The site also asked Sherry's name, mailing and email addresses, and age. a. Under COPPA, the website must disclose how it will use the information it acquires from Sherry. b. COPPA prohibits the internet operator from collecting such information under any circumstances. c. COPPA does not apply to Sherry's situation since she is over the age limit for those protected by the statute. d. Under COPPA, the website may only collect information about Sherry's name and email address.

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Chap 10_9e_Standard 17. The law that protects the privacy of medical records is called the a. Children’s Online Privacy Protection Act of 1998 (COPPA). b. Health Insurance Portability and Accountability Act (HIPAA). c. Foreign Intelligence Surveillance Act (FISA). d. Electronic Communications Privacy Act of 1986. 18. . What is user-generated content? a. commercial transactions conducted electronically on the internet b. unsolicited commercial email c. anything created and made publicly available by end users d. large data sets that reveal user patterns, trends, and association 19. The case of Chaney v. Fayette County Public School District held that a. when someone shares a photo with friends online, they cannot justifiably expect that the photo will be kept private. b. the Fourth Amendment governs the private sector as well as actions taken by the government. c. wiretap laws protect all speakers, not just those with a reasonable expectation of privacy. d. so-called "revenge porn" posted on social media is protected speech by the First Amendment. 20. The Electronic Communications Privacy Act includes a. the Foreign Intelligence Surveillance Act. b. the Wiretap Act and the Stored Communications Act. c. the Health Insurance Portability and Accountability Act. d. the Family Educational Rights and Privacy Act. 21. Data disposal laws require a. businesses to destroy customer data and maintain reasonable security procedures to guard against theft. b. senders of promotional emails to offer an opt-in system to recipients. c. companies to obtain permission from customers before destroying data older than ten years old. d. businesses to notify individuals who are affected by any incident that results in unauthorized access of data. 22. Burns Medicine Shop developed a website where customers could ask the pharmacists questions and could refill prescriptions online. What statute requires Burns to have and disclose a privacy policy to anyone using the website? a. the Federal Trade Commission Act b. the Electronic Communications Privacy Act c. the Fair Information Practices Act d. No statutes presently require websites to have or disclose a privacy policy.

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Chap 10_9e_Standard 23. Spam, officially known as unsolicited commercial email or unsolicited bulk email, a. is regulated by Section 5 of the FTC Act. b. accounts for about 55 percent of all email traffic. c. is estimated to be fraudulent in content or packaging in approximately one-fourth of all cases. d. although annoying, does lower the cost of connecting to the internet. 24. Which of the following is a true statement regarding the EU General Data Protection Regulation? a. It defines data only as information that can be used directly to identify an individual. b. It applies only to companies located within Europe. c. It allows people to stop companies from processing their personal data. d. It allows businesses to keep customer data indefinitely. 25. Which of the following statutes requires that commercial email not have deceptive headings and clearly indicate if the email is an advertisement? a. ECPA b. CDA of 1996 c. Section 5 the FTC Act d. CAN-SPAM 26. Which statement regarding FIPS is true? a. FIPS are only recommendations, not law. b. FIPS originated from the Department of Justice. c. FIPS has been ineffective in shaping privacy policies. d. FIPS was established after the 9/11 terrorist attacks. 27. Emily, an 11-year-old girl, wants to sign-up for a fashion newsletter and sweepstakes. In order to do so, the website wants to know Emily's name, address, phone number, and email address. Which of the following is correct? a. Emily must have permission from her parents in order to furnish the information to the website. b. Under the Children's Online Privacy Protection Act, the website cannot collect any of this information from Emily, even if her parents give her permission. c. Under Section 5 of the FTC Act, the website is protected from disciplinary action if Emily provides the requested information. d. The Electronic Communications Privacy Act will allow the website to collect Emily's information but restricts the website from sharing the information with other firms. 28. The Children's Online Privacy Protection Act (COPPA) prohibits internet operators from collecting information from children under what age without parental permission? a. 18 b. 16 c. 13 d. 10

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Chap 10_9e_Standard 29. Under the Electronic Communications Privacy Act, a. violators are subject to both criminal and civil penalties. b. violators may be subject to civil, but not criminal, penalties. c. only the unauthorized disclosure of email messages constitutes a violation. d. only the unauthorized interception of email messages by the government or an ISP constitutes a violation. 30. Which of the following protects email messages from unauthorized interception? a. CAN-SPAM b. FIPS c. ECPA d. COPPA 31. Musical Productions has a privacy policy posted on its website, but it does not follow the provisions contained within it. Musical Productions is in violation of a. the CAN-SPAM Act. b. the Communications Decency Act. c. Section 5 of the Federal Trade Commission Act. d. the Electronic Communications Privacy Act 32. What are some ways we lose our privacy in the digital world? a. through data breaches b. through surveillance c. via the internet of things d. All of these are correct. 33. You make an online purchase of a hooded sweatshirt with the logo of the Dallas Cowboys. The next time you log on, your screen has a banner ad for Dallas Cowboy hats and shirts. This banner ad is most likely the result of a. data mining. b. a coincidence. c. the internet crime of theft of private information. d. encryption software. 34. Which of the following is NOT a core principle of the Fair Information Practices (FIPS)? a. notice/awareness b. choice/consent c. privacy/refusal d. access/participation 35. Under what circumstances is intrusion into someone's private life a tort? a. under all circumstances based on the Fourth Amendment b. if a reasonable person would find it offensive c. only if it conflicts with the First Amendment d. only if the intrusion is substantially untruthful Copyright Cengage Learning. Powered by Cognero.

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Chap 10_9e_Standard 36. Which of the following regulates deceptive practices regarding a company's privacy policy? a. Section 5 of the FTC Act b. the federal COPPA c. the federal ECPA d. the FCC's privacy directive 37. Which of the following statements regarding the Foreign Intelligence Surveillance Act (FISA) is true? a. To spy on people located in the United States who are communicating abroad, the government needs a warrant. b. FISA was enacted in 1978, but its provisions were greatly strengthened in the aftermath of the 9/11 terrorist attacks. c. Under the FISA, the government does not need to notify defendants if the evidence being used against them in court was gathered in FISA surveillance. d. To spy on people located in the United States who are communicating abroad, the government must obtain permission from a secret Foreign Intelligence Surveillance Court. 38. The FTC regulates truth in advertising and endorsements. Its rules apply a. the notion that federal government remain a neutral party in deciding privacy law cases regarding the internet. b. the principle that internet service providers (ISPs) should not remain neutral in determining how information should flow on the internet. c. the notion that the First and Fourth Amendments should not be used in determining citizens' privacy rights regarding the internet. d. equally to bloggers, YouTubers, online reviewers, and others on social media. 39. A website printed some truthful, but secret, information about Danielle. Which of the following would likely result in a court ruling that Danielle had NOT stated a claim under the public disclosure tort? a. The excerpts the website printed were from Danielle's personal diary. b. The website disclosed that Danielle secretly hated her mother and father. c. The website printed that Danielle had participated in a robbery in 2010. d. The website's revelations were seen by over 50,000 viewers. 40. Under the Stored Communications Act, which of the following are considered electronic communication? a. voice mail b. email c. social media d. All of these are correct.

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Chap 10_9e_Standard 41. Daniel went onto an internet message board and found that his ex-wife, Faye, had posted a message calling him a fat, insensitive jerk who only cared about watching sports on TV. Does Daniel have any protection against Faye making such statements to a potentially large number of readers, some of whom may know Daniel and some of whom may not?

42. Discuss the liability of internet service providers (ISPs) under the Communications Decency Act of 1996 (CDA).

43. Explain the core principles in the Fair Information Practices (FIPS).

44. What provisions are commercial email subjected to under the CAN-SPAM Act?

45. Stuart is vying for a promotion but faces competition from a coworker, Brenda. Without authorization, Stuart accesses stored company records and discovers an unfavorable email message Brenda had written about the company. Stuart sends the message to his supervisor in hopes of keeping Brenda from getting the promotion. Discuss whether Stuart has violated any statute and, if so, what sanctions he may face.

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Chap 10_9e_Standard Answer Key 1. True 2. True 3. True 4. True 5. False 6. True 7. False 8. True 9. True 10. True 11. False 12. False 13. True 14. False 15. True 16. a 17. b 18. c 19. a 20. b 21. a 22. d 23. b 24. c 25. d 26. a

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Chap 10_9e_Standard 27. a 28. c 29. a 30. c 31. c 32. d 33. a 34. c 35. b 36. a 37. d 38. d 39. c 40. d 41. Faye’s postings have First Amendment protection of free speech, as long as Faye does not commit defamation. Courts have tended to find that such statements are opinion, not fact, and therefore are protected speech. The fact that a statement may be offensive is not reason enough to suppress it. 42. Under the CDA, end users and anyone who simply provides a neutral forum for information (such as ISPs and website hosts) are not liable for content provided by someone else. Only content providers are liable. But to avoid liability, the ISP or website must not create or otherwise develop the content. Website operators are also liable for their broken contracts and promises. 43. There are four core principles of the FIPS. They are:

Notice/Awareness. Notice should be given before any personal information is collected. Choice/Consent. People should be able to control the use and destination of their information. Access/Participation. People should have the ability to view, correct, or amend any personally identifiable record about them. Integrity/Security. Information collectors must take reasonable precautions to ensure that the data they collect are accurate and secure.

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Chap 10_9e_Standard 44. Under the CAN-SPAM Act, commercial email: May not have deceptive headings (From, To, Reply To, Subject), Must offer an opt-out system permitting the recipient to unsubscribe (and must honor those requests promptly), Must clearly indicate that the email is an advertisement, Must provide a valid physical return address (not a post office box), and Must clearly indicate the nature of pornographic messages. 45. Stuart violated the Electronic Communications Privacy Act. This is a federal statute prohibiting unauthorized interception or disclosure of wire and electronic communications or unauthorized access to stored communications. The Act applies to electronic communication from email, cell phones, and social media. Stuart may be subject to both criminal and civil penalties for violating the Act.

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Chap 11_9e_Standard Indicate whether the statement is true or false. 1. Some of the elements of a contract are acceptance, consideration, legality, and capacity. a. True b. False 2. Under a contract, Danielle is required to paint a room with paint chosen by the homeowners, the Flynns. After Danielle paints the room according to the contract requirements, her duties under the contract are discharged. a. True b. False 3. Contracts for the sale of fabric, automobiles, computers, furniture, and paper clips would all be governed by Article 2 of the Uniform Commercial Code. a. True b. False 4. In a unilateral contract, one party makes a promise that the other party can accept only by actually doing something. a. True b. False 5. Quasi-contract is a possible remedy for an injured plaintiff. a. True b. False 6. The element of a contract that states the parties must be adults of sound mind is consent. a. True b. False 7. Lucy and Rick sign a contract in which Lucy agrees to deliver 10 boxes of chocolates in exchange for Rick's promise to pay $5 per box. Lucy delivers the candy. Rick pays for the goods. This contract is fully executory. a. True b. False 8. Mary goes into Honest Harry's Electronics and purchases a TV. Mary agrees to pay for the TV in 30 days on the store's "30 days same as cash" plan. This is an executory contract. a. True b. False 9. Alex promises to pay $100 to anyone who finds his lost watch. Kate finds and returns the watch to Alex after hearing of the reward money. Alex and Kate have an enforceable unilateral contract. a. True b. False

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Chap 11_9e_Standard 10. Valerie promises Teresa that she will pay Teresa $75 if Teresa will clean Valerie's house by noon on Saturday. If Teresa cleans the house by noon on Saturday and Valerie pays the $75, then this is an implied, bilateral, executory contract. a. True b. False 11. When promissory estoppel is used by the courts, it is because there is NOT an enforceable contract present. a. True b. False 12. Robert offers to buy a car from Jane for $400. Jane must accept this offer in order to form an enforceable contract. a. True b. False 13. One purpose of contract law is to determine which agreements are worthy of legal enforcement. a. True b. False 14. A valid contract can legally be voided by either party. a. True b. False 15. Paid surrogacy contracts are viewed by the legislative majority in all states as immoral and illegal. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 16. Tim sent an email to Belinda offering to sell his car to her for $5,000. Belinda texted Tim back offering to pay $4,000 for the car. A valid contract did not exist because a. Belinda should have accepted Tim's offer orally. b. consideration was not present in the negotiations. c. the contract was not for a lawful purpose. d. Belinda did not accept Tim's offer; she is still negotiating. 17. Miles purchased a lawnmower with an attached warning that said, "The manufacturer is not responsible in the case of an injury caused by the lawnmower." If Miles is injured because of a defect in the mower and sues the lawnmower manufacturer, he will most likely a. lose, as he agreed to not hold the lawnmower manufacturer liable. b. lose, as he assumed the risk. c. win, as this warning would be unenforceable. d. win, as all lawnmower manufacturers are strictly liable.

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Chap 11_9e_Standard 18. Robert, a minor, buys a stereo from Jane for $200. State law allows a minor to disaffirm contracts within a reasonable time after turning 18. Robert disaffirms the contract the day after turning 18 and returns the stereo. a. This contract was a valid contract, Robert cannot disaffirm. b. This contract was a voidable contract, Robert can disaffirm. c. This contract was a void contract. d. This contract was unenforceable because it needed to be in writing to be enforceable. 19. Larry goes to his barber who has cut his hair for the past several years. The barber proceeds to cut his hair as they talk about the most recent snow storm to hit the area. This is an example of a a. unilateral, implied contract. b. bilateral, implied contract. c. unilateral, express contract. d. bilateral, express contract. 20. Courts may award damages called quantum meruit, which means a. "as much as he deserves." b. "to the letter of the law." c. "let the buyer beware." d. "something for something." 21. When Myrtle comes home from work one evening, she finds that her yard has been mowed and trimmed. Later, a man comes to collect for the yard work done. Myrtle refuses to pay for the work since she has never seen the man before and did not hire him to do her yard work. Which of the following answers is most accurate? a. This is an implied, unilateral contract and she must pay the price requested by the man. b. This is an express, voidable contract that either party may avoid. c. The court would order Myrtle to pay the reasonable value of the yard work because of the benefit conferred on her. d. Myrtle would not have to pay for the yard work. 22. Which of the following is NOT required to establish promissory estoppel? a. a promise made by the defendant b. a promise made by the plaintiff in response to the defendant's promise c. reliance on the defendant's promise d. All of these are required. 23. As English judges were developing the common law of contracts in the twelfth and thirteenth centuries, a. most promises were found to be enforceable. b. promises were found not binding unless written and sealed. c. the term “contract” became common. d. changes in the law occurred rapidly.

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Chap 11_9e_Standard 24. What element of a contract refers to both parties receiving some measurable benefit? a. consideration b. capacity c. consent d. legality 25. Mike made the following offer to Mick: "I will pay you $500 if you agree to paint my house." Mick replied that he would. At this point, the contract is an a. executed, bilateral, express contract. b. executory, bilateral, implied-in-law contract. c. executed, unilateral, express contract. d. executory, bilateral, express contract. 26. Which of the following types of property would be considered "goods" under the Uniform Commercial Code? a. a promissory note b. a stock c. a patent d. a computer 27. Jerry offers to shovel the snow from Ben's driveway for $35. Ben replies "OK." This is an example of a. an implied, unilateral contract. b. an express, unilateral contract. c. an implied, bilateral contract. d. an express, bilateral contract. 28. Walter enters a dentist office and points to a damaged tooth. The dentist, Matt, treats the tooth. If Walter refused to pay and Matt sued, a. Walter would win as there was no contract. b. Walter would win because of the UCC. c. Matt would win; this is an implied contract. d. Matt would win in quantum meruit. 29. Which of the following represents a unilateral offer? a. "I will pay you $50 if you mow my lawn." b. "I will pay you $50 if you promise to trim that tree." c. "I will pay you $50 for your CD player." d. "I will pay you $50 for your backpack." 30. The courts will find an implied contract when a. justice demands it. b. conduct of the parties indicates they intended an agreement. c. there is promissory estoppel. d. there is undue influence. Copyright Cengage Learning. Powered by Cognero.

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Chap 11_9e_Standard 31. Patty is a poor college student struggling to work and keep up with her studies. Fred, her uncle, promises to pay Patty support of $200 per month for the next six months. Although Fred did not ask her to, she quits her current job in order to devote full time to her studies for the next six months. Fred makes one payment and then stops with no explanation. If Patty sues, what is the likely result? a. Fred would win, as he did not ask Patty to quit her job. b. Patty would win, as a contract was formed when Fred promised to pay her the support. c. Fred would win, as family members cannot sue each other for breach of an oral promise. d. Patty may win under the doctrine of promissory estoppel. 32. Jennifer has offered to sell her laptop computer for $500 to Jack. She tells Jack that the computer is only six months old but, in fact, it is three years old, and Jennifer wants to unload the lemon. Jack agrees to buy the computer based on Jennifer's representations. This contract is a. a void agreement because of the fraud involved. b. a voidable contract, one that Jack can void. c. a voidable contract, because it is unilateral. d. a void contract because of the UCC. 33. One of the factors leading courts away from a laissez-faire approach to contract law was a. the movement away from requiring written contracts with a seal affixed. b. a change in relative bargaining power between parties to contracts. c. the assumption that promises are not legally significant. d. the assumption that parties had freedom to contract and would have to live with the consequences. 34. An agreement in which parties intend to form a valid bargain, but a court declares that some rule of law

prevents enforcing it is called a. a void agreement. b. a voidable contract. c. an unenforceable agreement. d. a quasi-contract. 35. What type of contract is a possible remedy for an injured plaintiff in a case with no valid contract, when the plaintiff can show benefit to the defendant, reasonable expectation of payment, and unjust enrichment? a. an express contract b. an implied contract c. a quasi-contract d. a unilateral contract 36. Noncompetition agreements are a. more common today than they were in the past, although policy issues they raised in the 1700s have never gone away. b. now illegal, as they violate antitrust laws. c. infrequently litigated. d. relatively recent developments, first used following the Great Depression in the United States. Copyright Cengage Learning. Powered by Cognero.

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Chap 11_9e_Standard 37. Madison purchases several 50-pound bags of mulch at the local gardening store. An employee carries the bags of mulch to Madison's truck and loads them into the back for her. Will Article 2 of the UCC govern the contract in this situation? a. No, this is a mixed contract because Madison is paying for both goods and labor. b. Yes, because the primary purpose of this contract is the sale of goods. c. No, this is an express contract because both parties explicitly state their intentions. d. Yes, because Article 2 of the UCC governs all bilateral contracts. 38. . Which of the following is an example of an implied contract? a. Alberto visits his physician to be treated for a sinus infection. They do not discuss payment, but the following week Alberto receives a bill from his physician for services rendered. b. Midori offers to sell a necklace to Patricia for $50; Patricia agrees to pay $50 for the necklace. c. Amy tells her neighbor Tom, "If you rake up my leaves, I'll make you a batch of brownies." Tom accepts the offer. d. Miguel wants to purchase his first home. When he found the perfect place, he signed a contract for purchase and closed on the home within a month. 39. The basic distinction between an executory contract and an executed contract is that a. one is enforceable, the other is not. b. only one promise is involved in an executory contract. c. one is legal, the other is not. d. all parties have fulfilled their obligations in an executed contract. 40. An express contract a. must be in writing. b. may be inferred by the conduct of the parties involved. c. has both parties setting forth their intentions. d. is not valid in many states.

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Chap 11_9e_Standard 41. Preferred Contractors was a general contractor and owner of a condominium complex that was under construction. Barrett, a subcontractor, had been hired by Henderson Plumbing, another subcontractor, to help it complete the plumbing work on the project. When Henderson began using shoddy installation procedures and subsequently fell behind the scheduled completion time for the project, Preferred Contractors urged Barrett to correct Henderson's mistakes and to finish the job. Barrett refused to continue until he knew who would pay him, since he feared Henderson's financial position was shaky. Nonetheless, Preferred Contractors’ job superintendent told Barrett to go ahead even if Barrett and Preferred Contractors had no contract because "he would use his influence to try to help Barrett get his money." Barrett finished the work and sent a $7,500 bill to Henderson, which was never paid. When Barrett later sent the bill to Preferred Contractors, these facts emerged: Preferred Contractors told him that due to Barrett's failure to notify Preferred Contractors promptly of Henderson's non-payment, Preferred Contractors had already paid Henderson in full and therefore would not pay twice for the work. Discuss the best possible theory of recovery Barrett may argue.

42. Discuss the requirements of promissory estoppel.

43. List and briefly describe the seven key characteristics that must be present for a contract to be enforceable.

44. ACME, Inc. is a software producer that entered into a verbal agreement with XYZ Corporation wherein XYZ agreed to buy ACME's newly developed software. The agreement also provided that ACME would supply training personnel, as well as technical personnel, to work with XYZ employees in installing and learning the software. What law governs this agreement?

45. Briefly discuss the meaning of bilateral, unilateral, executory, and executed contracts.

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Chap 11_9e_Standard Answer Key 1. True 2. True 3. True 4. True 5. True 6. False 7. False 8. False 9. True 10. False 11. True 12. True 13. True 14. False 15. False 16. d 17. c 18. b 19. a 20. a 21. d 22. b 23. b 24. a 25. d 26. d

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Chap 11_9e_Standard 27. d 28. c 29. a 30. b 31. d 32. b 33. b 34. c 35. c 36. a 37. b 38. a 39. d 40. c 41. Barrett's best theory for recovery is quasi-contract. Barrett will need to show three elements: 1) Barrett gave some benefit to Preferred Contractors. 2) Barrett reasonably expected to be paid for the benefit and Preferred Contractors knew this. 3) Barrett must show that he should receive the reasonable value of the services in order to avoid the unjust enrichment of Preferred Contractors. Barrett should argue that Preferred Contractors’ business and financial well-being have been enhanced unjustly by his completion of the job. 42. Promissory estoppel is an equitable remedy that requires the plaintiff to establish that the defendant made a promise upon which the plaintiff relied and the only way to avoid injustice is to enforce the promise. This doctrine allows courts to enforce a promise even when there is no contract. 43. Offer. All contracts begin when a person or a company proposes a deal. Acceptance. Once a party receives an offer, he or she must respond to it in a certain way. Consideration. There has to be bargaining that leads to an exchange between the parties. Legality. The contract must be for a lawful purpose. Capacity. The parties must be adults of sound mind. Consent. Certain kinds of trickery and force can prevent the formation of a contract. Writing. While verbal agreements are often contracts, some types of contracts must be in writing to be enforceable.

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Chap 11_9e_Standard 44. You must first determine whether the contract is for a good or a service. The software involved here is considered to be a good, since "goods" means anything movable, except for money, securities, and certain legal rights. If the contract involves both goods and services, the court will look to see which element is the primary purpose. The UCC governs contracts for a sale of goods, while common law principles govern contracts for sales of services and everything else. Here the primary purpose of the contract is to sell the software. The services are merely to support the sale of the software. The UCC would probably control. 45. In a bilateral contract, both parties make a promise to do something. In a unilateral contract, one party makes a promise that the other party can accept only by actually doing something. A contract is executory when it has been made but one or more parties have not yet fulfilled their obligations. A contract is executed when all parties have fulfilled their obligations.

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Chap 12_9e_Standard Indicate whether the statement is true or false. 1. According to the UCC, one or more open terms will not cause a sales contract to fail for indefiniteness as long as the parties intended to make a contract and there is a reasonably certain basis for the court to determine the open terms. a. True b. False 2. Software clickwrap agreements have been found by the court to be binding on the consumer. a. True b. False 3. Nunnsky’s Retail sent out newspaper inserts advertising wool suits for $50. In fact, the store had only two, outof-style suits for sale at this price. Their other wool suits started at $175. This constitutes bad faith in its advertising, so consumers may have protection through state consumer protection statutes. a. True b. False 4. In an option contract, the offeror may not revoke an offer during the option period. a. True b. False 5. On Monday, Mick puts an offer in the mail to Sheri to sell his guitar for $50. Monday night when jamming with his buddies, he decides he will really miss his old guitar and has second thoughts about selling it. Tuesday morning, he puts a revocation in the mail informing Sheri he has changed his mind and the guitar is no longer for sale. The revocation is effective even if Sheri sent an acceptance on Monday night. a. True b. False 6. Nella offers to sell her crop of strawberries, which have just been picked, to Morgan’s Market. Since Nella does not specify a time limit for acceptance, Morgan’s can accept the offer at any point in time. a. True b. False 7. A letter of intent summarizes progress made during business negotiations, but more importantly, it creates a binding contract. a. True b. False 8. Revocation is the withdrawal of an offer by the offeror. a. True b. False 9. If the offer does not specify a type of acceptance, the offeree may accept in any reasonable manner and method. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 12_9e_Standard 10. The mirror image rule requires that only notification is required to accept an offer. a. True b. False 11. Candy, Inc. signed an agreement with Sweet Plantation. Under the contract, Candy, Inc. agreed to purchase all the sugar cane Sweet Plantation grew during the coming season for $0.16 per pound. This contract will be unenforceable due to its vagueness. a. True b. False 12. You have placed an antique sofa up for auction, and the auctioneer has not made any special announcements about the sale. You can withdraw the sofa at any time before the auctioneer closes the sale by announcement or by the fall of the hammer. a. True b. False 13. If an offer does not specify a type of acceptance, the offeree may accept in any reasonable manner and

method. a. True b. False 14. Vick Valve Company makes valves for plumbing fixtures. At the beginning of the year, it sends out a price list addressing each one, "To our valued customers." Honest Hank Hardware orders a variety of valves at the prices quoted on the price list. Vick Valve must honor the prices on the list and sell the valves to Honest Hank. a. True b. False 15. When Olga asks Sven if he wishes to sell his Harley motorcycle, he replies that he would not sell it "for less than $2,000." Olga replies, "I accept," and hands him $2,000. A contract exists. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 16. If an offer specifies no time limit in which to accept, a. the offeree has 30 days to respond. b. the offeree has 10 days to respond. c. the offer is not valid and therefore it does not matter when the offeree responds d. the offeree has a reasonable period during which to accept 17. Which of the following offers are considered to be irrevocable for a given period? a. firm offers b. option contracts c. a writing signed by a merchant offering to hold open an offer for the sale of goods for a stated period d. All of these are correct. Copyright Cengage Learning. Powered by Cognero.

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Chap 12_9e_Standard 18. Travel Lines offered to sell 10 round-trip tickets to Elaine. Travel Lines stated that the acceptance must be in writing by USPS next-day service. Which of the following acceptances will create a contract between Travel Lines and Elaine? a. Elaine calls Travel Lines and states that she will buy the tickets. b. Elaine sends a fax to Travel Lines stating she will buy the tickets. c. Elaine sends a letter by USPS next-day service to Travel Lines stating that she will buy the tickets. d. All of these responses will create a contract between Travel Lines and Elaine since they constitute reasonable means of communication. 19. Which of the following scenarios describes an offer? a. Luther says to Consuela, "My son needs tutoring in Spanish. I'd like you to come to my home on Monday and Wednesday nights beginning next week for two-hour sessions, and I'll pay you $40 per hour. I'd like you to tutor him for the next three months." b. Raoul asks Wendy if she would be willing to sell her first-edition copy of War and Peace. Wendy replies, "I couldn't possibly part with that book for less than a couple thousand dollars." c. KD Lamp Company sends out a catalog to customers that lists prices for various types of light bulbs. d. Nestor places an antique pocket knife, which he inherited from his father, up for auction. He tells the auctioneer that he hopes to get at least $250 for the knife 20. Noah tells Ivy he is willing to sell his comic book collection to her for $100. Ivy says no, she would rather save her money to buy a new cell phone. What just happened? a. termination by expiration b. termination by rejection c. termination by revocation d. termination by operation of law 21. Jack mails an offer to Joan that states, "I offer to sell you my car for $2,000. If I don't hear from you in 10 days, I will assume you are willing to buy the car for the stated price." Jack hears nothing by the deadline and assumes he has a deal. What is the result? a. Jack has a deal. His offer was intended and contains definite terms. b. Jack has a deal. Joan should have responded saying she is not interested in the car if she didn't want to be bound to the offer.. c. Joan is not bound. Generally, an offeree must say or do something to accept an offer. d. Joan is not bound. Ten days is not a reasonable amount of time to consider the offer and accept by mail 22. What is the best definition of the mailbox rule? a. Acceptance of an offer must be on precisely the same terms as the offer. b. Users must agree to certain terms and conditions prior to using the product or service. c. Acceptance of an offer is generally effective upon dispatch; terminations are effective when received. d. Courts follow certain practices when parties to an agreement fail to make provisions for a particular matter.

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Chap 12_9e_Standard 23. Dick offers to sell Jane his 1955 Thunderbird convertible. Before Jane can accept the offer, lightning strikes the car and it is totally destroyed. Which of the following is true? a. Jane can still accept the offer and John must find a 1955 Thunderbird to sell. b. The offer is terminated by law. c. Dick can still revoke his offer so long as he does so before Jane accepts. d. Jane can still accept the offer. She will be entitled to the insurance proceeds. 24. The intent of the offeror to extend an offer to the offeree is generally determined by reference to a. the beliefs of the offeror b. the subjective intention of the offeror. c. the assumptions of the offeror d. the words and conduct of the offeror 25. Which term refers to whether an offeree accepts an offer? a. manner of acceptance b. method of acceptance c. definiteness d. intent 26. Oxtron, Inc. sent the following price list to its customers. Dispensers: SBC-500J

$670.00

True TDD-1

$875.00

True TDD-2

$1,465.00

True TDD-3

$1,515.00

CO2 Tank and Regulator

$150.00

Which statement is correct? a. These price quotes would generally be considered offers. b. These price quotes would generally not be considered offers. c. These price quotes would generally be considered output contracts. d. These price quotes would generally be considered requirements contracts. 27. A seller’s form clearly states no warranty is included. The buyer’s form states that the seller warrants the goods for one year. In this case, a. no contract can be created. b. the warranty term is a “different term,” and the majority of states hold that a contract can be formed but the contradictory terms cancel each other out. c. the warranty term is an “additional term” that becomes part of the contract in most states. d. the warranty term is a “different term,” which in most states becomes part of the contract unless the seller promptly objects.

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Chap 12_9e_Standard 28. If Morales and Rolfes Supply negotiate for the purchase and sale of a supply of fuel for a three-year period for Morales’ business, a. the contract may indicate a method for determining the price, without stating a definite price. b. Morales and Rolfes must depend on the UCC’s gap-filler provisions to determine a price since the fuel is a “good” covered by Article 2 of the UCC. c. the contract price must remain the same for the entire three-year contractual period. d. their contractual requirements regarding definiteness would be the same under the UCC and the common law. 29. . Collector Carl displays his beer can collection at the local swap meet. Mary sees the collection and is interested in buying it. Carl says he will sell the collection for $1,500. Mary says she really likes the collection but is only willing to pay $1,000. Which of the following is correct? a. Mary's counteroffer terminates Carl's offer of $1,500. b. If Carl rejects Mary's counteroffer, she can still accept Carl's offer of $1,500. c. Neither offer is valid. Who would ever pay $1,000 or $1,500 for a beer can collection? d. Mary's offer is an option contract and she cannot revoke the offer. 30. Bob signed an agreement with Joe under which Bob agreed to purchase all the hay that Joe grew during the coming growing season. This contract will be a. unenforceable due to its vagueness. b. unenforceable due to the difficulty of devising an appropriate remedy for a breach. c. enforceable as long as both parties act in good faith and Bob doesn't suddenly demand more hay than what was reasonably estimated. d. unenforceable unless state real estate law makes an exception. 31. Floyd offers to sell his 1967 Ford Mustang convertible to Tim. Before they conclude their negotiations, Floyd dies. Which of the following is true? a. Floyd's heirs must sell the car to Tim. b. Floyd's heirs must continue to negotiate the offer and sell the car, if a reasonable price can be determined. c. The offer terminates automatically upon Floyd's death. d. There is a contract if Tim accepts before learning of Floyd's death. 32. Seth told the salesperson at Outdoor Times that he wanted the sleeping bag that was advertised in the Sunday paper; one that would keep him comfortable if the temperature drops to 10 degrees Fahrenheit. The salesperson told Seth they were sold out of that bag, but there were two other styles that would meet his needs and were the same price. Seth insisted he wanted the advertised bag and threatened to sue for breach of contract. Which is true? a. Outdoor Times is guilty of “bait and swap.” b. Seth will prevail in his case, as Outdoor Times is responsible for having sufficient stock of advertised items. c. Seth will not prevail, as the advertisement was simply a request for offers. d. Outdoor Times must provide Seth with a raincheck, ensuring he can buy the same bag at the sales price at a later date.

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Chap 12_9e_Standard 33. Which of the following is outlawed by consumer protection statutes? a. false advertising b. clickwrap agreements c. termination by expiration d. browsewrap agreements 34. Wally owns 200 acres of land. Wally offers to sell the land to Robert for $1,500 per acre. Robert replies that he does not need 200 acres of land but would like to buy 40 acres at $1,500 per acre. Wally agrees to sell but does not identify which 40 acres. Later, Wally refuses to sell any land to Robert. What is the result? a. Robert wins; this is an enforceable contract with complete and definite terms. b. Robert wins; the UCC will decide which 40 acres are to be sold c. Wally wins; the original offer was not intended to be an offer but merely an invitation to negotiate. d. Wally wins; this agreement is too indefinite since it does not identify which 40 acres are to be sold. 35. John owns a thoroughbred horse named Prince Charming that just ran in the Kentucky Derby. Prince Charming came in last, much to John's frustration and embarrassment. John exclaims in a loud voice, "I'm selling that horse to the first person who hands me $100!" John has a. made an offer to anyone within hearing distance and will be bound by his offer to the first person who produces $100. b. made a firm offer and will be bound by his offer for a reasonable period of time. c. made an acceptance to the first person who can produce $100. d. not made an offer because under the circumstances, a reasonable person would not conclude that John had intent to make an offer. 36. What does it mean if an auction is with reserve? a. Unless otherwise stated, the auctioneer has the right to withdraw the item before the fall of the hammer. b. The auctioneer must sell to the highest bidder. c. Even after the fall of the hammer, the auctioneer can accept other bids d. The items for sale have a minimum price. 37. Acme Co. offers to buy 1,000 widgets from Widget World Co. The written offer provides for 1,000 at $10 per widget, to be delivered May 1. The offer has no other provisions. Widget World sends a written acceptance. However, the acceptance also states that if any claim arises under this contract, Widget World must be notified within 10 days. Acme does not object to this provision. Both parties are merchants. Which of the following best describes this situation? a. No contract exists. The purported acceptance contains additional terms, so it is a counteroffer, which has not been accepted. b. No contract exists. The terms materially alter the original offer. c. A contract exists. The additional terms are not material; they are part of the contract. d. A contract exists, but the additional terms are not part of the contract no matter what.

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Chap 12_9e_Standard 38. Jaime offered to buy Kevin's bike. Jamie is the a. offeree. b. offeror. c. mortgagor. d. trustee. 39. Which of the following are generally considered to be legal offers? a. placing an item up for auction b. catalog advertisements c. price lists d. a note scribbled on a restaurant napkin that includes the details of the offer 40. Jerry knows that Lucy has coveted his classic car for quite some time. Finally, willing to sell it, he sends a letter to Lucy offering to sell the car for $15,000. Lucy responds by saying she needs time to arrange financing. Lucy offers Jerry $100 to keep the offer open for two weeks. Jerry agrees, taking the $100. Three days later, Roberta contacts Jerry saying she is interested in buying the car and has the cash to buy it outright. Jerry is concerned that if he doesn't sell the car to Roberta now, she may not be interested later. Furthermore, Lucy may never be able to arrange financing. Jerry is afraid he may end up with no buyer at all. He comes to you for advice. What do you advise?

41. Discuss the effect of the Uniform Commercial Code on the law of sales contracts in the area of open terms.

42. What elements are necessary for an offer to be valid? Give two examples of no offers.

43. Briefly discuss how an offer can be accepted. Include in your answer the application of the mirror image rule.

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Chap 12_9e_Standard 44. McCann Construction purchased a poured concrete form from Advance Concrete Forms, Inc. McCann purchased the concrete form by placing a phone call to Advance in Madison, Wisconsin. Advance delivered the concrete form with an invoice stating the terms of the sale required payment within 30 days and a 1.5 percent interest per month finance charge would be charged on accounts over 30 days. When McCann failed to pay the invoice on time, interest was charged according to this rate. Later, McCann refused to pay the accumulated interest charge, claiming there was not a meeting of the minds regarding the finance charge in any conversation prior to the sale. The trial court concluded that the finance charge was in fact an additional term added by Advance when it accepted McCann's purchase order. Discuss Uniform Commercial Code Section 2-207 in general and with regard to this situation. Does McCann owe the interest accrued?

45. Spangel Fashions sends out its spring and summer catalog to Cindy. Cindy falls in love with the cute dress featured on the front cover of the catalog. When Cindy calls to order the dress, she is informed that the company has sold out of the dress. Cindy is upset and claims that the store is in breach of contract. She argues that the catalog presented an offer, which she accepted when she called to order the dress. Is Cindy correct? Why or why not?

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Chap 12_9e_Standard Answer Key 1. True 2. True 3. True 4. True 5. False 6. False 7. False 8. True 9. True 10. False 11. False 12. True 13. True 14. False 15. False 16. d 17. d 18. c 19. a 20. b 21. c 22. c 23. b 24. d 25. a 26. b

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Chap 12_9e_Standard 27. b 28. a 29. a 30. c 31. c 32. c 33. a 34. d 35. d 36. d 37. c 38. b 39. d 40. Jerry made an option contract with Lucy. This means that Lucy "bought" the right to have the offer held open. Jerry's offer may not be revoked during the two-week option period. 41. The UCC makes the law of sales more flexible. Negotiations with open terms may create a binding agreement under the UCC even though the same negotiations under the common law would not have created a contract. UCC Section 2-204(3) states, “Even though one or more terms are left open, a contract does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.” The UCC will not create a contract where the parties never intended to create one. A contract may state a method for determining missing terms, but if it does not, the UCC contains “gap-filler” provisions or rules for supplying the missing terms. 42. An offer is an act or statement that proposes definite terms and permits the other party to create a contract by accepting those terms. First the offeror has to intend to make a bargain. Second the terms of the offer need to be definite. Invitations to bargain, price quotes, letters of intent, advertisements, and items on the auction block are generally not offers. 43. When there is a valid offer outstanding, it remains effective until it is terminated or accepted. An offeree accepts by saying or doing something that a reasonable person would understand to mean that he definitely wants to take the offer. It is important to note that the offeree must say or do something to accept. It need not be a formal acceptance: for example, if Grace offers to sell Janie her accounting textbook for $50, Janie does not have to say "I accept your offer." She can accept by simply saying "I'll take it," or "It's a deal." Janie does not even need to speak. If she hands Grace $50, she also accepts the offer. The common-law mirror image rule requires that acceptance be on precisely the same terms as the offer. If the acceptance contains terms that add or contradict the offer, even in minor ways, courts generally consider it a counteroffer. UCC Section 2-207 has modified this rule for the sale of goods by providing that an acceptance that adds different or additional terms will often create a contract.

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Chap 12_9e_Standard 44. Yes, he does. According to UCC 2-207, an offeree who accepts may include in the acceptance terms that are additional to or different from those in the offer. It says that between merchants, an additional term becomes part of the contract unless the proposal meets one of the following exceptions: 1) the original offeror insisted on its own terms; 2) the additional terms materially alters the original offer; or 3) the offeror receives the additional terms and promptly objects to them. 45. No. Advertisements, price lists, and catalogs generally are not offers. Cindy submitted the offer and the store would have accepted the offer if the merchandise had been in stock. As long as Spangel Fashions is not violating any consumer protection statutes, it has no liability here.

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Chap 13_9e_Standard Indicate whether the statement is true or false. 1. Section 2-306 of the UCC expressly disallows output contracts in the sale of goods. a. True b. False 2. Contracts in which one party agrees in good faith to buy all his requirements of certain goods from the other party are generally unenforceable because there is no definite amount. a. True b. False 3. The two basic elements of consideration are intention and agreement. a. True b. False 4. Agreeing not to open a competing business could be consideration. a. True b. False 5. Denton agreed to build a cedar deck for the Thrashers for $7,000. After he began the work, the Thrashers asked him to add cedar flower boxes at one side. Denton replied he would, but it would cost an additional $600. In this case, the Thrashers would not be obligated to pay the additional sum because the original agreement already obligated Denton to complete the deck for $7,000. a. True b. False 6. A promise to do (or not do) something in the future counts as consideration. a. True b. False 7. A completed act can be the basis for consideration. a. True b. False 8. Billy owes a liquidated debt of $3,000 to Rayna, his personal weight trainer. Billy sends Rayna a check for $300 on which he has marked, "Payment in Full." If Rayna cashes the check, she will NOT be able to successfully sue Billy for the remainder of the debt. a. True b. False 9. A forbearance is, in essence, the opposite of an act. a. True b. False

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Chap 13_9e_Standard 10. An illusory promise is valid consideration. a. True b. False 11. The UCC requires consideration for agreements modifying contracts for the sale of goods. a. True b. False 12. A debt that is disputed because the parties disagree over its existence or amount is an unliquidated debt. a. True b. False 13. Consideration is the inducement, price, or promise that causes a person to enter into a contract and forms the

basis for the parties’ exchange. a. True b. False 14. Pastor Tom was employed by the First Church for 40 years. On Pastor Tom's retirement, there was no adequate pension plan. Two months after the retirement, a wealthy parishioner, in consideration for Pastor Tom's 40 years of faithful service and for being such a "sweet" man, promised to pay him $500 per month for the rest of his life. This promise probably is not enforceable. a. True b. False 15. Hilda owes Lex $3,000, which is an undisputed amount. If she offers him her car in full settlement of the debt and he accepts, the agreement is binding and he can no longer claim she owes him anything on the original debt. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 16. Bernie owes an undisputed amount to Wilde’s Heating & Air Conditioning. Which of the following is true? a. If Wilde’s agrees to accept less than the full amount as full payment, the agreement is not binding. b. The undisputed amount is also known as an unliquidated amount. c. If the parties agree to settle for less than the full amount, their agreement is governed by the ruling in Henches v. Taylor. d. If Wilde’s agrees to accept less than the full amount, the agreement is only binding if it is in writing and signed by Bernie.

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Chap 13_9e_Standard 17. Juan agrees to paint Michelle's house for $1,000. Halfway through the job, Juan tells Michelle that he will need an extra $250 to finish the job. Which of the following is a correct evaluation of the situation? a. Michelle will have to pay because she and Juan did not have a bargained-for exchange. b. Michelle will have to pay the extra $250 because Juan has promised not to finish the job unless she does. c. Michelle will not have to pay the extra $250 because Juan made an illusory promise about only charging $1,000. d. Michelle will not have to pay the extra $250 because Juan has a preexisting duty to paint the house for $1,000. 18. What phrase explains how a requirements contract can be valid? a. “will buy 100 percent of output” b. “willing to accept the entire quantity” c. “no consideration needed” d. “in good faith” 19. A promise by Derkin Restaurants to buy all of the produce it needs this next year at an established price from Elfredo's Produce would be an a. enforceable requirements contract. b. enforceable output contract. c. unenforceable illusory contract. d. unenforceable promise based on past consideration. 20. Mid-American Oil had a contract with NSB Company to supply 1,000 gallons of oil by September 1. The contract contained a provision that required all modifications to be written and signed by the company presidents. In early August, an executive of Mid-American talked with the purchasing agent of NSB who orally agreed to two shipments of oil; one in September and the second one in December. By September 30, when only 500 gallons had been delivered, NSB sued. The likely outcome of this lawsuit is a. NSB wins because the modification was not supported by new consideration. b. NSB wins because the modification has to be in writing. c. Mid-American Oil wins because the UCC governs this case and no new consideration is required. d. Mid-American Oil wins because new consideration was present. 21. Regarding consideration, an act occurs when a person a. complies with the law. b. fulfills an obligation under an existing contract. c. does something not legally required. d. All of these are correct.

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Chap 13_9e_Standard 22. In January, Alex promised to pay Y-K Inc. $5,000 if it would refrain from filing suit against him on a breach of contract action. Y-K agreed and accepted a $5,000 check from Alex. Which of the following statements is correct? a. Y-K's promise to refrain from suing Alex was not supported by legal consideration. b. Y-K's promise to refrain from suing Alex was supported by legal consideration and is enforceable. c. This is an accord and satisfaction, and Y-K cannot sue. d. The courts would apply promissory estoppel in this situation. 23. A liquidated debt is one in which a. the debtor is unable to pay. b. there is no dispute about the amount owed. c. the parties dispute whether any money is owed. d. there is disagreement about the amount owed. 24. Marco agrees to sell Clowns R Us some balloons. The contract states that Clowns may buy as many balloons as it wishes. This agreement is a. a requirements contract. b. an output contract. c. an illusory contract. d. an enforceable contract. 25. If Becky promises not to drink alcohol until she becomes a legal adult in exchange for Ben's promise of $1,000, the agreement is a. enforceable because Becky is giving up the right to do something she would otherwise be entitled to do. b. enforceable because the agreement accomplishes Ben's goal of keeping Becky from drinking. c. not enforceable because Becky does not have a legal right to drink alcohol. d. not enforceable because Becky is a minor and could disaffirm the contract. 26. Jamie is building a house on her lot. She invites Earnie of Earnie's Excavation to bid on the excavation job. Earnie observes that the lot next to Jamie's is also under excavation and the soil in that lot is normal and not excessively rocky. Based on the assumption that the soil in Jamie's lot will be similar, he and Jamie agree that the excavation will cost $3,000. When Earnie starts digging, he learns there is solid rock under Jamie's lot. Earnie says it will cost an extra $2,500 for the excavation work. Jamie agrees just to get the job done but later refuses to pay a dime more than $3,000. If Earnie sues, the most likely result would be a. Jamie wins, as Earnie was under a preexisting duty to dig the basement. b. Earnie wins, as this modification is governed by the UCC and consideration is not required to enforce a modification of the agreement. c. Jamie wins, as Earnie was not acting in good faith and just wanted to put Jamie in a situation where she didn't have a choice but to agree to more money. d. Earnie wins, as the modification was due to unforeseen difficulties.

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Chap 13_9e_Standard 27. Zero, Inc. agreed to build Millie a storage building for $8,000. After beginning the project, Zero realized that it could not complete the job and make a profit. Zero demanded $9,500 to complete the building. Millie agreed to pay the $9,500. When the project was complete, Millie tendered $8,000 to Zero for the job. If Zero sues Millie for the remaining $1,500, a. Zero will win because there was consideration for the additional $1,500. b. Zero will win because Millie had a preexisting duty to pay any additional amounts. c. Zero will lose because there was no legal consideration to support the additional $1,500. d. Zero will lose because the UCC does not require consideration to modify an existing contract. 28. Police Officer Paul apprehends a wanted criminal and then demands the $10,000 reward offered by Crime Stoppers. Which of the following statements is true? a. Police Officer Paul is not entitled to the reward because past consideration is never valid consideration. b. Police Officer Paul is entitled to the reward because he puts his life on the line every day. c. Police Officer Paul is not entitled to the reward because he was under a preexisting duty to make the arrest. d. Police Officer Paul is not entitled to the reward but may have an argument under promissory estoppel 29. An unliquidated debt can be described as a. a debt in which both its existence and amount is in dispute. b. a debt in which the existence or amount is in dispute. c. a debt disputed by the creditor but not the debtor. d. a debt undisputed by either party. 30. Bailey Co. and Spryt Bros. enter into a contract for the manufacture and sale of 400 lawn chairs. If both parties agree that a modification is necessary, a. the surest way to modify the contract is to liquidate it. b. they may not do so without court supervision. c. an agreement to rescind the contract will terminate the contractual rights of Bailey Co. and Spryt Bros. if neither of them had completed their obligations. d. courts will generally not enforce a cancellation and modification of a contract unless one party received inadequate consideration under the original contract. 31. Upon graduating from college, Kathy announced her plans to enter law school the following fall and to marry Rick in December. Kathy's father was afraid that marriage during her first year in law school might cause her to fall behind in her studies or cause her to drop out of school. He called Kathy and promised her $10,000 if she postponed her wedding until after completion of her first year of law school. Kathy agreed and postponed the wedding for a year. Kathy successfully completed her first year of law school, but soon thereafter, Kathy's father died. The administrator of her father's estate claimed she was not entitled to the $10,000 because there was no consideration for her father's promise. If Kathy sues the estate, she will probably be a. unsuccessful because her father's death terminated the contract. b. successful because there was consideration. c. unsuccessful because her father received no benefit. d. unsuccessful because it was merely fatherly advice not to get married during the first year of law school. Copyright Cengage Learning. Powered by Cognero.

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Chap 13_9e_Standard 32. If Crosby and Dash are in disagreement as to the exact amount of money that Crosby owes Dash, then they may choose to form a new agreement at a set amount. If they both perform the new agreement, their conduct would be an example of a. a rescission. b. a contract modification. c. a preexisting duty. d. an accord and satisfaction. 33. Yolanda was shoveling snow from her sidewalk, and just to be nice, she also shoveled snow from her neighbor Melody's walk. The next day, Melody promises that she will pay Yolanda $25 for shoveling snow from her walk. Has a contract been created? a. No, Yolanda had a preexisting duty to shovel Melody's walk. b. No, past consideration is not valid consideration. c. Yes, Melody made a promise and that created the contract. d. Yes, Melody has a moral obligation to pay for the work, even if she didn't request it. 34. If someone provides a service that he or she is already obligated to do, it is an example of a. a promissory estoppel. b. a past consideration. c. an illusory promise. d. a preexisting duty. 35. What is an output contract? a. a contract in which a buyer agrees to purchase all of his or her goods from one seller b. a contract between a manufacturer and a distributor where the distributor only buys from the manufacturer and is contractually prevented from trading with the manufacturer's competitors c. a contract in which the seller guarantees to sell all of its output to one buyer, and the buyer agrees to accept the entire quantity d. a contract in which a seller agrees to sell a product or service to the buyer only on the condition that the buyer also purchases an additional product from the seller 36. An agreement between two parties to pay a lesser amount to settle an unliquidated debt is a. enforceable, as there is consideration. b. unenforceable, as there is no consideration. c. enforceable in only some states. d. unenforceable as a violation of public policy. 37. As it pertains to consideration, which of the following constitutes value? a. an illusory promise b. a preexisting duty c. a forbearance d. All of these are correct.

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Chap 13_9e_Standard 38. An agreement to settle a debt for less than the sum claimed is referred to as a. a promissory estoppel. b. an accord. c. a satisfaction. d. rescission. 39. In the historic case of Hamer v. Sidway, the nephew a. lost, as the Court found there was no consideration. b. lost, as the uncle was dead. c. won, as the Court found there was consideration. d. won, as there was a completed gift. 40. Mary owes $3,800 on her credit card. She sends the credit card company a check for $800 with the notation “payment in full” on the check. If the credit card issuer cashes the check, a. Mary’s balance will automatically be paid in full if the $3,800 amount was a liquidated debt. b. Mary’s balance will automatically be paid in full regardless of whether the amount of $3,800 was liquidated or unliquidated. c. the check may be subject to a UCC exception to the general rules for accord and satisfaction cases involving checks. d. Mary’s balance will automatically be paid in full if the $3,800 amount was an unliquidated debt. 41. Frank's Furniture Company promised in a written agreement to purchase as much walnut wood "as it desires" from Forestry Products, Inc. If Frank's purchased walnut wood from another source and Forestry Products sued, what is the likely result?

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Chap 13_9e_Standard 42. Shirley suffered injuries when a truck struck the vehicle in which she was riding. State Auto Mutual Insurance Co. was the insurer involved and provided personal injury coverage. Shirley went to see Dr. Allen, a chiropractor who provided treatments 32 times over a 3-month period. Dr. Allen billed State Auto in three separate billings. After paying the first two billings in full, State Auto expressed concern about whether Dr. Allen's charges were excessive. State Auto hired Chiropractic Consultants, Inc. to evaluate Dr. Allen's billings. The consultants advised that Dr. Allen's billings were indeed excessive. State Auto then called Dr. Allen and offered a partial payment to settle the account. After this conversation, State Auto issued and sent a check for $864 payable to Dr. Allen. On the face of the check, State Auto noted the total amount allocated to each claim and typed "settlement in full." On the reverse side it said, "The endorsement of this draft by the payee constitutes a clear release and full settlement of the claim or account shown on the other side." Upon receipt of the check, Dr. Allen cashed the check. He then sought payment of an additional $895. State Auto claims there was an accord and satisfaction with respect to the amount due for services rendered by Dr. Allen. What are the requirements of an accord and satisfaction? Were those requirements met in this case?

43. What two exceptions did the UCC create for accord and satisfaction check cases?

44. Shelby hired Evan to drill a well on her property for $3,000. They both thought the soil and subsoil were normal for the area, but after he started drilling, Evan found a layer of rock that required him to purchase a special drill and required an extra ten hours of work. Evan demanded an extra $1,000 to complete the job. Discuss whether Shelby is liable for the additional $1,000.

45. What is consideration and what are the two basic elements of consideration?

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Chap 13_9e_Standard Answer Key 1. False 2. False 3. False 4. True 5. False 6. True 7. False 8. False 9. True 10. False 11. False 12. True 13. True 14. True 15. True 16. a 17. d 18. d 19. a 20. b 21. c 22. b 23. b 24. c 25. c 26. d

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Chap 13_9e_Standard 27. c 28. c 29. b 30. c 31. b 32. d 33. b 34. d 35. c 36. a 37. c 38. b 39. c 40. c 41. Frank's is not obligated to purchase anything from Forest Products under this contract. Therefore, the contract is illusory and fails for lack of consideration. Forestry Products could not win a suit to enforce an agreement. 42. An accord is the agreement to settle for less than the creditor claims. The satisfaction is the actual payment of that compromised amount. There must be: 1) an unliquidated debt, 2) an agreement between the parties that the creditor will accept as full payment a sum less than originally claimed, and 3) payment by the debtor of the agreed amount. An accord and satisfaction is valid consideration to support a creditor’s agreement to drop all claims. It appears that all the elements of an accord and satisfaction were satisfied in this case. 43. The first Code exception involves “organizations” that receive potentially thousands of checks every day and cannot inspect all notations. Under the exception, if an organization notifies a debtor that any offers to settle for less than the debt claimed must be made to a particular official, and the check is sent to anyone else in the organization, depositing a “full settlement” check generally does not create an accord and satisfaction. Second, if within 90 days of cashing a “full payment” check, the creditor offers repayment of the same amount to the debtor, there is no accord and satisfaction. 44. The general rule is that a promise to do something the promisor is already obligated to do is not consideration. Therefore, under the general rule Shelby would not be liable for the extra $1,000, since Evan was already obligated to drill the well for $3,000. However, under an exception to the general rule, when unforeseen circumstances cause a party to make a promise regarding an unfinished project, that promise is generally valid consideration. Even though Evan was only promising to finish what he was already obligated to do, his promise to finish the well was valid consideration because neither he nor Shelby knew of the rock, and he faced a situation quite different from what the parties anticipated when they entered into the contract.

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Chap 13_9e_Standard 45. Consideration is the inducement, price, or promise that causes a person to enter into a contract and forms the basis for the parties’ exchange. Contracts must be a two-way street. If one side gets all the benefit and the other side gets nothing, then an agreement lacks consideration and is not an enforceable contract. Consideration is proof that the parties intended to be bound to their promises. There are two basic elements of consideration: value and bargained-for exchange.

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Chap 14_9e_Standard Indicate whether the statement is true or false. 1. In many states it is illegal to lend money to help someone gamble a. True b. False 2. L & M loaned Joan $400 so that she could buy her textbooks for the current semester. L & M's terms for repayment of the loan (including interest) are $200 in two months, $200 in four months, and another $100 at the end of the fifth month. The legal maximum rate of interest on this type of loan is 6 percent per annum. L & M's loan is usurious. a. True b. False 3. A gambling contract is illegal unless it is a type of wagering specifically authorized by state statute. a. True b. False 4. Barbara, a skilled welder, was hired at Mainco Enterprises for a welding position. She was asked to sign a noncompete clause limiting future employment if she left Mainco. A court would be very likely to enforce the noncompete clause unless the time or geographic restriction is unreasonable a. True b. False 5. A gambling contract is illegal unless it is a type of wagering specifically authorized by state statute a. True b. False 6. Rudolph overhears Macy's plans to go skydiving over spring break. Not really knowing Macy, but figuring it's worth a chance, Rudolph rushes out and buys an insurance policy for $100,000 on Macy's life. Macy does in fact meet her demise jumping out of the airplane. Rudolph can collect the $100,000. a. True b. False 7. Roger parked his car at a garage that has a large sign at the entrance saying, "This garage is not liable for items stolen from a car." This type of notice is referred to as an exculpatory clause a. True b. False 8. When Randy, an electrician, accepted a job with Buren Construction, Randy signed the following agreement: "Upon termination of my employment with Buren Construction, I agree never to work for another employer as an electrician." If Randy resigns from Buren Construction, this agreement would be upheld under the theory of freedom of contract. a. True b. False

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Chap 14_9e_Standard 9. If an agreement not to compete is ancillary to the sale of a business, it is enforceable if reasonable time, geographic area, and scope of activity are set. a. True b. False 10. When a licensing requirement is designed merely to raise revenue, a contract made by an unlicensed person is generally enforceable. a. True b. False 11. According to Section 2-302 of the UCC, if a court finds as a matter of law that a clause of a contract was unconscionable at the time the contract was made, the court must refuse to enforce the contract a. True b. False 12. John was a licensed physician in Michigan. When he retired to Florida, he started providing medical services to the people in his condo, relying on his Michigan license since he did not have a Florida license and there is no reciprocity between the two states. Isaac, John's next-door neighbor, owed John $2,000 for medical services. John will be able to enforce the contract he made with Isaac. a. True b. False 13. If a contract is made with a person required by law to hold a license, and the purpose of the license is protection of the public, the contract made by an unlicensed person will generally be unenforceable. a. True b. False 14. . Cynthia and Brian were friends. Brian was a dare devil. Because of his antics, Cynthia thought that Brian wasn't long for this life. Cynthia purchased a life insurance policy on Brian's life. Subsequently, Brian was killed in a car accident. Since Cynthia and Brian were friends, Cynthia had an insurable interest in his life and will be entitled to the insurance proceeds. a. True b. False 15. A contract may violate public policy even if the agreement does not violate a statute. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 16. Virginia borrowed money from G & L Lending at 35% interest per year. The state maximum interest rate is 20% per year. Virginia defaulted on the loan. What amount can G & L collect from Virginia? a. G & L will be able to collect the principal, plus 20% interest per year. b. G & L will be able to collect the principal, but not any interest. c. G & L will not be able to collect either the principal or interest. d. Any one of these may be correct. The answer depends on the particular state law. Copyright Cengage Learning. Powered by Cognero.

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Chap 14_9e_Standard 17. Barb has been a children's day care provider for several years in the small town of Sallton. She has decided to give it all up, and move to the big city for excitement and adventure. She sells her business to Ken, agreeing not to open a competing business within five miles of Sallton for a period of nine months. After five months of the big city life, Barb is broke and moves back to Sallton. She opens a small day care business. Ken sues on the noncompete clause. What is the most likely result? a. Ken wins. The agreement is enforceable. b. Barb wins. The agreement is denying her the right to do the only thing she knows how to do. c. Barb wins. The agreement is not enforceable because it is not ancillary to a legitimate bargain. d. Barb wins. The agreement is not reasonable as to time. 18. Asher buys a linen suit from Miriam and gives it to his father, Moises. Moises takes the suit to Vanessa, who runs a local dry cleaner, to have the suit cleaned and pressed. Who is the bailee? a. Asher b. Moises c. Miriam d. Vanessa 19. Which of the following can be characterized as an exculpatory clause? a. Contractor is not liable for damage caused by its employees. b. Buyer agrees to pay $5,000 for a used cell phone. c. Creditor charges 45% interest on a loan. d. All of these are correct. 20. In a non-compete agreement, the term "ancillary" means that a. both parties must have a stake in the outcome. b. the agreement is harmless to the general public. c. the non-compete agreement must be part of a larger agreement. d. the non-compete agreement is unfair to the employee, but not the employer. 21. What are the two most common settings for legitimate non-compete agreements? a. Real estate purchase and employment relationship b. Sale of a business and real estate purchase c. Real estate purchase and insurance purchase d. Sale of a business and employment relationship 22. Suppose that Lenny Lawyer enters into an agreement with Cindy Client that his fee will be a percentage of the recovery Lenny obtains for Cindy in her pending divorce. State law makes such a contingency fee arrangement illegal in divorce actions. What will be the probable outcome if Lenny attempts to enforce the agreement? a. The contract will be valid. Cindy would not have been able to afford an attorney otherwise, and therefore Lenny was doing a public service. b. The contract will be voidable at Cindy's option. c. The contract will be void as violating a statute. Lenny will not be able to recover anything. d. The contract will be unenforceable if Lenny did not get the agreement in writing.

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Chap 14_9e_Standard 23. An exculpatory clause is generally unenforceable when a. it attempts to release a party from liability for ordinarily negligent behavior. b. it involves public transportation. c. it is written clearly and in bold, large print. d. the affected activity is a recreational activity. 24. A Tavern's secret recipe for its pizza sauce would be considered a. a trade secret, and an employment non-compete clause would be enforceable to protect it. b. a trade secret, but an employment non-compete clause would NOT be enforceable to protect it. c. just a secret recipe and not something the Tavern could protect in a non-compete clause. d. an exculpatory clause and not enforceable. 25. An insurance contract is NOT considered to be an illegal form of "wagering" because a. one must have an insurable interest in the person being insured. b. insurance contracts are underwritten by reputable companies. c. insurance activities are regulated by the state department of insurance. d. the money being paid out comes from premiums collected over time. 26. An unconscionable contract is one that a court refuses to enforce because of a. fundamental unfairness. b. illegality. c. its limit to free trade. d. overt vagueness. 27. E-mation, Inc., hires Marvin to steal trade secrets from one of its competitors for $10,000. Marvin demands half of the money up front. E-mation pays Marvin $5,000, but Marvin decides not to pursue theft of the trade secrets. E-mation sues Marvin for the return of the $5,000. What will the court do with this contract? a. The court will order Marvin to return the $5,000. b. The court will order Marvin to return the $5,000 with interest. c. The court will order Marvin to obtain the trade secrets. d. The court will not do anything to help E-mation get its money back. 28. Wendell, new to the area, selects a doctor from the telephone book and visits that doctor to have a splinter extracted. Unbeknownst to Wendell, the doctor has never passed the state licensing exams. Later, when Wendell discovers the truth, he refuses to pay his bill. If the doctor sues for recovery of the fee, will the court support the doctor's claim? a. Yes, it was up to Wendell to verify the doctor's qualifications prior to having the splinter extracted. b. No, the court is likely to take the position that it is not in the public's best interest to enforce contracts with unlicensed doctors.. c. It depends on whether Wendell's injury healed properly. d. Yes, it is unconscionable that Wendell would not pay a bill he owed.

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Chap 14_9e_Standard 29. Giving possession and control of personal property to another person is referred to as a. adhesion. b. usury. c. unconscionability. d. bailment. 30. A contract most likely will be declared unconscionable if a. it allows for an extremely high rate of interest to be charged. b. it contains a cancellation clause. c. it is as such as no man in his senses and not under delusion would make on the one hand, and as no honest and fair man would accept on the other. d. it is signed by a minor for an item of luxury. 31. The UCC deals with unconscionability in a contract by providing that a court may a. refuse to enforce the contract. b. enforce the remainder of the contract without the unconscionable clause. c. limit the application of any unconscionable clause as to avoid any unconscionable result. d. All of these are correct. 32. A national bank based in New York issues credit cards to customers in all 50 states. What interest rate can the bank charge customers? a. The interest rate of New York only. b. The interest rate of New York or that of the customer's state, whichever is higher. c. The interest rate of the customer's state only. d. The interest rate of New York or that of the customer's state, whichever is lower. 33. A court is unlikely to enforce the non-compete agreement Kelly and Amber signed because of which of the following clauses? a. Kelly agrees not to work for a competitor for two years. b. Kelly agrees not to work for a competitor within a 10-mile radius of Amber's business. c. Kelly agrees to go into a completely different line of work than Amber. d. All of these are correct. 34. Which of the following relationships generally fails to create an insurable interest? a. Husband and wife b. Doctor and patient c. Debtor and creditor d. Chief executive officer and corporation

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Chap 14_9e_Standard 35. Larry has the largest pizza business in the city. He learns that Henry is thinking of opening a competing pizza and pasta delivery business. Larry gives Henry $25,000 to not open his proposed business in the same city. Which statement is correct? a. The contract is voidable at Larry's option.. b. The contract is void for lack of consideration. c. The contract is illegal and void. d. The contract is enforceable. 36. E-mation entered into a contract with a consumer, Ezra, a recent immigrant to the United States who spoke very little English and had no formal education. The contract provided for Ezra to pay $2,500 for a computer system. The system was worth $400. If E-mation sued Ezra for enforcement of the contract, what is the most likely result? a. The contract is enforceable because of usury statutes. b. The contract is unenforceable because it is ancillary to a legitimate bargain. c. The contract is enforceable because of the exculpatory clause. d. The contract is unenforceable because it is unconscionable. 37. Usury laws are designed to protect consumers from a. obtaining loans to gamble on credit. b. taking insurance policies out on the life of another. c. companies charging excess interest on loans. d. professionals practicing a trade without a valid license. 38. Mike owns a house in a low-income area of a large city. Mike is on disability, and his total monthly income is $700. A sales representative visits his home to sell him a water purification system. Mike signs a contract that calls for monthly payments of $500 for the next 10 years. The water system is worth no more than $1,000. Mike thought he was signing a permission slip allowing the salesman to conduct a free water test to determine the toxins in the water. How would a court most likely describe this contract? a. The contract is fully enforceable as written. b. The contract is unenforceable because it is unconscionable. c. The contract is enforceable, but only up to the value of the water system. d. The contract is unenforceable because it is exculpatory. 39. In bailment cases, exculpatory clauses a. are very rarely used. b. are somewhat more likely to be enforced than in other types of cases. c. ordinarily involve an attempt to limit liability for damage to persons rather than property. d. are not enforced because any harm is to property and not persons.

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Chap 14_9e_Standard 40. Judith is a CPA with an excellent reputation and client base. She sells her tax preparation business to Shawn, and the sales contract includes a non-compete clause restricting Judith from opening a similar business for one year within a 10-mile radius of her former office. If she opens a tax preparation office five miles away after one year, a court would probably a. grant an injunction barring her from operating the new office. b. order confiscation of all of her new client files and turn them over to Shawn. c. refuse to become involved, as the non-compete clause was illegal. d. refuse to enforce the non-compete clause, as it is unreasonable regarding time and geographic area. 41. Marcy and Elliot are both sophisticated merchants who deal in diamonds. Marcy contracted to purchase a diamond for $20,000. The day after the purchase, Marcy took the diamond to a jeweler's show but the highest offer for the diamond was only $10,000. Is Marcy's contract for purchase of the diamond for $20,000 unconscionable?

42. Differentiate between licensing requirements designed to protect the public and those designed to generate revenue.

43. Cherise contacted her insurance agent and said she was interested in purchasing several life insurance policies: (a) a policy on her own life for $100,000, naming her son and daughter as beneficiaries; (b) a policy on her neighbor’s life for $100,000, since she had observed him engaging in reckless behavior, naming herself as beneficiary; (c) a $5,000 policy on another neighbor to cover a loan Cherise made to him, naming herself as beneficiary; and (d) a $250,000 policy on her business partner, naming herself as beneficiary. Discuss the legality of each of these potential contracts.

44. Discuss exculpatory clauses, and designate when an exculpatory clause is unenforceable.

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Chap 14_9e_Standard 45. Discuss the pros and cons of gambling in the state of California, and what the California Court of Appeals ruled regarding the treatment of gambling on credit.

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Chap 14_9e_Standard Answer Key 1. True 2. True 3. True 4. False 5. True 6. False 7. True 8. False 9. True 10. True 11. False 12. False 13. True 14. False 15. True 16. d 17. a 18. d 19. a 20. c 21. d 22. c 23. b 24. a 25. a 26. a

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Chap 14_9e_Standard 27. d 28. b 29. d 30. c 31. d 32. b 33. c 34. b 35. c 36. d 37. c 38. b 39. b 40. a 41. Probably not. The parties had equal bargaining power in that they were both experts in this field. Elliot did not use a superior position to force the contract on Marcy. Furthermore, Marcy is going to have a tough argument to say she did not fully understand the consequences of the agreement. 42. States require licenses for anyone who practices a profession, such as law or medicine, works as a contractor or plumber, and for many other kinds of work. These licenses are required in order to protect the public. For example, states demand that an electrician be licensed because the work is potentially dangerous to a homeowner: The person doing the work must know an amp from a watt. When a licensing requirement is designed to protect the public, any contract made by an unlicensed worker is unenforceable. States use other licenses simply to raise money. For example, most states require a license to open certain kinds of retail stores. This requirement does not protect the public because the state will not investigate the store owner the way it will examine a prospective lawyer or electrician. The state is simply raising money. When a licensing requirement is designed merely to raise revenue, a contract made by an unlicensed person is generally enforceable. Thus, if you open a stationery store and forget to pay the state’s licensing fee, you can still enforce a contract to buy 10,000 envelopes from a wholesaler at a bargain price. 43. A person may insure her own life for any amount and may name any beneficiary. Anyone who takes out a life insurance policy on the life of another must have an insurable interest in that person. The policy in (a) would be legal, as Cherise is insuring her own life. The potential policy in (b) is lacking in insurable interest and therefore would not constitute an enforceable contract. The policy in (c) would be legal because the debtor-creditor relationship creates an insurable interest. The potential policy in (d) would be legal, as the business relationship creates an insurable interest; Cherise would need compensation if her business partner dies.

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Chap 14_9e_Standard 44. An exculpatory clause is one that attempts to release one of the parties from liability in the event of injury. A clause is generally unenforceable when it attempts to include an intentional tort or gross negligence, affects an activity that is in the public interest, and when the parties have greatly unequal bargaining power. Another requirement for clauses is that it is clearly written and readily visible. 45. Almost all states permit some form of wagering. Supporters of gambling say that casinos create jobs and steady income, provide money for the state, and take business away from organized crime. Opponents argue that naive citizens inevitably lose money they can ill afford to forfeit, and that addicted gamblers destroy their families and weaken the fabric of communities. Many states do not allow gambling on credit. The California Court of Appeals in Metropolitan Creditors Service of Sacramento v. Sadri states, "There is a special reason for treating gambling on credit differently from gambling itself. Having lost his or her cash, the pathological gambler will continue to play on credit, if extended, in an attempt to win back the losses. This is why enforcement of gambling debts has always been against public policy in California and should remain so, regardless of shifting public attitudes about gambling itself. If Californians want to play, so be it. But the law should not invite them to play themselves into debt. The judiciary cannot protect pathological gamblers from themselves, but we can refuse to participate in their financial ruin."

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Chap 15_9e_Standard Indicate whether the statement is true or false. 1. Frank suffers from a mental impairment due to a brain injury from an airplane accident. He contracts with Glena to purchase her dining room furniture. A month later, he tries to void the contract. If he is unable to return the furniture, a court will not rescind the agreement unless Frank can show that Glena acted in bad faith. a. True b. False 2. If a minor can cancel a contract, it can be done at any time before the minor reaches the age of majority or within a reasonable time after reaching majority age. a. True b. False 3. Alice offers to sell her car to Barry for $500, and Barry accepts. Alice's car has a market value of $1,000, but this fact is unknown to Alice. The contract is enforceable. a. True b. False 4. Fraudulent but innocent misrepresentation permits the injured party to rescind a contract. a. True b. False 5. In contract law, a minor is someone under the age of 21. a. True b. False 6. Roger, a minor, buys a stereo from Tuneland, Inc. Roger uses the stereo for a few months, returns it to Tuneland, and demands his money back. Roger may rescind the contract, return the stereo and get his money back. a. True b. False 7. Travis had too many beers at the baseball game. Ed realized Travis was so intoxicated he wouldn’t know what he was doing, so he got Travis to sign a promise to sell his motorcycle to Ed for $50. When Travis gets sober, he can attempt to void the contract. a. True b. False 8. A party injured by fraud generally has the choice of suing for damages or rescinding the contract. a. True b. False 9. A party to a contract has a duty to investigate the other party's factual statements. a. True b. False

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Chap 15_9e_Standard 10. If a salesperson says, "This is a great car and it’s really fun to drive," but the car turns out to be a lemon, the salesperson has committed fraud. a. True b. False 11. Mrs. Elsley was an elderly woman who relied on Nancy to visit her every day and prepare her meals. Nancy convinced Mrs. Elsley that she should give Nancy her house so they could live together and Nancy could better care for her, although Nancy really just wanted the house and had no intention of moving in to take care of Mrs. Elsley. Although Mrs. Elsley agreed, she may rescind the contract because of undue influence. a. True b. False 12. Courts will not allow the rescission of a contract due to a unilateral mistake. a. True b. False 13. After her 18th birthday Lora may, by words or action, ratify a contract she made during the previous year. a. True b. False 14. When fraud is committed during the sale of goods, all states allow the remedy of rescinding a contract while still allowing the remedy of suing for damages. a. True b. False 15. Spencer, age 18 and of sound mind, has the legal capacity to contract. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 16. When courts consider economic duress, they consider all the following factors EXCEPT a. relative bargaining power. b. financial distress. c. legitimate business purpose. d. relative size of the contract. 17. Ron, a minor, goes to the hospital for treatment of the flu. On the new-patient form Ron signs, he agrees to pay for any care or treatment he receives. When billed for the treatment, a. Ron must pay for the value of the benefit he received, because medical care is a necessary. b. Ron must pay for the benefit he received because the contract was fully executory. c. Ron must pay for the benefit he received because he ratified the contract. d. Ron does not have to pay for the benefit he received.

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Chap 15_9e_Standard 18. Peter, a minor, purchased a car from ACME Motors. Using a fake ID, he misrepresented his age to be 18. The contract is fully executed. Which of the following is correct? a. Peter cannot disaffirm the contract because a car is a necessary. b. Peter cannot disaffirm the contract because of his misrepresentation. c. Peter can disaffirm the contract, because a minor must be saved from his own poor judgment, including his lie. d. Either b or c may be applicable depending on the law of the jurisdiction in which the contract was formed. 19. Sasha, who is mentally infirmed, contracts to purchase a piano for $2,500 in 60 monthly installment payments. Six months later she tries to void the contract on grounds of mental impairment. A court will a. normally void the contract without requiring anything further on Sasha’s part. b. normally void the contract but will require Sasha to return the piano. c. ordinarily not void the contract unless Sasha had a court-appointed guardian at the time she entered into the contract. d. not void the contract unless Sasha agrees to have the court appoint a guardian for her. 20. Duress occurs when a. the enforcement of a contract results in unconscionability. b. an improper threat is made to force another party to enter into a contract. c. both parties contract based on the same factual error. d. a party gives notice of refusal to be bound by an agreement. 21. Pamela is planning to sell her home-decorating store to her daughter. Pamela has a. a greater duty to reveal problems in the business, because her daughter assumes she will be honest. b. no duty to disclose hidden defects in the business. c. a lesser duty to reveal problems in the business, because she has a relationship of trust with the buyer. d. a duty to report only any latent defects she knows about, that her daughter should not be expected to discover herself. 22. Which scenario is an example of puffery? a. Martina purchases a ring from Alison. Both genuinely believe the stone in the ring is an emerald, but Martina later finds out the stone is just cut glass. b. A salesperson tells Jinxing that the shiny, chrome-covered motorcycle he is looking at is "the hottest ride on the road." c. Simon threatens to smash the windshield out of Clara's vintage Pontiac GTO unless she agrees to sell it to him. d. The clerk at the candy store tells Billy the "Jug 'o Jellybeans" contains 1,000 jellybeans. When Billy takes the jug home and counts, he finds that the jug contains only 995 jellybeans. 23. As it applies to minors, which of the following is LEAST likely to be regarded as a necessary? a. rent b. food c. medical expenses d. educational expenses Copyright Cengage Learning. Powered by Cognero.

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Chap 15_9e_Standard 24. Which of the following is the MOST accurate statement regarding economic duress? a. It is never grounds for rescission. b. It is always grounds for rescission. c. It is a UCC concept only. d. It may be grounds for rescission. 25. If Jane persuades Linda to buy her horse by telling Linda that the horse runs "like the wind," then Jane's statement is a. fraud. b. reckless misrepresentation. c. a unilateral mistake. d. puffery. 26. Mark's home had burned to the ground. When he met with his insurance adjuster, she accused him of burning down the house and said she would have him criminally prosecuted if he didn't settle the claim for much less than the house was worth. Mark agreed to the settlement. If he changes his mind, he can probably rescind the settlement on the basis of a. fraud. b. duress. c. undue influence. d. mistake. 27. A person who is mentally impaired generally can create only __________ contracts. a. fraudulent b. void c. unconscionable d. voidable 28. Alejandro was new in town and was considering buying Helen's house. Helen knew the basement flooded when it rained heavily, but she did not tell Alejandro this and he did not think to ask. Alejandro bought the house, but after the first heavy rainstorm he attempted to rescind the contract because Helen had not explicitly pointed out the problem with the basement. What would most likely be the final outcome? a. Alejandro will definitely be successful, because Helen had a duty to report this major defect about the house. b. Alejandro will probably be successful, because there was a relationship of trust between himself and Helen. c. Alejandro will definitely succeed, because he bought the house under duress. d. Alejandro will probably not be successful; this is something he could have reasonably been expected to notice himself.

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Chap 15_9e_Standard 29. Which of the following is NOT a true statement about fraud? a. The plaintiff must prove that the defendant has knowledge of the falsity of his or her statement. b. It is necessary for the plaintiff to show that he or she has suffered some type of detriment or injury because of his or her reasonable reliance on the defendant's false statement. c. The defendant made the statement with the intent to induce the plaintiff to enter into the contract. d. The plaintiff must show that although the defendant acted in good faith, the statement was material because the defendant expected the plaintiff to rely on it and enter into the contract. 30. Larson entered Forrester's Auto Mart to purchase a used car. Larson found a vehicle with a sales price of $11,000. After Forrester answered all of Larson's questions, Forrester and Larson agreed to a sale. As Larson was leaving to get the money to pay for the car, Forrester told Larson that he thought Robert Redford formerly owned the car. Larson later learned that Robert Redford had never owned the car. If Larson seeks to rescind the deal based on Forrester’s statement, Larson will a. win because he relied on the misrepresentation. b. win because there was a misrepresentation of a material fact. c. lose because he will not be able to prove reliance on the misrepresentation. d. lose because Forrester made a unilateral mistake. 31. Deborah purchased a boat from Sun ‘N Surf Marine. She later learned that the salesman had made misrepresentations to induce her to make the purchase. Under UCC Section 2-721, Deborah can rescind the contract a. only if the misrepresentation was fraudulent. b. and sue for damages if the misrepresentation was fraudulent. c. but cannot sue for damages even if the misrepresentation was fraudulent. d. but must forego all other remedies. 32. A(n) _______ contract is illegal from the beginning and may not be enforced by either party; a(n) _______ contract is legal but permits one party to escape, if he or she so wishes. a. disaffirmed; affirmed b. void; voidable c. affirmed; disaffirmed d. voidable; void 33. Which of the following statements, if made by a seller who knows the statement to be untruthful, would NOT be misrepresentation of material fact resulting in a cause of action for fraud? a. "This horse is only six years old." b. "There is no better car in the world." c. "The tires have less than 5,000 miles on them." d. "This car gets 28 miles per gallon."

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Chap 15_9e_Standard 34. Marty, a 16-year-old, contracted with Cream-of-the-Crop Cycles to buy an $8,000 motorcycle. He agreed to make monthly payments until the purchase price plus interest were paid in full. It is three years later and Marty has not disaffirmed the contract and has made regular payments on the cycle since turning 18. Which of the following is correct? a. The contract is void and Marty has no obligation. b. The contract is now voidable by Cream-of-the-Crop Cycles. c. Marty has ratified the contract and is now bound by its terms. d. Marty has ratified the contract, but can still get a return of the payments made while he was a minor. 35. Alejandro was new in town and was considering buying Helen's house. The paint was peeling off the exterior and most of the windows were broken, but Helen did not make a point of mentioning these defects. Alejandro bought the house, but the following month he attempted to rescind the contract because Helen had not explicitly pointed out these cosmetic problems. What would most likely be the final outcome? a. Alejandro will definitely be successful, because Helen had a duty to report any defects about the house. b. Alejandro will probably be successful, because there was a relationship of trust between himself and Helen. c. Alejandro will definitely succeed, because he bought the house under duress. d. Alejandro will probably not be successful; this is something he could have reasonably been expected to notice himself. 36. In contract law, capacity is best defined as a. a benefit which must be bargained for between the parties. b. one person's compliance with the offer made by another. c. a promise in exchange for performance by another party. d. the legal ability of a party to enter into a contract. 37. Jeff was a subcontractor, bidding on a contract for ACE Corp., the general contractor. When adding up the total of materials and labor, Jeff's secretary mistakenly moved the decimal point one place, ending up with a bid of $3,500 rather than $35,000. ACE Corp. accepted Jeff's bid, mostly because all the other bids were over $30,000. When Jeff learns of the mistake, he tells ACE Corp. that he cannot do the job for $3,500. If ACE Corp. sues to enforce this contract, what is the most likely result? a. The contract is enforceable, since there was an offer, acceptance, and consideration. b. This is a bilateral mistake, so the contract can be rescinded by either party. c. This is a unilateral mistake, so the contract cannot be rescinded by Jeff. d. This is a unilateral mistake, but one where ACE Corp. knew that a mistake had been made. Jeff should be able to rescind the contract.

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Chap 15_9e_Standard 38. Vince has begun forgetting things and is becoming very difficult to get along with. He is 85, has been ill, and is very fond of his housekeeper Annie. He gives a deed to Annie for all of his real property. At Vince's death, his children, who got only his photograph albums according to the will, ask that the deed be set aside and the land be put back in the estate for purposes of division among all the children. What will be the probable result in this case? a. Since Vince was 85 he was probably incompetent and the court would rule for the children. b. Clearly Annie used her position of dominance to persuade Vince to deed her the property, and it will be set aside. c. Unless the children can prove that Vince was unable to understand what he was doing, or that Annie used her position to improperly influence Vince, Annie can keep the property. d. Annie will not be able to keep the property since she is not a family member. 39. Marty, a 16-year-old, contracts with Cream-of-the-Crop Cycles to buy an $8,000 motorcycle. Marty agrees to make monthly payments until the purchase price plus interest is paid in full. Which of the following is correct? a. The contract is voidable by Marty. b. The contract is void as soon as it is made. c. The contract is voidable by Cream-of-the-Crop Cycles. d. The contract is voidable by either Marty or Cream-of-the-Crop Cycles. 40. An example of the type of relationship required to find undue influence would be a. a salesperson-purchaser relationship. b. a bartender-customer relationship. c. a doctor-patient relationship. d. a neighbor-neighbor relationship. 41. Describe legal capacity and discuss how it applies to minors entering into and cancelling contracts.

42. What is the difference between a unilateral mistake and a mutual mistake? Under what circumstances will a court refuse to rescind a contract based on the defense of a "mistake?"

43. Adrianna wants to purchase a ten-acre tract of land. Under what circumstances would the seller be required to divulge information Adrianna does not possess?

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Chap 15_9e_Standard 44. Discuss the meaning of "material fact" in fraud situations.

45. Reed, a 15-year-old, has run out of money while on a trip away from home. Martha gives him food, a place to sleep, and his bus fare home, in exchange for Reed's promise to pay $200 after he got home. Is Reed's promise enforceable?

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Chap 15_9e_Standard Answer Key 1. True 2. True 3. True 4. True 5. False 6. True 7. True 8. True 9. False 10. False 11. True 12. False 13. True 14. True 15. True 16. d 17. a 18. d 19. b 20. b 21. a 22. b 23. d 24. d 25. d 26. b

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Chap 15_9e_Standard 27. d 28. a 29. d 30. c 31. b 32. b 33. b 34. c 35. d 36. d 37. d 38. c 39. a 40. c 41. Capacity is the legal ability to enter into a contract. Two groups of people usually lack legal capacity: minors and those with a mental impairment. Because a minor lacks legal capacity, he or she can only create a voidable contract. This means that when a minor enters into a contract, he or she generally may choose between enforcing the agreement or negating it. A minor who wishes to escape from a contract generally may disaffirm it; that is, he may notify the other party that he refuses to be bound by the agreement. A minor may disaffirm a contract by simply telling the other party (orally or in writing) that he will not honor the deal. Or he may disaffirm a contract by refusing to perform his obligations under it. A minor may go further—he can undo a contract that has already been completed by filing a suit to rescind the contract (i.e., have a court formally cancel it). 42. A unilateral mistake occurs when only one party enters a contract under a mistaken assumption. A mutual mistake, on the other hand, occurs when both parties contract based on the same factual error. However, the defense of mistake is not a cure-all for all bad deals. Courts will not rescind contracts based on the following: A prediction error—a contract based on a prediction that proved wrong cannot be rescinded. A mistaken value—not knowing the value of an item is not enough to take back a deal. A conscious uncertainty—no rescission is permitted where one of the parties knows he is taking on a risk (e.g., the person realizes there is uncertainty about the quality of the thing being exchanged).

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Chap 15_9e_Standard 43. There used to be no duty to disclose, even if a party knew the other party was negotiating under a mistake. Now, however, because of changes in social attitudes about fairness, a seller who knows something the buyer does not know is often required to divulge it. There are four circumstances in which nondisclosure of a fact to Adrianna would be misrepresentation: (a) when disclosure is necessary to correct a previous assertion; (b) when disclosure would correct a basic mistaken assumption on which Adrianna is relying; (c) when disclosure would correct Adrianna’s mistaken understanding about a writing; and (d) when Adrianna and the seller have a relationship of trust. The seller generally must disclose any latent defect he knows about that Adrianna should not be expected to discover herself. 44. Fraud begins when a party to a contract represents something that is factually wrong. The statement must first be a fact, not an opinion. "This car is the best" would not be the type of statement that should be relied upon. Contrast that type of statement with, "this car gets 28 miles per gallon." This is a statement of fact upon which someone would rely. The statement must also be material; that is, important in the decision to enter into the contract. For the fact to be material, the maker must have expected the other party to rely on the statement, and the other party must have relied upon it. 45. Food, clothing, housing, and medical care are necessaries. The bus fare would probably be considered a necessary as well, although it may be debatable depending on how far the minor is away from home. The rule for a contract involving necessaries is that a minor must pay for the value of the benefit received. In other words, Reed may be able to disaffirm the contract, but he is liable for whatever benefit he obtained from Martha.

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Chap 16_9e_Standard Indicate whether the statement is true or false. 1. Ramona, age 42, orally agreed to work for Brahma, Inc., for the rest of her life for $50,000 per year. This agreement would not be enforceable since it violates the one-year rule of the Statute of Frauds. a. True b. False 2. Parol evidence refers to anything (other than the written contract itself) that was said, done, or written before or after the parties signed the contract. a. True b. False 3. Under the Statute of Frauds, the writing must: be signed by the defendant; and must state with reasonable certainty the name of each party, the subject matter of the agreement, and all of the essential terms and promises. a. True b. False 4. Any contract involving a sale of goods of $100 or more must be in writing. a. True b. False 5. Sweet Plantation, Inc., made a written contract with Candy, Inc., whereby Sweet Plantation agreed to supply all of Candy's sugar requirements for the next year at $0.25 per pound. A dispute arose as to how much sugar Sweet is to supply. The parol evidence rule will bar Sweet's introduction of evidence concerning the intent of the requirements of Candy. a. True b. False 6. The Uniform Commercial Code provides that, under certain circumstances, a merchant may be liable on a written contract, even though that merchant has NOT signed it. a. True b. False 7. The original purpose of the statute of frauds was to prevent lying (i.e., fraud) in civil lawsuits. a. True b. False 8. Either party may demand rescission of a fully executed oral contract if it was required to have been in writing under the Statute of Frauds. a. True b. False

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Chap 16_9e_Standard 9. Bry, Inc., and Gangl Co. entered into an oral agreement for the sale of 3,000 sweaters. Both parties performed as required under the contract. Bry delivered the sweaters, and Gangl accepted and paid for them. Since the contract is fully executed, it makes no difference that it was an oral agreement. a. True b. False 10. Raymond agrees to transfer an easement right to Sandra for $1,000. This contract is within the Statute of Frauds and therefore needs to be in writing to be enforceable. a. True b. False 11. Rest Well Hotel orally ordered 1,000 blankets monogrammed with its initials, RWH, from TriColor Textiles. TriColor had just finished monogramming the blankets when Rest Well called and canceled the order. TriColor will be able to enforce the agreement even though there was no writing. a. True b. False 12. Patrick owned an acre of land which was being divided into building lots. Nancy was interested in purchasing the corner lot. In a signed writing, Patrick stated, “I will sell Nancy Grimes a lot on Route 70 for $5,500 cash, payable on April 30, 2012.” This writing is sufficient under the Statute of Frauds to make the contract enforceable. a. True b. False 13. E-signatures are valid in all 50 states. a. True b. False 14. Hannah orally agrees to sell her house to Brett for $175,000. If she delivers the deed to Brett with the expectation of payment in two weeks and he fails to pay, most courts will not enforce the contract since it was not in writing. a. True b. False 15. Amanda, a recent university graduate, needed a car to get to her new job. To help Amanda secure a loan for the car, Ted, a friend, agreed to pay the loan should Amanda default. Ted's promise to pay the loan is a collateral promise. His promise must be in writing to be enforceable. a. True b. False

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Chap 16_9e_Standard Indicate the answer choice that best completes the statement or answers the question. 16. Christine agrees to marry Barry after he tells her he will buy her a brand-new Rolls Royce within a year of their marriage. After they are wed, Barry refuses to give her the car. What will happen if Christine sues Barry? a. She will win because of the "one-year rule." b. She will lose because a promise made in consideration of marriage must be in writing. c. She will win because a spouse is legally required to keep the promises made to his/her partner. d. She will lose because Barry's promise of a car is a collateral promise, which must be in writing. 17. Derek and Abyan were discussing business over lunch when they agreed on the sale of a five-acre parcel of land. Since neither of them had any paper with them, Derek wrote the following on a napkin: "Abyan agrees to purchase from Derek a 5-acre parcel located at the local address of 123 105th Street, St. Joseph, Minnesota, U.S.A. for the price of $4,500 per acre. Transfer of title, payment, and possession to take place on May 1, 2011." Abyan signed the napkin. On May 1, 2011, Derek was ready to close the deal and transfer title but Abyan refused to pay the purchase price. If Derek sues Abyan for the price of the land, the most likely result will be a. Abyan will win because the writing is not sufficient under the Statute of Frauds. b. Derek will win because the writing is sufficient under the Statute of Frauds. c. Abyan will win because Derek did not sign the writing. d. Derek will win because the Statute of Frauds does not apply to this situation. 18. Alfred orally promised to pay Robert a salary of $30,000 per year for five years and his moving expenses up to $10,000 if Robert would quit his job and come to work for him at his manufacturing plant. Robert agreed to do so, but requested a written contract. Alfred assured him that the company attorney would prepare such a contract as soon as possible, but Alfred needed Robert to start at once. Accordingly, Robert sold his house, moved his family, and commenced to work for Alfred. He was fired without cause two months later. No written contract was ever executed. Can Robert enforce Alfred's oral promise? a. No. This was a contract for longer than one year and is not applicable to exception. It violates the Statute of Frauds and is not enforceable. b. Maybe. Robert should go to court under the theory of promissory estoppel. Alfred made an oral promise that Robert relied upon, and the way to avoid injustice is to enforce the promise. c. Yes. This is a personal satisfaction contract, and Alfred gave no reason for dissatisfaction. Robert can recoup the loss he took on the sale of his house. d. Yes. This is a partial performance of the sale of goods. Robert can recoup the loss he took on the sale of his house. 19. Does the statement "The sale of goods will not be enforceable unless there is some writing, signed by the defendant, indicating that the parties reached an agreement" accurately reflect the UCC's basic rule? a. No. It should also state that the contract must be signed by both parties, not just the defendant. b. No. It should state that the contract must require all of the terms of the agreement to be in writing. c. No. It should state that the contract must be for the sale of goods of $500 or more. d. Yes. The wording accurately reflects the UCC's basic rule.

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Chap 16_9e_Standard 20. When one person agrees to pay the debt of another as a favor to that debtor, it is called a. promissory representation. b. a mutual promise. c. promissory estoppel. d. a collateral promise. 21. The main difference between the UCC requirement for a writing in a contract for the sale of goods and the common law rule is that the a. UCC requires the signature of only one party. b. UCC does not require all the terms of the agreement to be in writing. c. common law requires only an indication that the parties reached an agreement. d. common law requires only the signature of the defendant and the quantity of goods being sold. 22. Under the merchants' exception rule of the UCC, within a reasonable time of making an oral contract, if a merchant sends a written confirmation to another, and if the confirmation is definite enough to bind the sender herself, then the merchant who receives the confirmation will also be bound by it unless he objects in writing within a. 3 days. b. 5 days. c. 10 days. d. 30 days. 23. Willis and Leslie orally agree to the sale of a parcel of land for $50,000: one-half payable now as a down payment; one-half payable in 30 days at the time of closing when the title will be transferred. The buyer, Willis, is to have possession immediately. Willis pays Leslie $25,000, takes possession of the land, and starts building a house. At the time of closing, Willis has made a substantial beginning on the house. However, Leslie refuses to transfer the title, claiming the oral contract is not enforceable. This contract is a. enforceable, because the Statute of Frauds does not apply to this interest in land. b. unenforceable, because there is no writing signed by Leslie. c. enforceable, because Willis has partially performed the oral contract and made improvements on the land. d. unenforceable, because the parol evidence rule applies. 24. Which of the following is a "special circumstance" in which an oral contract may be enforceable under the UCC? a. It is the first transaction between both parties who are not considered to be merchants. b. The contract is for goods in an amount of $750. c. The seller is specially manufacturing the goods for the buyer, and begins work on them before the buyer cancels the order. d. There are no special circumstances to the UCC; it deems that all contracts must be in writing.

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Chap 16_9e_Standard 25. Many states will not accept an e-signature on a. a will. b. a foreclosure notice. c. a court order. d. All of these are correct. 26. Renita, a merchant, has received a signed, written confirmation from Merchants, Inc., referring to goods she had not ordered. Renita should a. ignore the confirmation. b. call the seller and object to the confirmation as soon as she gets back from her two-week vacation. c. object to the confirmation in writing within 10 days. d. return the goods within two weeks of their delivery with a note attached saying she will not pay for the goods. 27. Contracts that cannot be performed within __________ are unenforceable unless they are in writing. a. one month b. six months c. one year d. two years 28. Which of the following types of contracts cannot be either contradicted or supplemented by evidence of prior agreements or expressions? a. integrated contracts b. incomplete contracts c. ambiguous contracts d. implied contracts 29. Ethel's Exercise World plans to order three weight machines from Pete's Push, Pedal, and Pull, Inc., for a total of $15,000. Pete's demands that Ethel’s friend Moneybags (a wealthy independent businesswoman) promise to pay Pete's for the three machines if Ethel's Exercise World does not. Which of the promises in this problem must be in writing to be enforceable? a. The promise made by Ethel's Exercise World to buy the weight machines. b. Moneybag's promise to pay if Ethel's Exercise World doesn't. c. Both Moneybag's promise and Ethel's Exercise World's promise. d. None of the promises in this problem need to be in writing. 30. Abby hires a contractor to make repairs on her house. Before the repairs are finished, Abby dies. Her good friend Clay is appointed executor of Abby's estate. Clay orally promised that if the estate could not pay the repair bill, he would pay it even though he does not live in the house and has no entitlement under Abby's estate. If the contractor's bill does not get paid, who can the contractor collect from, if anyone? a. The contractor can collect from either the estate or Clay. b. The contractor can collect from the estate only. c. The contractor can collect from Clay only. d. The contractor must collect from the estate first, and then collect any deficiency from Clay. Copyright Cengage Learning. Powered by Cognero.

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Chap 16_9e_Standard 31. Brahma entered into an oral agreement to sell 50 jet skis to Summer Sports. Brahma delivered 20 of the skis on May 1. On June 1, Summer Sports notified Brahma that it would not honor the agreement. Which statement is correct? a. The contract is void since it was oral. b. The contract is enforceable for 20 jet skis. c. The contract is enforceable for the 50 jet skis. d. The contract is obsolete. 32. Which of the following would suffice for a signature on a writing under the Statute of Frauds? a. a stamped signature b. a handwritten signature c. a name keyed at the bottom of an e-mail d. Any of these would suffice. Judges define “signature” very broadly. 33. Vicki entered into a written contract to buy a car from Valley Motors. The written contract included a provision that stated, "This writing is the full and final expression of the parties' agreement; anything said before signing or while signing is irrelevant." This is a. an integration clause. b. a Statute of Frauds clause. c. parol evidence. d. an exculpatory clause. 34. The Uniform Electronic Transmission Act (UETA) a. declares that a contract or signature may not be denied enforceability just because it is in electronic form. b. declares that e-signatures are invalid. c. creates a safe cyberspace environment in which business communications cannot be intercepted or fraudulently altered. d. has only been adopted in a handful of states. 35. Vicki entered into a written contract to buy a car from Valley Motors. During the negotiations, the sales representative said that the car had a two-year full warranty. The written contract included a provision that stated, "This writing is the full and final expression of the parties' agreement; anything said before signing or while signing is irrelevant." The written contract did not include a warranty. Two months after Vicki took delivery of the car, she discovered that the transmission needed to be replaced. Vicki claimed that it was covered by the full warranty. Will Vicki be able to present evidence as to the sales representative's statements concerning the warranty? a. No. The parol evidence rule will most likely exclude any evidence of the discussion of the warranty. b. Yes. The leading object rule will allow evidence as to the discussion of the warranty. c. Yes. The evidence is needed because the contract is ambiguous. d. No, because the contract was fully executed.

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Chap 16_9e_Standard 36. Which of the following oral contracts may be enforceable? a. Nathan owes $1,000 in back rent to his landlord. Miranda tells Nathan not to worry about it, she'll pay his debt for him. b. Kenny orally agrees to purchase 5,000 pencils that the ABC Pencil Company stamps with the words "Kenny is the Greatest!" c. Mrs. Washington calls the corner grocery and places an order for a loaf of bread, a gallon of milk, and a pound of hamburger to be delivered to her. Ten minutes later, before the store has a chance to put together her items, she calls to cancel the order. d. All of these are correct. 37. When a contract falls within the Statute of Frauds but is not in writing, the contract is a. illegal. b. unenforceable. c. void. d. voidable. 38. Which of the following promises ordinarily must be fully executed in writing to be enforceable? a. Any sale of goods to a minor. b. An agreement between two parties to sell a piece of jewelry for $350. c. A six-month lease on an apartment beginning in 30 days. d. A promise made by an executor of an estate to pay a debt of the estate. 39. Tuan is president and sole shareholder of Entertainment, Inc. Entertainment, Inc., wishes to borrow money, but to do so, the bank requires Tuan to orally agree to personally pay the debt of the corporation if Entertainment, Inc., cannot. Tuan's guarantee to repay is a. enforceable under the parol evidence rule. b. unenforceable because there is no insurable interest. c. enforceable because of the leading object rule. d. unenforceable because it is a collateral promise. 40. A legal right that an owner gives to another person to make some use of the owner's land is called a. a deed. b. a mortgage. c. an easement. d. a lease.

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Chap 16_9e_Standard 41. Tony signed a contract agreeing to purchase a used, high-powered boat for $10,000. Prior to signing the contract, the sales representative explained that the boat motor was guaranteed for six months for all labor and parts. The written contract contained nothing about the warranty; however, it did have an integration clause in it. Tony had problems with the boat motor, causing expensive repairs. Tony returned the boat to the sales representative for the repairs, only to learn the salesman denied knowing anything about a six-month warranty. If Tony sues, discuss the likely outcome.

42. Herb was interviewed for a job on Wednesday. The employer orally offered Herb a job right on the spot. Herb orally agreed to start working the following Monday, to be employed from that Monday, for one year thereafter. Three weeks after starting the job Herb was fired without cause and replaced by the employer's friend. Will Herb be successful in an action brought against the employer for breach of contract? Explain why, or why not.

43. J.T. Tidwell entered into an oral contract with Robert Anthony for the purchase of 100 head of cattle at a price of $500 each. When the oral contract was made, Tidwell gave Anthony a check for $1,000 as "earnest money or good faith money towards the purchase of the cattle." Anthony sold the cattle to someone else. Tidwell sued, asking the court to either compel Anthony to perform the contract or to pay damages that Tidwell suffered from the alleged breach of contract. What issues do you see, and how would you resolve those issues?

44. List the types of agreements that are within the Statute of Frauds and explain the consequences if the parties do not comply with the requirements of the Statute of Frauds.

45. Explain the reason behind having a Statute of Frauds, and give arguments for and against having such a statute.

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Chap 16_9e_Standard Answer Key 1. False 2. True 3. True 4. False 5. False 6. True 7. True 8. False 9. True 10. True 11. True 12. False 13. True 14. True 15. True 16. b 17. b 18. b 19. c 20. d 21. b 22. c 23. c 24. c 25. d 26. c

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Chap 16_9e_Standard 27. c 28. a 29. c 30. b 31. b 32. d 33. a 34. a 35. a 36. b 37. b 38. d 39. c 40. c 41. If the written agreement was intended to be the integrated contract of the parties, which the integration clause would indicate, then neither party may use parol evidence to contradict, vary, or add to its terms. Two exceptions to this rule include an incomplete or ambiguous contract; and fraud, misrepresentation, or duress. Tony may be able to argue that a warranty clause is naturally within the scope of a sales contract, and therefore the ambiguity should allow extrinsic evidence to be presented at trial. Also, Tony has an argument to claim that he was induced into entering into the contract because of the misrepresentations of the salesman. Tony may make these arguments; however, he would be arguing exceptions to the basic rule. 42. Probably not. The one-year rule would require the contract to be in writing and signed by the employer. It is impossible to perform the terms of the contract within one year from the date the contract was made. Here the contract was made on Wednesday. The one-year period runs from Wednesday until the corresponding date one year later. The terms of the contract, however, require performance of the job to start the following Monday for one year. The terms of the agreement exceed the one-year mark measured from the date the contract was formed by several days. Promissory estoppel might be an exception here. 43. Cattle are goods. The Statute of Frauds requires all contracts involving the sale of goods with a purchase price of $500 or more to be in writing with the defendant's signature. Here the purchase price is $50,000, so the agreement falls within the Statute of Frauds and is unenforceable unless one of the exceptions applies. A relevant exception for Tidwell is the "Goods delivered or paid for" exception. As Tidwell paid $1,000 towards the purchase price, he is entitled to two head of cattle.

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Chap 16_9e_Standard 44. Agreements requiring a writing within the Statute of Frauds include: (a) agreements for the sale of any interest in land; (b) agreements that cannot be performed within one year from the date of the agreement; (c) a promise to pay the debt of another; (d) a promise made by an executor of an estate to pay the debt of the estate; (e) a promise made in consideration of marriage; and (f) a contract for the sale of goods worth $500 or more. If the agreement does not have a writing sufficient to satisfy the Statute of Frauds, it is unenforceable, but not void or illegal. The parties may still choose to perform the contract. 45. The British Parliament passed the original Statute of Frauds in 1677 to prevent lying (i.e., fraud) in civil lawsuits. At that time, neither the plaintiff nor defendant was permitted to testify at trial. The Statute of Frauds was passed to provide juries with more reliable evidence as to the existence of a contract by requiring that certain types of contracts be in writing to be enforceable. Almost all states of the U.S. have passed their own version of the Statute of Frauds in order to provide courts with the best possible evidence of whether parties intended to make a contract. An argument for Statutes of Fraud is that they are a valuable tool for justice. The requirement of a writing cautions people to be careful before making or relying on a promise. An argument against Statutes of Fraud is that rather than preventing wrongdoing, they help people commit fraud. Someone might orally agree to terms and then, if the terms become unprofitable, walk away from the contract, knowing it would be unenforceable without a writing.

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Chap 17_9e_Standard Indicate whether the statement is true or false. 1. Char-Glo Industries contracted with Evergreen Lawn Service to mow and trim the company’s lawn. In the contract, Char-Glo included a clause prohibiting Evergreen from delegating its duties. Courts will ordinarily not enforce such a clause. a. True b. False 2. Contract prohibitions against assignments are invalid as a matter of public policy. a. True b. False 3. An assignment is valid from the moment it is made, regardless of whether the assignor notifies the obligor. a. True b. False 4. A party may make either an assignment or a delegation but cannot make both an assignment and a delegation simultaneously. a. True b. False 5. If Ray agrees to rake leaves for Michelle in exchange for Michelle's promise to pay off the debt Ray owes to Dean, then Dean is a donee beneficiary of the agreement between Ray and Michelle. a. True b. False 6. Once a duty is delegated, it relieves the delegator of their own liability to perform the contract. a. True b. False 7. If Valley Bridge contracts with Rainbow Painters to paint a bridge and the contract requires that only SherwinWilliams paint be used, then Sherwin-Williams, as third party beneficiary, will be able to enforce the contract against either Valley Bridge or Rainbow Painters. a. True b. False 8. Most, but not all, contract rights are assignable. a. True b. False 9. If Casey assigns her rights to receive income from a rental property to Errol, then Errol will legally acquire any rights to the income held by Casey. a. True b. False

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Chap 17_9e_Standard 10. Most types of duties may be delegated. a. True b. False 11. Claims for personal injury are generally assignable. a. True b. False 12. If Velma, as a birthday present, assigns to Jim her contractual right to collect $50 from Wood Co., this would be a gratuitous assignment. a. True b. False 13. A person who fails to qualify as a donee beneficiary or a creditor beneficiary is merely an incidental beneficiary and may not enforce the contract. a. True b. False 14. An assignment for consideration is irrevocable. a. True b. False 15. Assignment is prohibited when the obligor is agreeing to perform personal services. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 16. Generally, in comparison to a donee beneficiary, a creditor beneficiary has a. about the same legal rights. b. substantially greater legal rights. c. substantially fewer legal rights. d. virtually no legal rights. 17. Which statement regarding assignment is accurate? a. Gratuitous assignments are generally revocable regardless of whether they are oral or written. b. An assignment for consideration is irrevocable. c. An assignment becomes valid when the obligor receives notice of the assignment. d. An assignment must be written and follow all legal formalities.

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Chap 17_9e_Standard 18. Johann, a well-known musician, agrees to give ten guitar lessons to Elton for $2,000. Nothing in the contract itself prohibits a delegation. If Johann delegates his obligation to Eugene, a second-year musical student and enthusiastic guitar player, then the delegation will probably be a. permitted because contracts may be freely delegated. b. permitted because the contract is just for music lessons. c. prohibited because the contract is for service from a specific person. d. prohibited by the UCC because this is a sale of services. 19. Which statement most accurately describes third party beneficiary rights? a. A beneficiary may enforce a contract if the parties intended to benefit her and if enforcing the promise will satisfy a duty of the promisee to the beneficiary. b. If a promisee intended to make a gift to the beneficiary, the beneficiary may not enforce the contract. c. An intended third party beneficiary has no enforceable rights in a contract. d. Incidental beneficiaries have enforceable rights against both contracting parties. 20. Robert hired James, a CPA, to prepare his tax returns. James was too busy and delegated the work to Sara, also a CPA. This delegation is a. enforceable, as Sara is also a CPA. b. enforceable, as there was no expectation James would do the work. c. not enforceable, as Robert hired James to perform personal services. d. not enforceable, as this violates public policy. 21. Cheryl enters into a contract with Gabe. In this contract, Cheryl asks Gabe to pay the money he owes her from the contract to her friend Leah because Leah is having financial troubles. Leah is a. a third party creditor beneficiary. b. a third party donee beneficiary. c. a third party incidental beneficiary. d. the promisee in the contract. 22. Linda assigns to Ben a right to receive rent payments. In terms of Linda's warranty as the assignor, the law implies which of the following? a. that the tenant is solvent b. that Linda actually has a right to the rental payments c. that the tenant will actually pay d. No warranties are implied by law in an assignment. 23. Lincoln has a $100,000 life insurance policy and names his daughter Venus as the beneficiary. When Lincoln dies, the insurance company refuses to pay Venus the $100,000. Can she sue them to recover the money? a. No, because she is the promisor. b. Yes, because she is an intended beneficiary. c. Yes, because she is the assignee. d. No, because incidental beneficiaries cannot enforce contracts.

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Chap 17_9e_Standard 24. Molly and Craig are the original parties to a contract. Craig is obligated to design a website for Molly. They subsequently make an agreement with Eric that Eric should take the place of Craig and assume all of Craig's rights and duties under the contract. The agreement releases Craig from his obligations under the contract. This agreement is a. a novation. b. an accord and satisfaction. c. an assignment. d. a nullification. 25. Ted and Alice own their recreational vehicle (RV) subject to a security agreement to Third U.S. Bank to secure the repayment of the purchase money loan. Ted and Alice sell their RV to Bob and Carol, who agree to take over the loan payments to the bank. There is no novation with the bank. Under these facts, if Bob and Carol do not make the loan payments, Third U.S. Bank a. can sue Bob and Carol only. b. can sue Ted and Alice only. c. can sue Bob, Carol, Ted, and Alice. d. cannot sue anyone but can repossess the RV. 26. Which of the following duties can probably be delegated? a. an agreement to perform an operation b. a contract to paint a picture c. an agreement by an attorney to draft a contract d. an agreement to paint a house 27. Meyer's Grocery signed a contract to build a store in Richmond, Kentucky. Soon afterward, Meyer's breached the contract. Which of the following can sue Meyer's to enforce the contract? a. a local home improvement store that hoped to sell building materials to the construction crew b. neighborhood residents who were looking forward to shopping at Meyer's c. the operator of a food truck, who intended to sell lunch to the construction crew d. None of these are correct. 28. Brandon orally assigned his right to $100 from a lawn mowing contract to Will as a gift. This assignment is a. not valid because it was not in writing. b. valid even though it was oral and there was no consideration from Will. c. irrevocable once Brandon has told Will about the gift. d. not valid because Will gave no consideration for the assignment. 29. Martina hired Alexander to renovate her home and specifies that Alexander use Spiffy Painting for all the painting because of Spiffy's excellent reputation. In this case, Spiffy is a(n) a. creditor beneficiary. b. incidental beneficiary. c. intended beneficiary. d. debtor beneficiary.

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Chap 17_9e_Standard 30. Lawrence took out a life insurance policy in which his daughter, Madeline, is named as a beneficiary. Madeline is a. a promisor. b. an obligor. c. an intentional beneficiary. d. an incidental beneficiary. 31. The status of a third party is determined by a. the type of contract. b. whether the third party gave consideration. c. the reasonable expectations of the third party. d. the intent of the contracting parties. 32. A donee beneficiary a. is not entitled to enforce a contract against either party. b. usually does not give consideration in return for the gift. c. will generally become a creditor beneficiary after their rights vest. d. is an incidental beneficiary. 33. A rock group assigns its payment under a performance contract to the Costume Shop, a business that has supplied the group with outrageous stage outfits and to which the group owes a great sum of money. Under this arrangement, the rock group is the a. assignor. b. assignee. c. delegator. d. delegatee. 34. Suppose that Maude has a contract with Nelson, who is obligated to deliver 700 live frogs to her shop. Maude (assignor) assigns her rights to Obie (assignee). Maude does not notify Nelson (obligor) of the assignment. Nelson delivers the frogs to Maude. In this case, a. Nelson will have no further obligations under the contract, and Maude owes Obie 700 frogs. b. Nelson still owes Maude 700 frogs on the contract. c. no debt is owed to any parties. d. Obie is required by law to sign a novation. 35. An assignment is valid a. three business days from declaring the assignment. b. when the obligor notifies the obligee. c. when the assignor notifies the obligor. d. from the moment it is made.

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Chap 17_9e_Standard 36. Harris, who owes Nathan $4,000, sells Bethany a used car for $5,000, payable in 30 days. Harris immediately tells Nathan that she doesn't have the money she owes him, but she is willing to give him her claim to Bethany's $5,000. Nathan agrees and gives up his claim against Harris for $4,000, and Harris notifies Bethany of the assignment. In this case, Bethany is best described as the a. assignee. b. assignor. c. obligor. d. obligee. 37. Jerry purchased a laptop computer for his personal use from Computer City on an installment loan contract. The sales contract stated that in the event the contract is assigned to a third party, the purchaser (Jerry) promises he will not assert any claim or defense against the assignee which he might have against Computer City. Computer City immediately assigns the contract rights to Finance USA. The computer stops working within two weeks of the purchase. a. This is a valid waiver of defense clause. Jerry signed the contract, so he can't raise a defense to Finance USA. b. Finance USA is an intended third party beneficiary and may therefore enforce the contract. c. In general, this type of waiver is not permitted in consumer contracts, so Jerry can raise his claim against Finance USA. d. This is a delegation of Jerry's duties and the delegator remains liable on the contract unless a novation agreement is made. 38. A rock group assigns its payment under a performance contract to the Costume Shop, a business that has supplied the group with outrageous stage outfits and to which the group owes a great sum of money. This is a(n) a. valid assignment because of the rule of freedom to contract. b. valid assignment because this is a simple transfer of the right to receive money. c. invalid assignment because it increases the burden of the payor. d. invalid assignment because this is a personal services contract. 39. Susan took out a life insurance policy on herself, paying all of the premium payments. She named her daughter, Jessica, as the beneficiary under the policy. Jessica has not given anything in consideration for the policy. Jessica is a(n) a. donee beneficiary who has rights to enforce the policy once Susan dies. b. creditor beneficiary who has rights to enforce the policy once Susan dies. c. incidental beneficiary because Jessica did not give any consideration for the policy and therefore cannot enforce the policy even when Susan dies. d. promisor in the contract with no enforcement rights. 40. When is an assignment valid and enforceable against an obligor? a. from the moment the assignment is made b. from the moment the obligor signs the contract c. from the moment the assignee gives consideration d. from the moment the obligor is notified of the assignment

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Chap 17_9e_Standard 41. Shirley is an actress under contract with Twentieth Century. Shirley agreed to perform the lead role in a musical to be filmed in Hollywood by Twentieth Century. At the last minute, Twentieth Century decided to scrap the musical and assigned its rights in Shirley to MGM. MGM was planning to film a western, requiring Shirley to spend six months filming in Australia. Can Shirley successfully prevent this assignment?

42. Kirk purchases a sailboat on credit from Lakefront Sales, and Lakefront keeps a security interest in the boat. Lakefront then assigns the security interest to First Finance Co. Explain what having a security interest means. Under the UCC, what defenses can Kirk assert against First Finance?

43. Andrew Durham was injured in a job-related accident that resulted in a workers' compensation settlement agreement with the employer's insurance carrier, Traveler's Indemnity Company. The settlement agreement required Traveler's to pay Durham $2,500 per month for the rest of his life. To finance its obligation, Traveler's purchased an annuity in its name. The settlement agreement required Traveler's approval or written consent prior to an assignment of the annuity payments. Durham later decided to open a business and went to a credit union for a $214,000 loan. The credit union loaned the money, taking a security interest in Durham's monthly annuity payments. Traveler's consent was never secured. Discuss the conditions in which a right may not be assigned and assess if this was a valid assignment.

44. Discuss the potential liability differences between a delegation and a novation.

45. Briefly discuss the enforceability of contracts by third parties.

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Chap 17_9e_Standard Answer Key 1. False 2. False 3. True 4. False 5. False 6. False 7. False 8. True 9. True 10. True 11. False 12. True 13. True 14. True 15. True 16. a 17. b 18. c 19. a 20. c 21. b 22. b 23. b 24. a 25. c 26. d

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Chap 17_9e_Standard 27. d 28. b 29. b 30. c 31. d 32. b 33. a 34. a 35. d 36. c 37. c 38. b 39. a 40. d 41. Yes. This assignment of rights would substantially change Shirley's duties under the original contract. First of all, her contract with Twentieth Century was for a musical. Shirley could argue that a western is substantially different from a musical. Secondly, under the MGM movie she would have to be on location a substantial distance away from home and Hollywood, where the other movie was to be filmed. 42. A security interest is a legal right in personal property that assures payment. Lakefront has a right to take the sailboat back if Kirk fails to make his payments. First Finance, the assignee of the security interest, generally has all the rights Lakefront Sales had. Under UCC Section 9-404, Kirk may generally assert any defense against First Finance that arose from the contract, such as refusal to continue making payments because the boat has a defective hull. Also, Kirk may generally assert any defense that arose before notice of assignment; for example, if Lakefront Sales committed fraud in the sale of the boat. 43. Assignments can be made unless: (a) the assignment would substantially change the obligor's rights and duties; or (b) the assignment is forbidden by law or public policy; or (c) assignments are validly precluded by the contract itself. The original contract between Durham and Traveler's required Traveler's written consent to make a valid assignment. The assignment is therefore not valid. 44. When an obligor delegates duties under a contract, the obligor is not relieved of the liability to perform the duty as promised. Thus, the obligee can sue the original obligor because of her liability under the original contract. Also, the obligee can sue the delegatee directly because the obligee is a third party intended beneficiary with regard to the contract between the delegator and the delegatee. A novation is a three-way agreement where the obligee agrees to release the obligor from all liability and to substitute in the name of the delegatee, relieving the delegator from liability.

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Chap 17_9e_Standard 45. Contracts can be enforced by third parties when they were intended beneficiaries of the contracting parties. Intended beneficiaries would include creditor and donee beneficiaries. Others who might benefit from a contract but the parties did not intend to benefit are called incidental beneficiaries. They have no right to enforce the contract.

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Chap 18_9e_Standard Indicate whether the statement is true or false. 1. Assume that Jessie and Lester have formed a contract whereby Jessie agrees to deliver 10,000 dozen "Grade A Large Eggs" to be shipped in paper cartons. A shortage of paper makes paper cartons much more expensive, so Jessie uses styrofoam cartons and ships the eggs. Lester is entitled to cancel the contract based on a material breach of the contract. a. True b. False 2. Most contracts are discharged by mutual agreement of the parties. a. True b. False 3. At times, a court will refuse to enforce an express condition on the grounds that it is unfair and harmful to the

general public. a. True b. False 4. The legal right to sue for a breach of contract is subject to a statute of limitations. a. True b. False 5. Abdulla hired Granite Construction to build an addition onto his home. Granite Construction dug the foundation but then abandoned the project. Granite Construction is entitled to receive the full contract price minus the value of the defects. a. True b. False 6. Concurrent conditions arise when there is both a condition precedent and a condition subsequent. a. True b. False 7. In negotiating the purchase of a vehicle, the sales representative told Karla, "I guarantee that you will be personally satisfied with this car." The guarantee was written on the contract when Karla purchased the car. If a controversy arises over Karla's satisfaction, the court will apply a subjective standard, which means Karla's judgment must be reasonable. a. True b. False 8. The statement, “You will have a job with Snelling & Snelling as long as you complete your degree in business administration this May” does not create a condition because it does not include the phrase “provided that.” a. True b. False

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Chap 18_9e_Standard 9. Monumental, Inc., contracts with Champion Builders to erect a three-story office building on a parcel of land it has purchased. Before construction begins, the local zoning board changes the zoning of the parcel (and those adjoining it) to residential use only. Monumental’s contract with Champion is discharged. a. True b. False 10. An employment contract is an example of a personal satisfaction contract. a. True b. False 11. Commercial impracticability means some event has occurred that neither party anticipated and fulfilling the contract would now be extraordinarily difficult and unfair to one party. a. True b. False 12. Alice signs a contract with Bob to buy Bob's house for $150,000, with the clause, "if I am able to obtain a mortgage loan for $125,000, at no more than 7% interest, payable over 15 years." Assume that Alice tries but is unable to obtain the described loan, and therefore refuses to proceed with the purchase. Alice is in breach of the contract. a. True b. False 13. A wholesaler of coffee notifies a retailer that it cannot fulfill its contractual obligation to deliver 1,000 pounds of coffee at the agreed upon price of $2.00 per pound next month because of recent price increases in coffee. The retailer may treat the wholesaler as having breached the contract and sue for damages even though the wholesaler's performance is not due until next month. a. True b. False 14. Ramon purchased 5,000 pounds of coffee from Quick Jump Coffee. The coffee was to be delivered on September 1. Since the contract included a date for performance, time is of the essence and the delivery date is strictly enforceable. a. True b. False 15. A court may, at times, discharge a party who has not performed. a. True b. False

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Chap 18_9e_Standard Indicate the answer choice that best completes the statement or answers the question. 16. Which of the following events would have the best chance of excusing performance of a contract based on commercial impracticability? a. The price of a raw material increases slightly so that the contract will not be as profitable. b. An unforeseeable trade embargo causes prices to triple. c. The promisor of personal services dies. d. The subject matter of the contract is destroyed. 17. Al contracted to sell his house to Bev. Subsequently, they both changed their minds and decided to cancel the contract. The contract between Al and Bev is discharged by a. full performance. b. agreement. c. accord and satisfaction. d. novation. 18. Melody is a recent graduate of State Law School. She lands an impressive employment contract with the firm of Dewey, Cheathem, and Howe, Attorneys at Law, on the stated provision that she must pass the upcoming bar exam. This provision in the employment agreement is a(n) a. condition precedent. b. condition subsequent. c. implied condition. d. concurrent condition. 19. When one party breaches a contract, the discharged party a. has no obligation to perform. b. may sue the breaching party for damages. c. has no obligation to perform, and may sue the breaching party for damages. d. None of these are correct. 20. Teresa tells her son Noah that she will give him her car when she finds a new job, provided that he gets all As in his classes this semester. Teresa's finding a new job is __________, and Noah's grades are __________. a. a condition precedent; a condition precedent b. a condition subsequent; not a condition c. not a condition; a condition precedent d. a condition subsequent; a condition subsequent

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Chap 18_9e_Standard 21. In January 2018, Professor Noe entered into a contract with State University. She agreed to teach full time during the 2018-2019 academic year. Professor Noe died on May 31, 2018. Her estate a. is obligated to find another person who will agree to teach during the academic year. b. is discharged from any further obligations under the contract. c. will be discharged from any obligations under the contract only if it can be shown that her death was unexpected. d. will not be discharged. If the University has to pay more in order to hire a comparable substitute professor at the last minute, then the estate will be responsible for the difference in pay. 22. Statutes of limitations a. define how much money the injured party can sue for under a breach of contract claim. b. define whether there has been substantial performance of a contract or a material breach. c. limit the time in which an injured party may sue. d. only apply to the sale of goods. There is no statute of limitations on a service contract. 23. Mary contracted to buy 100 table lamps. Under the terms of the agreement, Mary is to pay for the lamps upon delivery. This is an example of a a. condition precedent. b. concurrent condition. c. condition subsequent. d. service condition. 24. A contract between a company in the United States and one in China contained a clause that stated: "If an event happens which is extraordinary and out of the control of the parties such as a strike, act of God, fire, accident, or transportation difficulties, then the affected party shall be relieved of its obligations under the contract." This type of clause is a(n) a. objective impossibility clause. b. force majeure clause. c. concurrent condition clause. d. condition precedent clause. 25. Jackie hires Charles to lay new carpet in her bedroom. Charles does such a bad job, that the only way to fix the carpet is to start over and relay the carpet. Which of the following best describes this situation? a. This is substantial performance. Jackie must still pay something to Charles. b. This is a material breach. Jackie must still pay something to Charles. c. This is substantial performance. Jackie owes nothing to Charles. d. This is a material breach. Jackie owes nothing to Charles. 26. Harry agreed to pay $100 to rent a rooftop spot in downtown Seattle to watch the New Year's Eve festivities. The festivities were unexpectedly canceled because of concern over a terrorist attack. Harry is a. obligated to pay the $100. b. not obligated to pay under the commercial impracticability doctrine. c. not obligated to pay under the force majeure doctrine. d. not obligated to pay under the frustration of purpose doctrine. Copyright Cengage Learning. Powered by Cognero.

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Chap 18_9e_Standard 27. Ron operates a garbage pickup business. He contracts to pick up garbage from an apartment complex for the next 52 weeks at a price of $150 per week. Unexpectedly, the landfill center where Ron takes the garbage to dispose of it, files for bankruptcy. As a result, Ron must travel an additional 100 miles to the nearest landfill center, turning Ron's expected profit into a loss of $40 per week. Ron's best argument in support of his petition to be discharged from the contract is a. the mail box rule. b. commercial impracticability. c. frustration of purpose. d. true impossibility. 28. The law strongly prefers to apply the objective standard to contracts because a. it requires both parties to carry out their obligations in good faith. b. the subjective standard gives unlimited power to the promisee. c. it is almost impossible to breach a contract under this standard. d. the subjective standard gives unlimited power to the promisor. 29. M & E contracted to sell 500 music stands to Coda, Inc. M & E shipped the stands in accordance with the agreement. Coda paid for the stands as promised. The contract between M & E and Coda is discharged by a. full performance. b. agreement. c. rescission. d. accord and satisfaction. 30. In which case would true impossibility NOT apply? a. Nelson contracted with a local restaurant to supply 10,000 pounds of potatoes, but a tornado tore through his field, completely destroying it. b. A record company contracted with Darlene to produce a CD of traditional folk ballads; unfortunately, Darlene died before recording began. c. Reed agrees to purchase an expensive piece of jewelry for $25,000; a week later, he tells the jeweler that he simply does not have that kind of money. d. None of these are correct. 31. The distinction between a condition precedent and a condition subsequent a. is important because it determines whether the burden of proof is beyond a reasonable doubt or preponderance of the evidence. b. seldom arises in insurance cases. c. determines who has the burden of proof. d. is important because it determines whether the condition must be express or whether it can be implied.

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Chap 18_9e_Standard 32. Which of the following statements is accurate concerning express conditions? a. A court will enforce any express conditions intended by the parties. b. A court may refuse to enforce an express condition intended by the parties if the court determines it is unfair and harmful to the general public. c. A court requires strict performance if a clause of the contract expressly demands it. d. A court applies an objective standard whenever ruling on a personal satisfaction contract. 33. Dodger bought an insurance contract from Liberty Farm Co. The policy contained a clause stating that all claims for losses had to be reported within 45 days after the date of the loss or the claim would be barred. Time is stated to be of the essence. Dodger sustained a covered farm loss, but did not report it to Liberty Farm until 50 days later. Liberty Farm denied coverage for the claim. If Dodger sues, who wins? a. Dodger wins; the contract was substantially performed. b. Liberty Farm wins; there was failure of a condition subsequent. c. Dodger wins; courts will not enforce a time-of-the-essence clause. d. Liberty Farm wins; the impossibility doctrine applies. 34. Sea Rovers, Inc., contracted to sell 1,000 pounds of shrimp to the Seafood Shack with delivery on June 1. On May 1, Sea Rovers advised the Seafood Shack that it would not be able to deliver the shrimp. The Seafood Shack a. can sue Sea Rovers immediately for breach of contract. b. must wait until June 1 to see if Sea Rovers will perform before suing for breach of contract. c. cannot sue Sea Rovers because Sea Rovers gave adequate notice. d. must wait until actual damages are determined before it can sue. 35. Mohammed suffers a substantial financial loss when Olson Company breaches a contract. Under the statute of limitations, to receive damages Mohammed must file suit against Olson Company within a. one year. b. two years. c. five years. d. It depends on the state where Mohammed lives. 36. Dana hires Paris to paint a portrait of her poodle, "Mack." The painting is to be done to Dana's personal satisfaction. Upon completion of the painting, which of the following will be true? a. Dana may refuse to accept the painting if she really does not like it. b. Dana may refuse to accept the painting only if a reasonable person would not like it. c. Dana may refuse to accept the painting if she cannot afford to pay for it. d. Dana may not refuse to accept the painting.

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Chap 18_9e_Standard 37. What is the key to all conditional clauses? a. If a condition in a contract does not occur, public policy will require only substantial performance by the party for whom the condition failed. b. If a contract contains a conditional clause, the requirement of good faith will be eliminated. c. If a condition in a contract does not occur, one party will probably be discharged without having to perform his or her obligations under the contract. d. If a contract contains a conditional clause, it must be expressly written with specific language. 38. Linda agrees to buy Missy's Greyhound race dog for $2,000. Linda is to deliver the money and take possession of the dog the next morning. That night, running his best race ever, the dog runs away from Missy, never to be seen again. What will be the outcome in this case? a. Linda must give $2,000 for the dog, but only if the dog was insured. b. Linda must give $2,000 for the dog, but only if Missy can find a replacement dog within a reasonable time. c. Missy must find another dog for Linda or pay her $2,000. d. Linda does not have to pay for the dog; the contract duties are discharged. 39. The Grand Performance Hall is in the process of remodeling and is scheduled to open for business after being closed for 50 years. As part of the remodeling, it is installing a new sound system. The sound system is to be installed by Sound Systems, Inc., on or before April 10. Opening night of the hall is May 1. The contract states that "time is of the essence" because of the opening-night deadline. Sound Systems has some financial difficulties and doesn’t deliver the system until April 20. Grand Hall refuses to accept it, and Sound Systems sues. What will be the result? a. Grand Hall wins; the contract date was strictly enforceable. b. Sound Systems wins; the contract was substantially performed. c. Grand Hall wins; there was commercial frustration. d. Sound Systems wins; there was a true impossibility. 40. In January, All Seasons, Inc., ordered $4,000 of fireworks from Kaboom Ltd. with delivery to be on or before June 1. On April 15, Kaboom notifies All Seasons that it will not be able to perform the contract as agreed. How will the law characterize Kaboom's actions? Does All Seasons have to wait until June 1 before buying fireworks from another supplier?

41. What does the term "substantial performance" mean? What factors are generally considered when determining whether one of the parties has substantially performed?

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Chap 18_9e_Standard 42. Buddy was hired to play drums for a rock group scheduled to tour the Midwest. Part way through the tour, Buddy was tragically killed in a plane crash. The tour had to be discontinued until a new drummer could be found. The band lost money on the tour. Is Buddy's estate or agent responsible for the loss to the band?

43. Southern Fuels Co. and Langham-Hill Petroleum, Inc., are both in the business of buying and selling large quantities of petroleum products. In October, the parties entered into a fixed price contract wherein Southern agreed to purchase 4.2 million gallons of No.2 fuel oil at a specified price per gallon to be delivered in four monthly installments. The contract included a force majeure clause. The first three monthly shipments of oil were purchased by Southern as agreed. In January of the next year, the price of oil in the world market collapsed as a result of Saudi Arabian attempts to regain its share of the world oil market. Southern refused to purchase the last shipment under the contract. Southern informed Langham-Hill that because the drop in world oil prices was caused by Saudi Arabians who were "outside Southern's control" that it was invoking the force majeure clause. Langham-Hill sued for damages in the amount of $306,075. What is a force majeure clause? Southern's basic argument is that it can now buy oil at a substantially lower price. Will Southern succeed on this basis?

44. Name and describe the types of conditions, explain how conditions are created, and discuss whether it is important to identify the type of condition in a contract.

45. Identify the factors courts consider in deciding the validity of commercial impracticability and frustration of purpose claims.

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Chap 18_9e_Standard Answer Key 1. False 2. False 3. False 4. True 5. False 6. False 7. False 8. False 9. True 10. True 11. True 12. False 13. True 14. False 15. True 16. b 17. b 18. b 19. c 20. a 21. b 22. c 23. b 24. b 25. d 26. d

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Chap 18_9e_Standard 27. b 28. b 29. a 30. c 31. c 32. b 33. b 34. a 35. d 36. a 37. c 38. d 39. a 40. Kaboom's actions amount to an anticipatory breach. It has clearly indicated it does not intend to perform the contract. All Seasons does not need to wait until June 1 before buying the supplies from another source. Kaboom is responsible for the breach just as if it had breached on June 1. 41. Substantial performance occurs when one party fulfills enough of its contract obligations to warrant payment. In other words, it is performance that is less than perfect, yet it complies with the essential purpose of the contract. In a contract for services, a party that substantially performs its obligations will receive the full contract price minus the value of the defects. The following factors are often considered: How much benefit has the promisee received? If it is a construction contract, can the owner use the thing for its intended purpose? Can the promisee be compensated with money damages for the defects? Did the promisor act in good faith? 42. True impossibility of performance terminates and discharges personal service contracts. Death of the drummer certainly leads to a situation of impossibility of performance. Neither Buddy's estate nor his agent is responsible for the loss to the band. 43. A force majeure clause is a provision included in a contract which allows cancellation of the contract in the case of an extraordinary, unexpected event, such as an act of God, fire, labor dispute, or accident. A court will generally not enforce the clause if one party is trying to use it to escape from routine financial problems. A force majeure clause is not intended to buffer a party from the normal risks of a contract. These parties were sophisticated merchants who regularly entered into contracts in the international oil market. The normal risk of this type of contract was that the market value of the contract would change, so Southern would not succeed based on the argument that it can now buy at a substantially lower price.

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Chap 18_9e_Standard 44. A condition is an event that must occur before a party becomes obligated under a contract. Courts divide conditions into three categories: (a) conditions precedent, which must occur before a duty arises; (b) conditions subsequent, which must occur after a particular duty arises; and (c) concurrent conditions, which create simultaneous duties to perform on the part of both parties. Conditions may be created expressly, although no special language is required. Conditions may also be implied. It is important to make the distinction between a condition precedent and a condition subsequent because that determines who must prove whether the condition occurred. If there is a condition precedent, the plaintiff has to prove the condition happened and thus the defendant was obligated to perform. If there is a condition subsequent, the defendant must prove the condition occurred, relieving him of the contractual obligation. 45. In deciding whether a change in circumstances should permit one side to escape its duties under the doctrines of commercial impracticability or frustration of purpose, courts consider the following: (a) mere financial difficulties will never suffice to discharge a contract; (b) the event which led to the claim must have been truly unexpected; and (c) if the promisor must use a different means to accomplish her task, at a greatly increased cost, she probably does have a valid claim of impracticability.

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Chap 19_9e_Standard Indicate whether the statement is true or false. 1. Expectation interest can best be described as money spent in reliance upon the agreement. a. True b. False 2. Someone breaches a contract when he or she fails to perform a duty, even with a valid excuse. a. True b. False 3. Most courts hold that a seller of goods is NOT entitled to consequential damages. a. True b. False 4. Banner enters into a contract with Sylvia to buy her house for $150,000. Sylvia decides later not to sell because she is so emotionally attached to the house. Banner insists that he is entitled to the house. Banner can successfully sue for specific performance. a. True b. False 5. Carswell, a contractor, enters into a contract with Helen, a homeowner, to remodel her bathroom. The contract provides a specific completion date. The contract provides that if Carswell does not have the job finished by the date, Helen may deduct $200 per day from the contract price until the job is finished. This is an example of liquidated damages. a. True b. False 6. Tess, a tenant, moves from her apartment in breach of the lease agreement. The landlord, Lenny, does not attempt to rent the apartment until the date of the lease expiration, and so has no responsibility to minimize damages. a. True b. False 7. Under the UCC, the buyer is entitled to consequential damages if the seller could have reasonably foreseen them. a. True b. False 8. Specific performance is available when the subject matter of the contract is unique. a. True b. False 9. Someone breaches a contract when he fails to perform a duty without a valid excuse. a. True b. False

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Chap 19_9e_Standard 10. To win expectation damages, the injured party must prove the breach of contract caused damages that can be quantified with reasonable certainty. a. True b. False 11. Ernest operates an ice cream stand during the months of May, June, July, and August. Ernest's ice cream machine is broken and needs a new part to run. He contracts to have the part shipped to him by special carrier. Ernest emphasizes that the part needs to be delivered by April 25 and the carrier agrees, knowing that Ernest intends to open his stand May 1. If the shipper fails to deliver the part on April 25, Ernest will be able to recover consequential damages caused by the delay. a. True b. False 12. The expectation interest is designed to put the injured party in the position he or she would have been in had both sides fully performed their obligations. a. True b. False 13. Liquidated damages are awarded to parties who have experienced an injury to their legal rights but have no actual loss. a. True b. False 14. Nominal damages are awarded in contract cases in which a damage amount was named in the contract. a. True b. False 15. Dr. Gonzalez ordered specialized surgical equipment from Physician’s Supply Co., but the company informed Dr. Gonzalez that it would not be able to meet his order by the agreed date. Even if Dr. Gonzalez does nothing to secure equipment from another source, he will be able to recover damages since the contract was breached by Physician’s Supply, not Gonzalez. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 16. Ralph is a professional football player. He signs a valid contract with the Jets. Later, the Giants offer him more money, so he signs a contract with them. If the Jets sue Ralph, the most likely result will be? a. The court will order Ralph to play with the Jets. b. The court will order Ralph to play with the Jets, but Ralph is entitled to be paid the amount he negotiated under the Giants contract. c. The court will issue a preliminary injunction barring Ralph from playing with any team other than the Jets during the course of the lawsuit. d. The court will order Ralph to pay compensatory damages in the amount of the difference between the two contracts.

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Chap 19_9e_Standard 17. The remedy of reformation a. applies only when money damages are inadequate. b. can be used to correct mistakes in the original contract. c. is available only if fraud is involved. d. is a commonly used remedy. 18. The goal of expectation interest is to a. serve as a penalty for breaching a contract. b. award damages under the UCC when the sale of goods is the subject of the contract. c. put the non-breaching party in the position it would have been in had the contract never been formed. d. put the non-breaching party in the position it would have been in if the contract hadn't been breached. 19. Rich and Archie sign an agreement in which Archie agrees to deliver ten cases of champagne in 5 days. The parties negotiated and meant to say in the written agreement, delivery in 50 days. If the two cannot settle this dispute, and Archie still wants to deliver the champagne, then Archie should sue for the remedy of a. reformation. b. rescission. c. restitution. d. reliance. 20. Larry purchased a Leisure Lawnmower because the company salesperson intentionally misled him by assuring him that the mower was self-propelled, had a mulching feature, and had a five-year unlimited manufacturer's warranty. When Larry finds out that his new Leisure Lawnmower is not self-propelled, does not mulch, and has a 90-day warranty, he may successfully sue for a. reformation of the contract only. b. restitution only. c. restitution and possibly punitive damages. d. compensatory damages only. 21. All Seasons, Inc., ordered $5,000 worth of Christmas decorations from Santa, Inc. The shipment of decorations was to arrive no later than October 1, but did not arrive until December 1. All Seasons was able to purchase some of the unfulfilled order through other suppliers, but had to pay 15% more than the price under contract with Santa, Inc. As a result of the delay, All Seasons’ sales were down 25%. All Seasons can recover a. punitive damages. b. nominal damages. c. compensatory damages and consequential damages. d. compensatory damages, consequential damages, and punitive damages.

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Chap 19_9e_Standard 22. Tina and Leroy have a contract for the sale of a vinyl record album. Tina, the seller, breaches the contract. A court will be most likely to order specific performance if there are __________ identical copies of the record album available for sale on the market. a. 2 b. 2,000 c. 20,000 d. 200,000 23. To "undo" a contract and put the parties where they were before they made the agreement is called a. restitution. b. rescission. c. reliance. d. remediation. 24. In a promissory estoppel case, a court will generally award a. only reliance damages. b. specific performance. c. both reliance and punitive damages. d. only nominal damages. 25. The concept that expectation interest is designed to put the injured party in the position he or she would have been in had both sides fully performed their obligations is found in a. Bi-Economy Market, Inc. v. Harleysville Ins. Co. of New York. b. Hadley v. Baxendale. c. Hawkins v. McGee. d. None of these are correct. 26. If a court awards nominal damages, it will generally a. award compensatory damages as well. b. not make a determination as to whether there has been a breach of the contract. c. award punitive damages for the intentional breach of the contract. d. award a very small amount of money. 27. To make a good faith purchase of goods similar to those in a contract is to a. rescind. b. breach. c. cover. d. mitigate.

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Chap 19_9e_Standard 28. Which type of interest is designed to benefit the injured party by returning that object he or she has conferred on the other party, which would be unjust to leave with that person? a. reliance interest b. expectation interest c. restitution interest d. None of these are correct. 29. Which of the following is an example of incidental damages you might be awarded if you are wrongfully terminated from your job? a. the costs of psychological counseling b. the costs of mailing resumes to prospective employers c. the costs of a new wardrobe for future interviews d. the costs of cosmetic surgery 30. Specific performance may be available for the breach of a contract to sell a. an original painting. b. 20 shares of Walmart stock. c. a Nintendo Wii video game system. d. a 2007 Mustang in mint condition. 31. Bob, a house builder, contracts with Ollie to build a house on Ollie's lot. The total price of the construction is $100,000. Moreover, Bob’s profit will be $20,000. After Bob has put $10,000 worth of materials into the house, Ollie wrongfully refuses to let him finish the house. If Bob sues for damages, he will be able to collect a. $10,000. b. $20,000. c. $30,000. d. $100,000. 32. Solomon breaches his contract with Neal to purchase the 500 pairs of socks he had promised to buy. Neal is able to sell the 500 pairs to Renny for a much lower amount. Neal then sues Solomon for damages. Neal will be able to recover a. the amount in the liquidated damages clause. b. the difference between Solomon's contract price and the amount paid by Renny. c. Solomon's contract price. d. an amount which depends on whether Solomon intentionally breached because he found cheaper socks somewhere else. 33. Specific performance is always available in a. agreements involving farm goods. b. agreements involving vehicles. c. real estate contracts. d. employment contracts.

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Chap 19_9e_Standard 34. A contract clause which specifies the amount of damages to be paid in the event of a breach is called a. a covenant of damages clause. b. a reliance interest of damages clause. c. a liquidated damages clause. d. an incidental damages clause. 35. Mulligan Domestics Co. breached a contract by refusing to accept its order for 60 bolts of fabric from Wellington Mills, although the fabric met the contract specifications. In this situation, Wellington Mills a. has at least four remedies under the UCC. b. may resell the fabric to someone else and, if it sues Mulligan, Wellington Mills will be awarded the full contract price. c. may choose not to resell the fabric and settle for the difference between the contract price and the market value. d. would be awarded consequential damages by most courts. 36. Reformation is a. a type of restitution. b. the most common of all remedies. c. a form of quasi-contract. d. the least common of all remedies. 37. In breach of the partnership agreement, Trimble, a partner in the partnership of Morris, Newt, and Oppie, Ltd. quits the partnership and goes to work for a competitor. The former partners may ask the court for a. specific performance requiring Trimble to return to work for Morris, Newt, and Oppie, Ltd. b. an injunction to prevent Trimble from working in competition with the former partners. c. special damages under the rule of Hadley v. Baxendale. d. liquidated damages as compensation for the breach. 38. Farmer Elvin is holding 200 pounds of potatoes in storage for Chef Noble but Chef Noble has breached the contract by failing to pay for the potatoes. If Farmer Elvin sells the potatoes to a local diner to make potato soup and salad, then this action would be considered a(n) a. reasonable mitigation of damages. b. attempt to maximize damages. c. attempt to realize an unwarranted profit. d. attempt at reformation. 39. Carlos is hired to paint a house for $700. Before he starts, the woman who hired Carlos tells him she does not want the job done after all. Carlos finds another house-painting job that afternoon, but it pays only $500. If Carlos sues the woman for damages and is awarded $200, that amount is an example of a. direct damages. b. nominal damages. c. consequential damages. d. incidental damages.

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Chap 19_9e_Standard 40. Which of the following statements concerning liquidated damages is NOT TRUE? a. A liquidated damages clause will be enforced, if, when the contract was made, it was difficult to estimate actual damages. b. The amount of liquidated damages must be a reasonable estimation of the actual harm resulting from a breach. c. Nominal damages are not the same thing as liquidated damages. d. Liquidated damages are enforceable even if the amount is considered to be a penalty on the breaching party. 41. Abigail signed a contract to purchase a new car from Wolf's Auto Sales Company. The seller breached its agreement by not delivering the car. Abigail went to another car dealer and purchased the same model of car at the same price. Although she had experienced a legal injury, Abigail has no actual financial or other damages as a result of the breach. If Abigail sues and wins, what type of damages will she be awarded?

42. Identify and describe the principal contract interests a court may seek to protect.

43. In a construction contract, there is a $1,000 per day estimate of damages for each day that the contract runs over the completion date. The contractor is 30 days late when the job is completed, resulting in a prospective damage award of $30,000. What is this type of clause, and when will it be enforced?

44. Larry wanted to buy a 1957 Cadillac once owned by Reggie Jackson. Larry entered into a contract with the owner agreeing to pay $102,000. The owner subsequently changed his mind. If Larry sues, what remedies are potentially available?

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Chap 19_9e_Standard 45. Discuss the purpose of an injunction and how the two types of injunctions covered in the textbook are used.

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Chap 19_9e_Standard Answer Key 1. False 2. False 3. True 4. True 5. True 6. False 7. True 8. True 9. True 10. True 11. True 12. True 13. False 14. False 15. False 16. c 17. b 18. d 19. a 20. c 21. c 22. a 23. b 24. a 25. c 26. d

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Chap 19_9e_Standard 27. c 28. c 29. b 30. a 31. c 32. b 33. c 34. c 35. c 36. d 37. b 38. a 39. a 40. d 41. Abigail will be awarded nominal damages. Nominal damages refer to a token sum, typically one dollar. Nominal damages are given to a plaintiff who can demonstrate that the defendant breached the contract but cannot prove serious injury. Because Abigail was able to purchase the same car for the same amount, she has no real injury. A nominal damages award recognizes the technical breach by the car dealership, but because Abigail had no injury due to the breach, she is not entitled to compensatory damages. Nominal damages provide the plaintiff with a "moral victory." 42. The principal contract interests a court may seek to protect are: a. Expectation interest. The intent is to put the injured party in the position he would have been in if both parties had fully performed their obligations. Expectation damages include direct, consequential, and incidental damages. b. Reliance interest. The intent is to put the plaintiff in the position he would have been in if the parties had never entered into a contract. c. Restitution interest. The objective is to return to the injured party a benefit that he has conferred on the other party which it would be unjust to leave with that person. d. Equitable interest. In some cases, money damages will not suffice to help the injured party. Something more is needed. 43. This type of clause is known as a liquidated damages clause. Generally, this type of clause will be enforced if, at the time of creating the contract, it was very difficult to estimate actual damages, and the liquidated amount is reasonable. In this case, if the total construction contract involved millions of dollars, the estimate of damages may reasonably amount to a $1,000 per day. If the construction project is a small one, the court may see this amount as too much and not enforce the clause.

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Chap 19_9e_Standard 44. Larry could seek specific performance. Since the item is unique and a similar vehicle is not readily obtainable, the court could order the owner to sell the car to Larry by ordering specific performance. Although specific performance would be available, Larry could choose to seek compensatory damages, assuming he could establish an amount with reasonable certainty. 45. An injunction is a court order that requires someone to do something or to refrain from doing something. Injunctions are equitable remedies. Injunctions may be preliminary, which are issued early in a lawsuit to prohibit a party from doing something during the course of the lawsuit. Such injunctions are issued to protect the plaintiff’s interests immediately. If, after the trial, it appears that the plaintiff is entitled to an injunction, the court will make its order a permanent injunction. If it appears that the preliminary injunction should never have been issued, the court will terminate the order.

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Chap 20_9e_Standard Indicate whether the statement is true or false. 1. Any ambiguity in a contract is interpreted against the party who drafted the contract. a. True b. False 2. Ambiguities in contracts are always interpreted in favor of the party who wrote the contract, since he or she is the one who knows what the provision is supposed to mean. a. True b. False 3. In the case of a typo, a court will reform a contract if there is clear and convincing evidence that the alleged mistake does not actually reflect the true intent of the parties. a. True b. False 4. Some contracting parties are intentionally vague in contract terms. a. True b. False 5. In business law, a lawyer’s primary job is to represent the client in contract litigation. a. True b. False 6. Ricardo has agreed to sell his family farm to Walter for a price of $450,000. Even though both sides agree on the terms, it is still worth the money for Ricardo to hire a lawyer to write the contract. a. True b. False 7. Contracts must use formal terminology such as "whereas" and "heretofore" in order to be legal. a. True b. False 8. An agreement should definitely be in writing if you do not have an ongoing relationship with the other party. a. True b. False 9. It is unethical to use your lawyer as an excuse for a provision of a contract, such as, “My lawyer insists that I have a liquidated damages clause.” a. True b. False 10. You should hire a lawyer to review any legal papers you have to sign, especially such papers as lease agreements or car purchases. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 20_9e_Standard 11. Emily runs a children’s clothing boutique that takes in local homemade items on a consignment basis. Her standard form contract indicates that Emily has the right to put items on sale without prior approval, but does not specify what effect the sale has on the consignor’s payment percentage. Her intent is to keep the same profit she would have had without the sale. She is using ambiguity in her contract to increase her sales and profit. a. True b. False 12. Lawyers prefer to negotiate touchy subjects as they arise rather than address them at the beginning of a relationship. a. True b. False 13. .“Scrivener’s error” is another (fancier) name for a typo. a. True b. False 14. The legal term for a promise in a contract is “provision.” a. True b. False 15. A contract should have a descriptive title, which is generally in all capital letters, underlined and centered at the top of the page. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 16. Nate works as a sales representative. His employment contract specifies that he cannot work for a competitor for a period of two years from employment. This is an example of a. vagueness. b. extortion. c. ambiguity. d. duress. 17. Which of the following guidelines applies to writing the title of a contract? a. It should be written in general terms, like “Memorandum of Agreement.” b. It should be written like a sentence, with only the first letter capitalized. c. It should be brief with no more than five words. d. It should be descriptive of the agreement and typed in all capital letters. 18. An honest effort to meet both the spirit and letter of the contract is termed a. reasonable circumstances. b. sole discretion. c. honest representation. d. good faith. Copyright Cengage Learning. Powered by Cognero.

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Chap 20_9e_Standard 19. Which of the following is NOT one of the three ways to amend a written contract? a. by writing and signing an amendment (or rider) b. by verbally agreeing to the changes and shaking hands on the deal c. by crossing out the mistakes and writing in the corrections d. by writing a totally new contract with the correct provisions 20. Which of the following is a standard provision frequently found in contracts? a. choice of forum b. understanding c. choice of compensation d. mediation 21. Bob, a house painter, contracts with Ollie to paint a rental house that Ollie owns. Bob hires Rob to take his place as the painter on this contract. What has Bob done? a. made a scrivener’s error b. severed the contract c. delegated his duties d. assigned his rights 22. In the case of scrivener’s errors, a court will usually a. reform the contract if it is clear that the mistake is not what the parties intended. b. instruct the parties to rewrite the contract without the errors. c. enforce the contract as written. d. throw out the contract completely. 23. What is a force majeure event? a. any action that makes the contract unprofitable for either party b. any finding in a contract that shows a provision was deliberately left unclear c. a disruptive, unexpected occurrence for which neither party is to blame that prevents one or both parties from complying with a contract d. any happening that fulfills one of the conditions in the contract, making it enforceable 24. Standard provisions in a contract that are often listed under the heading “Miscellaneous” are called a. boilerroom. b. boilerplate. c. boilerpot. d. boilertape.

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Chap 20_9e_Standard 25. Marsha and Antonio make a contract in which Marsha agrees to sell Antonio an expensive and rare piece of art. In the contract, Marsha states that she has the authority to enter into an agreement with Antonio, that she owns the piece of art, and that the art is authentic and not a forgery. These statements are examples of a. covenants. b. representations and warranties. c. choice of law provisions. d. riders. 26. A+ Modeling Agency signs a contract with Sandi to do a photo shoot for the local used car dealer’s advertising. The contract was most likely written by a. the owner of A+ Modeling Agency. b. Sandi. c. A+ Modeling Agency’s lawyer. d. Sandi’s lawyer. 27. Which of the following is one of the four steps in reading a contract? a. What-ifs b. Scan for typos c. Re-write with a lawyer d. Final approval 28. In a contract modification, the phrase “charged with such amendment” refers to a. the party who suggested the change. b. the party who will benefit from the change. c. the party who will be adversely affected by the change. d. the party who did NOT suggest the change. 29. When a provision to a contract is accidentally unclear, it is called a. vagueness. b. a scrivener's error. c. ambiguity. d. a typo. 30. Two parties are debating whether or not to put their contract into writing. In making their determination, which of the following factors would normally NOT be considered? a. whether or not the agreement falls within the Statute of Frauds b. the complexity of the agreement c. the length of time covered by the agreement d. the relationship between the two parties

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Chap 20_9e_Standard 31. A severability provision a. rescinds the entire contract upon request of the party who drafted it. b. transfers benefits under a contract to another person. c. asks the court to delete the offending clause and enforce the rest of the contract. d. transfers the obligations of a contract to another party. 32. Ralph is a professional football player. He signs a valid contract with the Miami Dolphins. Later, he claims that he was also promised free use of the Dolphins’ private jet, but this was not in the contract. What type of clause in his contract would prevent him from flying away with this claim? a. a complete agreement clause b. a “no additional terms” clause c. an integration clause d. a severability clause 33. Farmer’s Fortune Insurance has a contract with Farmer Fran to insure her crops against insect damage. The contract does not specify which insects are covered or how much damage is necessary to make a claim. The contract will probably be enforced in favor of a. Farmer Fran. b. Farmer’s Fortune Insurance. c. Neither side, as it is ridiculous to try to insure against insects. d. Cannot determine... would have to go through litigation to decide. 34. Provisions that a party agrees to perform only if the other side also does what it promised are called a. choice of forum provisions. b. conditional promises. c. reciprocal promises. d. riders. 35. Which of the following generally is NOT in the introductory paragraph of a contract? a. the date of the contract b. the covenants of the contract c. the parties to the contract d. the nature of the contract 36. In which of the following situations is it likely that you may NOT need a written contract? a. You are dealing with a party you do not know well, so you need to remain flexible. b. You are buying land from a member of your family. c. The terms of the agreement are simple and the value of the transaction is small. d. You have negotiated with the other party enough that you both know what the other person intends.

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Chap 20_9e_Standard 37. Which of the following is the best example of a contract title? a. AGREEMENT b. LEASE AGREEMENT c. LEASE AGREEMENT BETWEEN ALISON ALBRIGHT AND KEYSTONE PROPERTIES d. CONTRACT BETWEEN LESSOR AND LESSEE 38. Rich and Archie sign an agreement in which Archie agrees to deliver ten cases of champagne in 5 days. The parties negotiated and meant to say in the written agreement, delivery in 50 days. If the evidence is clear that the two parties intended to agree to 50 days, the courts will probably a. reform the contract. b. rescind the contract. c. issue a warranty. d. issue a covenant. 39. If the subject of the contract includes issues that may be controversial or "touchy," it is best to a. keep lawyers out of the negotiation, so relationships are not strained. b. deal with them up front before the relationship becomes strained. c. deal with them one at a time, as the problems arise. d. state your position up front and stand firm when the other party objects. 40. When a party to a contract fails to fulfill all of her promises, she has breached the contract. What will a court look at in responding to a breach of contract?

41. Outline the focused, multi-step process recommended for reading a contract before you agree to it.

42. Define and compare the terms “vagueness” and “ambiguity.”

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Chap 20_9e_Standard 43. Outline the parts of a typical contract.

44. Identify and explain at least four situations where a written contract is either necessary or recommended.

45. Compare and contrast the perspectives of a lawyer and a business client, when approaching the negotiation of a contract.

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Chap 20_9e_Standard Answer Key 1. True 2. False 3. True 4. True 5. False 6. True 7. False 8. True 9. False 10. False 11. False 12. False 13. True 14. False 15. True 16. c 17. d 18. d 19. b 20. a 21. c 22. a 23. c 24. b 25. b 26. c

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Chap 20_9e_Standard 27. a 28. c 29. c 30. c 31. c 32. c 33. a 34. b 35. b 36. c 37. c 38. a 39. b 40. Typically, a court would not impose sanctions over minor issues. To constitute a violation of the contract, the breach must be material. A material breach is important enough to defeat an essential purpose of the contract.

Sometimes, contracts state the consequences of a breach, such as the amount of damages. A damages clause can specify a certain amount or a limitation on the total, or other variations. In these cases, the court would probably enforce the provision of the contract. But the vast majority of contracts have neither liquidated damages nor damage caps. A court may also look at whether the parties acted in good faith or with sole discretion. Reasonably means ordinary or usual under the circumstances. Good faith means an honest effort to meet both the spirit and letter of the contract. A party with sole discretion has the absolute right to make any decision on that issue. Sole discretion clauses are not entered into lightly.

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Chap 20_9e_Standard 41. Pre-reading. Before you begin reading the first draft of a contract, spend some time thinking about the provisions that are important to you. If you skip this step, you may find that, as you read, your attention is so focused on the specific language of the contract that you lose sight of the larger picture. The first read. Read through once, just to get the basic idea of the contract – its structure and major provisions. What-ifs. This is the time to think about various outcomes, good and bad. What happens, under the terms of the contract, if all goes according to your plan? Also consider worst case scenarios. In both situations, does the contract produce the result that you want? What happens if sales are higher than you expect? Or if the product causes unexpected harm? The second read. Now read the contract to make sure that it handles the what-ifs in a manner that is satisfactory to you. Think about the relationship between various provisions – does it make sense? 42. Vagueness occurs when the parties do not want the contract to be clear. They want to keep their options open, so they don’t clearly define some terms. Ambiguity is different -- it means that the provision is accidentally unclear. It occurs in contracts when the parties think only about what they want a provision to mean, without considering the literal meaning or the other side’s perspective. Any ambiguity is interpreted against the drafter of the contract. 43. The structure of a contract is as follows:

a) Title b) Introductory Paragraph c) Definitions d) Covenants e) Conditions f) Representations and Warranties g) Boilerplate 44. There are times when you should definitely sign a written agreement: a. The Statute of Frauds requires it. b. The deal is crucial to your life or the life of your business. c. The terms are complex. d. You do not have an ongoing relationship with the other party. 45. Businesspeople are optimists—they believe they have negotiated a great deal and everything is going to go well—sales will boom and the company will prosper. Lawyers have a different perspective—their primary goal is to protect their clients by avoiding litigation, now and in the future. For this reason, lawyers are trained to be pessimists–they try to foresee and protect against everything that can possibly go wrong. Businesspeople sometimes view this lawyering as a waste of time and a potential deal-killer. What if the two parties cannot agree about what to do in the event of a very unlikely circumstance? The deal might just collapse.

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Chap 21_9e_Standard Indicate whether the statement is true or false. 1. A court is much more likely to find a contract unconscionable when one party is a consumer than if the two

parties are businesses. a. True b. False 2. Megan agrees to sell Nancy her Rolex watch, but she does not specify a price. In such a case, the court would not enforce the agreement because all of the essential terms are not present. a. True b. False 3. Pizazz, Inc., sold a condo on the 34th floor in a building in downtown Chicago. This contract is governed by Article 2A of the UCC. a. True b. False 4. Rachel Retailer sends a preprinted purchase order offering to buy goods from Snidley Supplier. Snidley acknowledges Rachel's offer with a preprinted acceptance form. The terms of the two forms do not mirror each other. To analyze whether an enforceable contract exists, one must first determine whether the new language in the acceptance is an additional term or a different term. a. True b. False 5. The UCC requires that the parties in an output (or requirements) contract make their demands in good faith. a. True b. False 6. In a mixed contract involving both goods and services, Article 2 of the UCC will govern if the predominant purpose is the sale of goods. a. True b. False 7. Uncle Brandon promises to give his motorcycle to you for free at the end of the month. This transaction is governed by UCC, Article 2, because a motorcycle is within the definition of “goods.” a. True b. False 8. Under the UCC, a modification to a contract for the sale of goods needs no consideration to be binding. a. True b. False 9. The UCC imposes a duty of good faith in the performance of all contracts. a. True b. False

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Chap 21_9e_Standard 10. Lorene, an artist, orally agrees to sell Sabrina a painting for $600. While Lorene is busy talking on the phone, Sabrina writes her a note on the back of an envelope she finds in her purse. The signed note states that she will stop by the studio to pick up the painting within the week. Sabrina changes her mind about buying the painting, and when Lorene sues to enforce the contract, Sabrina defends on the basis of the Statute of Frauds. Sabrina will succeed with this defense. a. True b. False 11. Elizabeth worked as a salesperson in a carpet store. She was in the midst of divorce proceedings and needed some money. Elizabeth sold her wedding ring. Elizabeth is considered a merchant with regard to the sale of the ring. a. True b. False 12. Under the UCC, a merchant is frequently held to a higher standard of conduct than a non-merchant. a. True b. False 13. The UCC is a federal legislation enacted by Congress. a. True b. False 14. The UCC does not apply to a contract for the sale of goods if the value of the goods is less than $500. a. True b. False 15. Lian contracted the financial services from E-wise. This contract is governed by Article 2 of the UCC. a. True b. False

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Chap 21_9e_Standard Indicate the answer choice that best completes the statement or answers the question. 16. Dean Builders agrees to purchase all of its sump pump requirements for the new houses it builds from Satisfactory Sump Pump, Inc. These two business have had similar agreements the last three years, and Dean's requirements have averaged 100 sump pumps per year. This year there was an unusually wet spring and Dean's requirements doubled to 200 sump pumps. Because of the high demand for sump pumps, the market price of the pumps triples. Satisfactory Sump Pump, Inc., delivers 100 pumps at $75 (which is the contract price). Satisfactory has exhausted its inventory and cannot deliver anymore, so Dean buys the other 100 pumps from other suppliers at $225 each. Dean sues Satisfactory Sump Pump, Inc., for the additional expense. What is the most likely result? a. Satisfactory Sump Pump, Inc., wins; output and requirements contracts are not enforceable since no quantity is stated. b. Dean wins; Satisfactory Sump Pump, Inc., agreed to meet the needs of Dean and did not do so, which is a breach. c. Satisfactory Sump Pump, Inc., wins; requirements contracts are governed by a good faith standard, and it was unreasonable for Dean to demand so many additional pumps. d. Dean wins; the requirement of good faith applies only between merchants, and Dean is not a merchant. 17. In medieval England, the law merchant doctrine focused on all of the following except a. promises. b. the sale and exchange of goods. c. payment. d. the sale and exchange of real estate. 18. UCC Section 2-204 provides three important rules that enable parties to make a contract quickly and informally. Which of the following is NOT one of these rules? a. The parties may make a contract in any manner sufficient to show that they reached an agreement. b. A writing sufficient under the Statute of Frauds may be a simple memo, a letter, or informal note, but need not itself be a contract. c. The UCC will enforce a deal even though it is difficult to say exactly when it was formed. d. A court may enforce a bargain even though one or more terms were left open. 19. In which of the following cases is the predominant purpose the sale of goods? a. Juanita goes to her dentist to have a cavity filled; while there, she buys a tube of whitening toothpaste the dentist sells at the front desk. b. Anderson makes an appointment with his stockbroker to purchase 100 shares of Microsoft stock. c. Millicent purchases ten bags of gravel from a landscaping company; an employee carries them to her truck and loads them for her. d. Thomas purchases a membership to a health club; his membership entitles him to a free bottle of water with every visit.

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Chap 21_9e_Standard 20. ABC Siding, Inc., manufactures aluminum siding. ABC enters into a contract to deliver siding to Slippery Siding, Ltd., a retailer of aluminum siding. The written agreement insists that all modifications to the agreement be in writing and signed by both parties. This prohibition against oral modifications is a. valid regardless of whether the clause is signed separately. b. invalid unless the clause is signed separately by Slippery Siding, Ltd. c. invalid unless the clause is signed separately by ABC Siding, Inc. d. invalid unless new consideration is supplied by the parties when the modification agreement is made. 21. Stanziano Construction needs a backhoe to complete a project. If it pays Hofmann Rentals for temporary use of the equipment, the transaction will be governed by a. Article 2 of UCC. b. Article 2A of the UCC. c. Article 3 of the UCC. d. bulk transfer law. 22. All of the following parties had a hand in creating the UCC except a. the U.S. Senate. b. the American Law Institute. c. the National Conference of Commissioners on Uniform State Laws. d. None of these are correct. 23. Newt, a gun dealer, offers to sell a rare civil war musket to Rush (another dealer), for "$15,000, insurance and shipping paid by buyer." Rush responds, "I accept. Insurance and shipping costs divided equally between seller and buyer." The parties a. do not have a contract since the acceptance violated the mirror image rule. b. do not have a contract since Rush's response was a counteroffer. c. have a contract, and in the majority of states, the terms of the offeree control. d. have a contract, and in the majority of states, the different terms will cancel each other out. 24. In a "mixed contract," one involving a sale of both goods and services, the court will a. apply the UCC to the provisions of the contract involving the sale of goods and the common law to the provisions involving the sale of services. b. apply the lex mercatoria to the contract. c. first determine the dominant purpose of the contract. If the sale of goods dominates the contract, then the court will apply the law of the UCC, Article 2. If the sale of services dominates the contract, the court will apply the common law. d. apply UCC Article 2A. 25. Which of the following is TRUE regarding an open price term? a. It makes the contract unenforceable. b. The price may be fixed by the seller. c. The price is the "reasonable" price at the time of delivery. d. The price is set by the buyer.

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Chap 21_9e_Standard 26. By definition, a sale under Article 2 of the UCC requires a. that the parties involved be merchants. b. that the product involved be goods, services, or a mixture; that the sale be between or among merchants; and that the sale take place in the normal course of business for that industry. c. that title to the goods pass between the seller and the buyer, and that a price be paid for the goods. d. that the product involved be an item that can be sold or leased. 27. Betty's BBQ orally contracts with Denny's Design House for 10,000 matchbooks at the price of 10 cents per matchbook. The matchbooks are to be embossed with a logo to be designed by Denny's Design promoting Betty's BBQ. Price, payment terms, and delivery terms are agreed upon between the parties. Denny's Design creates the logo, gets Betty's BBQ's approval of the design, and begins applying the logo on the matchbook covers. Denny's Design has almost finished the order when Betty's BBQ calls to say it has decided to make the eatery a smoke-free restaurant and cancels the order. Denny's Design sues, but Betty's BBQ states that the agreement is unenforceable under the Statute of Frauds. Who wins? a. Denny's Design House wins. This situation falls under an exception to the Statute of Frauds. b. Denny's Design House wins. This is a service contract for design of a logo. Therefore, the UCC, including the Statute of Frauds provisions of Article 2, does not apply. c. Betty's BBQ wins. This is a contract for $1,000. The Statute of Frauds requires all sales contracts in excess of $500 be in writing. d. Betty's BBQ wins. The Statute of Frauds only applies to merchants. Betty's BBQ is not a merchant in this instance because it intended to give the matchbooks away and not sell them. 28. Long’s Department Store contracted to buy 1,000 drop-waist velour dresses in heather gray from Durham. Subsequently, Durham called and asked to ship mink-colored dresses instead of heather gray. Long agreed, in writing, to the change. Which statement is correct? a. The modification is not enforceable since there was no consideration for the change. b. The modification is not enforceable since the parties are merchants. c. The modification is enforceable. d. Whether the modification is enforceable depends on the gap-filler rule. 29. Trey, a full-time college student, sold his car to Don, another student. In the performance of this contract, Trey a. has a duty of good faith, which means honesty in fact and the exercise of good judgment. b. has a duty of good faith, which means honesty in fact. c. has a duty of good faith, which means honesty in fact and the exercise of reasonable commercial standards of fair dealing. d. does not have a duty of good faith. 30. Harriett raises and sells hippos. In order to keep her hippos happy and healthy, she feeds them Hippo Chow, which she buys from the local pet store. Under the UCC, Harriett is a. a merchant of both hippos and Hippo Chow. b. a merchant of hippos, but not of Hippo Chow. c. a merchant of Hippo Chow, but not of hippos. d. not a merchant of either hippos or Hippo Chow.

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Chap 21_9e_Standard 31. During the development of commercial law centuries ago, businessmen throughout England and Europe a. began to rely on the same set of laws used to govern land transactions. b. began to rely on a body of rules called lex mercatoria. c. had little need for laws to resolve commercial disputes. d. had a vast body of rules governing contracts. 32. Which of the following would be considered a merchant under the UCC? a. A woman sells her pistol to someone responding to a classified ad. b. A man who owns a jewelry store sells his used car to a neighbor. c. A gun dealer sells a rifle to someone who enters his shop. d. All of these are correct. 33. If Edmund and Kaylin have a writing mistakenly showing a sale and purchase of goods for $10,000 when the price should have been $1,000, a court will most likely a. enforce the agreement, relying on oral testimony to determine the correct price. b. only enforce the agreement as written. c. not hear the case unless both parties are merchants. d. not enforce the agreement since the writing did not reflect a meeting of the minds of the parties. 34. A requirements contract is a contract a. in restraint of trade. b. in which the seller provides all of the goods that the buyer needs. c. in which the buyer purchases all of the goods that the seller produces. d. in which a party must buy a product it does not want, in order to be allowed to buy a product it requires. 35. Which article of the UCC covers the sale of goods? a. Article 1 b. Article 2 c. Article 3 d. Article 4 36. Which of the following contracts requires a writing under the UCC, Article 2? a. Jeremy, a full-time student, sold his snow blower to a friend for $450. b. Kayla, a full-time student, purchased a used computer from Office Plus for $300. c. A toy manufacturer contracted to sell dolls valued at $10,000 to a department store. d. Tobias Department Store contracted to sell Jenny a $400 doll. 37. Which of the following is a stated purpose of Article 2 of the UCC? a. To simplify the law governing real estate transactions. b. To free up the courts from having to decide on contract issues. c. To make the laws governing sales uniform among the various jurisdictions. d. To come up with a boilerplate form to be used in all sales transactions.

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Chap 21_9e_Standard 38. Which of the following contracts is most likely to be declared unconscionable? a. A consumer sales contract that charges 300 times the fair market value of the goods. b. A consumer sales contract that limits the consumer's remedies to repair or replacement. c. A contract between a wholesaler and a retailer that adds delivery charges at 15% of the costs of the goods. d. A sales contract between a wholesaler and a retailer that limits remedies such as consequential damages. 39. In which of the following situations is the seller a merchant under Article 2 of the UCC? a. Paul, a full-time college student, sold his textbooks to State Bookstore. b. Randall, a part-time college student and full-time father, sold his textbooks to a friend. c. Zompa, Inc., a toy manufacturer, contracted to sell dolls to TonTon Department Store. d. Mabel, a stay-at-home mom, sold her car to her friend Gloria. 40. Sean of Sean's Shrimp House was enjoying a cup of cappuccino while visiting with Ollie at Ollie's Ocean Front Bar & Grill. During the course of their conversation, Sean agreed to supply 100 pounds of shrimp per month for the next year to Ollie's restaurant at the price of $2.50 per pound. When Sean got back to his office, he sent a written confirmation of the agreement to Ollie. Six weeks after receiving the confirmation Ollie wrote back, stating that he had not agreed to the price of $2.50 per pound. Is Ollie bound to the confirmation?

41. Oxtren, Inc., is a tools wholesaler. Oxtren sent M&E Tools a purchase order offering to buy 200 Model 308 milling and drilling machines with R-8 spindles. The purchase order stated the credit term to be 2% discount if payment was made in 10 days, with the full amount due in 30 days. M&E responded with an acceptance form accepting the offer. However, the acceptance form stated that full payment was due on delivery, and that disputes under the contract would be settled by arbitration. (A) Do the parties have an agreement? (B) What is the payment term? (C) Is the arbitration clause part of the agreement?

42. Jasmine agrees to purchase 1,500 tons of recycled glass from Louie, and the price is to be determined at the time of delivery. Is such an agreement enforceable? Compare the common law with Article 2 of the UCC.

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Chap 21_9e_Standard 43. Discuss the importance of the UCC to the law of sales. Include who created the UCC, how it became law, and the stated purposes of the statute.

44. Jones contracts to buy a computer from Martin for $1,500. The contract calls for Martin to service the computer quarterly for the first year and to tutor Jones on how to use the software. Is this contract covered by the UCC or common law?

45. Patsy is shopping for a used car. She finds a car she likes at Morley Motors. Discuss how the UCC views each party and the standard of conduct it imposes on the parties in performing the sales transaction.

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Chap 21_9e_Standard Answer Key 1. True 2. False 3. False 4. True 5. True 6. True 7. False 8. True 9. True 10. False 11. False 12. True 13. False 14. False 15. False 16. c 17. d 18. b 19. c 20. a 21. b 22. a 23. d 24. c 25. c 26. c

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Chap 21_9e_Standard 27. a 28. c 29. b 30. b 31. d 32. c 33. a 34. b 35. b 36. c 37. c 38. a 39. c 40. Probably. Shrimp is a "good," and therefore this contract is governed by Article 2 of the UCC. The Statute of Frauds requires agreements for the sale of goods with a purchase price $500 or more to be in writing with the defendant's signature. If Sean sues Ollie under the general provisions of the Statute of Frauds, Sean would not be able to satisfy the signature requirement without Ollie's signature on the letter of confirmation. However, when both parties are merchants entering into an oral contract, and one sends a confirming memo to the other within a reasonable time, and the memo is sufficient to bind the sender, then UCC, Section 2-201 provides that the memo is also valid against the merchant who receives it, unless he/she objects to the memo within ten days. Here, both parties are merchants. If Ollie's recollection of the conversation was not accurately recorded in the confirming memo, Ollie should have refuted the memo within ten days. Six weeks is an unreasonable time to wait to respond. 41. (A) Under the UCC, the parties will have an agreement since they intended to create a contract. (B) The payment term in the acceptance is a different term. In the majority of states, different terms cancel each other out. In deciding the payment term, the court will look to enforce an oral agreement if one exists. Otherwise, the court looks to the gapfiller provision concerning payment. (C) The arbitration clause is an additional term. Under the UCC, since the parties are merchants, the arbitration clause will be part of the contract unless: (1) the offer insisted on its own terms; (2) the additional terms materially alter the terms of the offer; or (3) the offeror promptly rejects the additional terms. 42. Yes, the agreement is enforceable under Article 2. Recycled glass is a good; therefore, Article 2 governs the agreement. Article 2, Section 2-305, provides that parties may conclude a contract even though they have not settled the price. This is a major change from common law which requires all important terms to be definite and certain.

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Chap 21_9e_Standard 43. The UCC is the major statute regulating commercial transactions, including sales of goods, in the United States. The UCC was created by two groups of scholars (the American Law Institute and the National Conference of Commissioners on Uniform State Laws), but their proposal had no legal effect until it was adopted by a state legislature. Over time, lawmakers in all 50 states were persuaded to adopt many parts of the UCC. Article 2 of the UCC is one of the most important articles in the Code, and it regulates the sale of goods. The stated purposes of the UCC are: (a) to simplify, clarify, and modernize the law governing commercial transactions; (b) to permit continued expansion of commercial practices through custom, usage, and agreement of the parties; and (c) to make uniform the law among jurisdictions. 44. Article 2 governs contracts for the sale of goods. When there is a "mixed" contract, one involving both goods and services, such as the one between Jones and Martin, the courts will look to what is the predominant purpose of the contract. Here, although Jones may have agreed to purchase Martin's computer because of the services Martin was willing to provide, the overriding purpose of the contract was to obtain a computer. In other words, the services without the computer are meaningless. Therefore, the UCC rather than the common law governs. 45. The UCC imposes a duty of good faith in the performance of all contracts. The UCC frequently holds a merchant to a higher standard of conduct than a non-merchant. A merchant is someone who routinely deals in the particular goods involved, or who appears to have special knowledge or skill in those goods, or who uses agents with special knowledge or skill in those goods. Morley Motors is a merchant when it comes to selling autos because it routinely deals in cars. For a merchant, good faith means honesty in fact plus the exercise of reasonable commercial standards of fair dealing. Patsy is not a merchant in cars and would be held to a lower standard of conduct. For non-merchants, good faith means honesty in fact. Thus, when performing the sales contract, neither Patsy nor Morley Motors may lie or mislead the other party. Morley must also act as fairly as the business community routinely expects.

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Chap 22_9e_Standard Indicate whether the statement is true or false. 1. Angela uses fraudulent means to induce Walter to enter a sales contract. Angela obtains a voidable title to the goods. a. True b. False 2. The UCC looks solely upon "title" to determine ownership in goods. a. True b. False 3. If a seller includes an express warranty in the written sales contract, any disclaimer is invalid. a. True b. False 4. You leave your watch with Bryte Jewelers for repair. Bryte cannot transfer ownership interests in the watch to a customer of the jewelry shop without your permission. a. True b. False 5. Implied warranties are those created by the UCC itself, not by any act or statement of the seller. a. True b. False 6. Both the buyer and seller can have an insurable interest in the same goods. a. True b. False 7. Only one party can have an interest in particular goods at a particular time. a. True b. False 8. A buyer obtains an insurable interest when the goods are identified to the contract. a. True b. False 9. Crops are considered identified when they are planted. a. True b. False 10. Generally, a contract may include language that limits or alters the damages recoverable for a breach of warranty, as long as the restrictions are not unconscionable. a. True b. False

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Chap 22_9e_Standard 11. When neither party has breached the contract, the risk of loss generally passes from seller to buyer when the seller has transported the goods as far as he is obligated to. a. True b. False 12. A tag attached to a tree in a nursery identifying the tree as a Southern Magnolia creates an express warranty. a. True b. False 13. In a shipment contract, the risk passes to the buyer when the goods are properly tendered at the destination point. a. True b. False 14. The shipping terms, FOB place of destination, indicate that the seller must deliver the goods at the place named and bear the expense and risk of shipping. a. True b. False 15. Mark, a power tool salesman, promises Jill, a customer, that the Turbo Power Hedge Trimmer 1000 will easily cut through bamboo up to 3 inches thick. Mark's statement constitutes an express warranty if Jill purchases the hedge trimmer. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 16. A contract that requires a seller to deliver goods to the carrier is a a. destination contract. b. shipment contract. c. C.I.F. contract. d. C.O.D. contract. 17. Bill is injured when his new motorcycle speeds out of control because of a defective part. In most jurisdictions, Bill a. can sue the motorcycle manufacturer even though he does not have privity. b. cannot sue the motorcycle manufacturer because his injuries are personal injuries as opposed to economic loss. c. cannot sue the motorcycle manufacturer because the law requires arbitration. d. cannot sue the motorcycle manufacturer because there is no privity of contract.

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Chap 22_9e_Standard 18. Alice's Aspirin, Inc., produces and packages aspirin for sale to retail stores. Bob buys a bottle of Alice's aspirin at Dahl's Food Stores. Two days later Bob takes two aspirin and within minutes, becomes very ill and is rushed to the hospital, where it is found that a defect in the aspirin caused the reaction. Which of the following is correct? a. Bob can sue both Alice's Aspirin, Inc., and Dahl's because he suffered personal injury due to the defective product. b. Bob cannot sue anyone because he assumed the risk of taking the aspirin. c. Bob cannot sue anyone because he is not in privity with Dahl's or Alice's. d. Bob can sue but will not be able to recover consequential damages for his medical expenses. 19. A gun manufacturer in Helena, Montana, agrees to sell guns and ammunition to the ATF in Washington, D.C. The terms of the contract specify that the goods are to be shipped "FOB, Chicago." When does the buyer acquire title and risk of loss? a. When the goods reach Chicago. b. When the goods are delivered to the carrier in Montana. c. When the goods are tendered in Washington D.C. by the carrier. d. When the goods reach Washington D.C. 20. Leonardo fraudulently obtained a piece of jewelry from Jessica. He then sold the piece to Midori, who did not know about the fraud. Which of the following describes the situation? a. Leonardo had voidable title and Midori gets a void title. b. Leonardo had void title and Midori gets good title. c. Leonardo had voidable title and Midori gets good title. d. Leonardo had good title and Midori gets good title. 21. Marco Manufacturing contracted to sell Kurtz Industries 3,000 iron clasps. The contract specified: F.O.B. Kurtz Industries. Upon arrival and inspection, the goods were rejected by Kurtz Industries because they did not conform to the contract specifications. In transit back to Marco Manufacturing, the common carrier's truck overturned and completely destroyed the clasps. Which statement is correct? a. Marco may sue Kurtz for the contract price, as risk of loss transferred to Kurtz at the F.O.B. point. b. Kurtz will not be liable for the purchase price. The risk of loss had not yet transferred since the goods were nonconforming. c. The loss will be split between the parties on a 50/50 basis. d. The loss will be assigned to the party who can best bear the loss. 22. If shipping terms are C&F, then a. the price includes, in a lump sum, the cost of the goods and freight, but not insurance. b. the price includes, in a lump sum, the cost of the goods and the insurance and freight to the named destination. c. neither the buyer nor the seller bears risk; the shipping company bears all risk. d. the seller bears all risk until goods are in the carrier's possession; then the buyer bears the risk.

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Chap 22_9e_Standard 23. In January, Eddie contracts to sell 100 bushels of soybeans in the fall. This contract a. is void. He cannot contract to sell a crop before it is even planted; the goods must be in existence. b. is void. The soybeans must be identified to the contract at the time he contracts to sell them. c. can be valid, but title to the soybeans cannot pass until the soybeans exist. d. can be valid, and title to the soybeans passes when the contract is signed. 24. A sales representative at Oxtren, Inc., orally tells the purchasing agent at Wety, Inc., that its industrial saw is exceptional. Which statement is correct concerning the claim that the saw is exceptional? a. The claim is an express warranty. b. The claim is an implied warranty of merchantability. c. The claim is not a warranty, because it is not in writing. d. The claim is not a warranty, because it is sales puffery. 25. Ruppart Manufacturing has a contract for the sale of 100 cases of teaching supplies to Teachers Co-op, Inc. Payment of the order is to be made in installments over the next year. Ruppart Manufacturing keeps a security interest in the cases sold to assure payment by Teachers Co-op, Inc. When the order is completed, Ruppart ships the order. Legally a. both Ruppart and Teachers have an insurable interest in the supplies. b. only Ruppart has an insurable interest in the supplies. c. only Teachers has an insurable interest in the supplies. d. neither Ruppart nor Teachers has an insurable interest in the supplies. 26. In a breach of warranty case, the buyer must a. notify the seller of defects within a reasonable time. b. bring any lawsuit no later than three years after the defect was discovered. c. extend the statute of limitations in writing rather than orally if he chooses to allow a longer time for bringing suit. d. notify the seller of defects within six months of his discovery or he cannot bring a lawsuit. 27. The buyer of a product is located in Des Moines, Iowa, and the seller is located in Sacramento, California. The contract specifies F.O.B. Des Moines. What type of contract is this? a. destination contract b. mixed contract c. shipment contract d. carrier contract

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Chap 22_9e_Standard 28. Mason bought a rotisserie in preparation for a party he was planning. When he put a chicken on the rotisserie, it would not rotate, but stayed in one position where it burned the chicken on one side and left it raw on the other. When he returned the rotisserie to the store, the salesperson disclaimed any responsibility because he had never told Mason the rotisserie would rotate the food as it cooked. Does Mason have any recourse? a. No, the salesperson did not make any express warranties. b. Yes, the salesperson made an express warranty just by selling the goods. c. Yes, although the salesperson did not make any express warranties, the UCC imposes an express warranty on the sale. d. Yes, although the salesperson did not make any express warranties, the UCC imposes an implied warranty of merchantability under which the rotisserie is guaranteed to be fit for the ordinary purposes for which it is used. 29. On impulse, you purchase a travel trailer and ask your acquaintance, Max, if you can leave the trailer at the edge of his restaurant’s parking lot until you can have a concrete pad built to store the trailer on your property. Max agrees. When you return for the trailer the next week, it is gone and you find out that Max sold it. You can a. recover the trailer because Max did not have any ownership interest to pass. b. recover, but only if Max bought insurance to cover the trailer while it was on his property. c. not recover because you “entrusted” the trailer to Max, who then had a right to sell it. d. not recover because Max had only a voidable title to transfer. 30. The statute of limitations for breach of warranty under the UCC is a. one year. b. two years. c. three years. d. four years. 31. Tuan, Inc., contracted to buy 200 monogrammed blankets from Titex, Inc. Before Titex segregated and monogrammed the blankets, Tuan filed for bankruptcy. Tuan does not own title to the blankets because a. Tuan is a merchant. b. the blankets were not identified to the contract. c. Tuan became bankrupt after the contract was formed. d. the goods were specially manufactured. 32. Which of the following would be a breach of the implied warranty of merchantability? a. A knife that cuts its user when slicing a bagel. b. A radio that does not pick up FM signals. c. A match that burns a spot in the carpet when accidentally dropped. d. A dress watch that does not keep accurate time after getting wet. 33. Implied warranties are created by a. the seller's words or actions. b. the buyer's intentions. c. the UCC itself. d. both the seller and the buyer. Copyright Cengage Learning. Powered by Cognero.

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Chap 22_9e_Standard 34. Crytrin Manufacturing, Inc., contracted with Molfry, Inc., to manufacture three large pieces of equipment. The contract contained a clause stating that Crytrin agreed to repair or replace any defective equipment, but that was the only remedy Molfry would have. This clause a. is an effective disclaimer. b. will not keep Molfry from obtaining consequential damages since, under the UCC, consequential damages cannot be excluded. c. is a limitation of remedy clause, which limits or excludes normal remedies permitted under the UCC. d. limits any express warranties made by Crytrin. 35. Imogene takes her diamond solitaire ring to Sparkle Jewelry Shop to have the prongs holding the diamond retipped and the ring cleaned. The clerk at Sparkle tells her she will have to leave the ring, and that it should be ready in about a week. When Imogene returns in a week to get her ring, she finds out that the ring has been sold. Which of the following is true? a. Sparkle Jewelry Shop had the power to transfer all of Imogene's rights in the ring to a good faith buyer in the ordinary course of business. b. This situation was a theft of the ring by Sparkle, and Sparkle must retrieve the ring and return it to Imogene. c. The buyer of the ring must return it to Imogene since the buyer did not fully investigate whether Sparkle had good title to the ring. d. Imogene has lost title to her ring and has no recourse since she was responsible for investigating the merchant's integrity before leaving her property. 36. Mike sold his car to Beth, who was to pick the car up at Mike's house and pay for it then. In fact, when Beth arrived, she discovered Mike's home and the car destroyed by a fire the night before. The risk of loss falls on a. Mike because Beth had not taken possession of the car. b. Beth because Mike was ready, willing, and able to tender the car. c. Beth because under the UCC, the buyer bears the risk of loss. d. Mike, because as a merchant he is responsible for the car. 37. Tu-thumbs buys a used paint sprayer from the local paint store. The sprayer had a large sign on it that said "AS IS." The dealer made no promises or statements concerning the performance of the paint sprayer. When Tuthumbs attempts to spray paint his house, the trigger on the sprayer sticks in the "on" position and before Tuthumbs can pull the electrical cord to cut the power, paint is sprayed all over his prize Borzoi dog that is scheduled to be shown in a dog show the next day. Tu-thumbs sues the dealership. Who wins? a. Dealer wins; there were no express warranties, and all implied warranties have been successfully disclaimed. b. Tu-thumbs wins; he can recover on the basis of express warranties. c. Tu-thumbs wins; he can recover on the basis of the implied warranty of merchantability because the word "merchantability" was not used in the disclaimer. d. Dealer wins; even though there were implied warranties, the damage to the dog could not have been foreseen.

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Chap 22_9e_Standard 38. A statement that a particular warranty does not apply is called a(n) a. disclaimer. b. infringement. c. limitation of remedy clause. d. voidable title. 39. What is a bailment? a. One party assures another party that goods will meet certain standards. b. One party delivers goods to a merchant or permits the merchant to retain them. c. One party conveys goods to another for a specified time, usually in return for a periodic payment. d. One party is legally holding goods for the benefit of another party. 40. Inez contracted with Filippo Furnaces Co. for the installation of a new furnace. Inez selected the furnace she wanted, accepting no suggestions from Filippo Furnaces' heating engineer. The furnace operated fine, but it did not heat the entire house. The size of the blower on the furnace was too small to accommodate the third floor of the house. Inez sued Filippo Furnaces Co. for the breach of the implied warranties of merchantability and fitness. What result?

41. Explain the concept and significance of identification of goods. Discuss how identification takes place.

42. Discuss the concept of insurable interest. Indicate the difference between a buyer's and a seller's insurable interest.

43. Baker Furniture sold 50 living room sets to King's Department Store. The parties did not agree on passage of title, but the delivery term was F.O.B. place of shipment. Discuss title and risk of loss regarding the furniture.

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Chap 22_9e_Standard 44. A common problem in cases of express warranty is being able to separate statements that create express warranties from statements that do not. Discuss what types of statements create an express warranty, and four indications that a statement is likely to create an express warranty.

45. Garden World orders 120 hand cultivators from Green Thumb, Inc. When the cultivators arrive, they seem fine, so Garden World accepts them. As the stock person is putting the cultivators on display, she notices that the tines are loose on all the cultivators. Garden World returns the cultivators to Green Thumb, but they are lost when the delivery truck slips on an oily spot in the road and drives into a nearby lake. Discuss who bears the risk of loss for the shipment.

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Chap 22_9e_Standard Answer Key 1. True 2. False 3. True 4. False 5. True 6. True 7. False 8. True 9. True 10. True 11. True 12. True 13. False 14. True 15. True 16. b 17. a 18. a 19. a 20. c 21. b 22. a 23. c 24. d 25. a 26. a

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Chap 22_9e_Standard 27. a 28. d 29. a 30. d 31. b 32. b 33. c 34. c 35. a 36. a 37. a 38. a 39. d 40. Inez will lose under both implied warranties. The implied warranty of merchantability was not breached because the furnace was operating according to the standards of the heating industry. The implied warranty of fitness was likewise not breached. This warranty requires the seller to know of the buyer's particular purpose, and that the buyer is relying on the seller's skill or judgment in recommending a particular product. Here Inez did not ask for or receive any suggestions from the seller or the seller's expert. 41. Identification means the parties have designated the specific goods to be sold. Identification is important because goods must be identified to the contract before title can pass. Identification must also occur before a buyer obtains an insurable interest in the goods. The parties may agree in their contract how and when the goods will be identified, and they may identify them to the contract however they wish. However, if the parties do not specify, identification will take place according to the following rules: (a) If the contract describes specific goods that already exist, identification occurs when the parties enter into the contract. (b) For unborn animals, identification ordinarily takes place when they are conceived. For crops, identification ordinarily occurs when they are planted. (c) For other goods, identification occurs when the seller marks, ships, or in another way designates the exact goods going to the buyer. 42. Closely related to identification and title is the idea of insurable interest. Anyone buying or selling expensive goods should make certain that the goods are insured. There are some limits, though, on who may insure goods, and when. If a person buying the insurance policy lacks a real interest in the thing insured, the law regards the insurance policy as a gambling contract and will consider it void. A buyer obtains an insurable interest when the goods are identified to the contract. The seller retains an insurable interest in goods as long as she has either title to the goods or a security interest in them. 43. Since the goods are to be moved, title passes to the buyer when the seller completes its transportation obligation. Here, title will pass when the seller puts the goods in the possession of the carrier at the place of shipment. With F.O.B. place of shipment, the seller bears the risk until the goods are in the possession of the carrier.

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Chap 22_9e_Standard 44. Any affirmation of fact, or any promise, can create an express warranty. An affirmation of fact is a statement about the nature or the quality of the goods. A statement indicating the seller’s opinion or a statement of sales puffery does not create a warranty. A statement is more likely to be an affirmation of fact if: (a) it is specific and can be proven true or false; (b) it is written; (c) defects are not obvious; and (d) the seller has greater expertise than the buyer. 45. When a buyer accepts goods but then rightfully revokes acceptance, the risk remains with the seller to the extent the buyer’s insurance will not cover the loss. If Garden World’s insurance does not cover the loss, Green Thumb must bear the loss.

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Chap 23_9e_Standard Indicate whether the statement is true or false. 1. In the Zion Temple First Pentecostal Church of Cincinnati, Ohio, Inc. v. Brighter Day Bookstore & Gifts case, the court found that, because of an error in the company's catalog, there was no right to cure a nonconformity with the sleeves of the choir robes delivered to Zion. a. True b. False 2. Matson agrees to purchase 500 wooden chairs from Woodcarvers, Inc. After Woodcarvers sets the chairs aside in its warehouse, but before the risk of loss passes to Matson, the chairs are destroyed in a fire, which was not the fault of Woodcarvers. The contract between Matson and Woodcarvers is void. a. True b. False 3. If Chuck buys frozen cheese from Cheese, Inc., then fails to inspect the cheese within a reasonable amount of time and does not reject the shipment, Chuck has accepted the shipment even if there is non-conformity. a. True b. False 4. A buyer has an absolute right to reject non-conforming goods as long as the rejection is timely. a. True b. False 5. A seller may not make repairs or adjustments after the goods have been tendered, even if that action will bring the goods into conformity in order to "cure" nonconforming goods. a. True b. False 6. A buyer's material breach gives the seller the right to refuse to deliver the goods. a. True b. False 7. Liquidated damages are not permitted under the UCC. a. True b. False 8. The UCC includes sections that limit the perfect tender rule's effect, and courts have a tendency to apply these limitations more enthusiastically than the rule itself. a. True b. False 9. Wimble ordered 1,000 pro-quality luminescent orange tennis balls from Sports Unlimited at a cost of $800. On June 1, Sports Unlimited shipped standard white tennis balls, but Wimble rejected them. Wimble bought the same number of pro-quality luminescent orange balls from another supplier the same day for $650. In a suit against Sports Unlimited, Wimble may recover $800. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 23_9e_Standard 10. "Course of dealing" refers to prior commercial transactions between the same parties. a. True b. False 11. The term tender means to physically deliver the goods to the buyer. a. True b. False 12. Under the "perfect tender rule" the buyer may reject the goods if they fail in any respect to conform to the contract. a. True b. False 13. A buyer who accepts nonconforming goods may revoke the acceptance under limited circumstances. a. True b. False 14. A homeowner has a contract with a firewood supplier to bring a stack of hardwood at the beginning of each month from October through March. If the supplier has brought a mixture of hard and soft woods for the first three deliveries and the homeowner accepted the deliveries, the homeowner cannot reject a delivery in January just because it includes some soft wood. a. True b. False 15. In some industries it is a routine practice to draft contracts permitting imperfection in the seller’s goods, thereby limiting the effect of the perfect tender rule by the parties’ agreement. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 16. A buyer who is unable to obtain cover a. will be limited to the remedy of incidental damages. b. will be limited to the remedy of consequential damages. c. will lose the money or goods invested in the breached contract. d. may be allowed the remedy of specific performance.

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Chap 23_9e_Standard 17. Meister Bros. shipped 250 radiator belts to fill Braybon’s order. Quality control measures had been in place in Meister’s factory when the belts were manufactured. When Braybon received the order one day before it was due, it notified Meister that it rejected the belts because of a variation from the contract specifications. Meister, although it believed the original belts met the contract specifications, notified Braybon that it would supply conforming goods within one week. When the conforming goods arrive in one week, a. Braybon must accept them, but does not have to pay the full price because the contract deadline has passed. b. Braybon does not have to accept them because Meister Bros. only has one chance to fill the order correctly. c. Braybon should accept them because Meister Bros. has a right to cure even after the contract deadline under these circumstances. d. Braybon does not have to accept them because Meister Bros. failed to meet its UCC requirement to deal in good faith. 18. Which of the following statements is NOT TRUE regarding the buyer's right to cover? a. The buyer must cover. b. The measure of damages in a cover is the difference between the cover price and the contract price. c. Cover must be done by reasonably obtaining substitute goods. d. Consequential damages can be recovered in addition to the cover damages. 19. Reba orders a pair of custom-made cowboy boots, C.O.D. from Home on the Range Western Wear. When the boots arrive, Reba pays the carrier for the boots, then opens the package, only to discover that the boots are the wrong snake skin color and three sizes too big. At this point a. Reba is entitled to inspect the goods after payment (due to the C.O.D. terms), and she can reject the boots because they are nonconforming. b. Reba cannot revoke the acceptance, because the wrong color and size of the boots are not substantial impairments. c. Home on the Range can allege that Reba did not conduct a proper inspection; therefore, Home on the Range owes Reba nothing. d. Reba has no recourse; she should have known to inspect the goods before paying the C.O.D. amount. 20. Under which circumstances has the buyer accepted goods? a. A shipment of goods was delivered to Kamala, who immediately picked up the box from her porch and placed it on her dining-room table. b. Peter received a shipment of 100 toy soldiers on Monday; by the end of the week, he had already sold half of them. c. Goods were delivered to Lao-tzu, who told the seller that he had received them; two days later, Lao-tzu informed the seller that, upon inspection, the goods were not conforming. d. None of these are correct.

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Chap 23_9e_Standard 21. If a seller cures within a reasonable amount of time, the contract a. has been performed. b. is breached. c. is void. d. is voidable. 22. A buyer who accepts goods but notifies the seller the goods are non-conforming a. cannot recover any damages. b. can recover the difference between the goods as promised and as delivered, plus incidental and consequential damages. c. cannot recover incidental damages. d. cannot recover consequential damages. 23. Turtle World orders 200 small sea turtles from Reptile World. After the sea turtles had been identified to the contract but before the risk of loss had passed to Turtle World, the turtles were released into the ocean by a militant animal rights group who broke into Reptile World to set the animals free. Under this scenario a. Turtle World cannot successfully sue because the contract is void. b. Turtle World can cover, then win a judgment against Reptile World for the difference between the contract price and the cover price, plus incidental and consequential damages, minus expenses saved. c. Turtle World can successfully sue for specific performance because sea turtles are everywhere. d. Turtle World is entitled to a judgment for compensatory damages, but not consequential damages. 24. Bryson Hardware accepted delivery of the 50 door handles it ordered. If it later finds the handles do not conform to the contract specifications and it wants to revoke its acceptance, it may return the goods only if a. it shows the original acceptance of the goods never occurred. b. it shows that the defects substantially impair their value. c. it can prove it is commercially impracticable for it to keep the goods. d. the documents of title are in order. 25. Under the UCC, a buyer's right to reasonably obtain substitute goods because another party has not honored a contract is called a. a breach. b. a cure. c. a cover. d. a consideration. 26. Which is an example of a repudiation? a. Jaime orders goods to be delivered on May 1; the company does not deliver the goods until May 15. b. Darlene offers to sell her car to Brian for $5,000; Brian tells Darlene he will give her $4,000 for the car. c. Max places an order for five custom-made shirts; two hours later, he changes his mind and notifies the shirt company that he will not pay for the shirts if they are sent. d. Venus orders 100 silk dresses, which she plans to resell; when the order arrives, she finds the dresses are made of cotton, so she refuses to pay for them.

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Chap 23_9e_Standard 27. If a contract does not provide for a time of inspection, the UCC allows inspection to take place a. within a reasonable time. b. the same day as delivery. c. within 3 days of delivery. d. within 10 days of delivery. 28. A court order requiring the seller to perform as promised is called a. specific performance. b. cover. c. liquidated damages. d. good faith. 29. A buyer may revoke an acceptance of goods if a. the nonconformity does not impair the value of the goods. b. the buyer had a legitimate reason for the initial acceptance. c. the buyer knew the nonconformity could not be cured. d. the buyer thought they could easily cover. 30. Family Time Restaurant has a contract with Prime Meats for Prime to deliver 100 pounds of ground sirloin twice a week for the next three months. If, on one delivery, Prime brings 95 pounds of ground chuck instead of 100 pounds of ground sirloin, a. Family Time may unquestionably reject the non-conforming goods because they vary in both quantity and quality. b. Family Time may reject the non-conforming installment only if it substantially impairs the value of that installment and cannot be cured. c. Prime has no right to cure. d. the perfect tender rule applies. 31. A baseball team ordered 500 wooden baseball bats from Bats, Inc., for delivery on June 1. On May 15, the ball team received 500 aluminum bats instead of the wooden ones. As of May 16, Bats, Inc. a. may cure before June 1. b. has breached the contract and is liable for damages. c. has breached the contract only if the baseball team rejects the goods. d. may cure if the baseball team gives Bats, Inc., permission to do so. 32. Under the doctrine of commercial impracticability, which situation would NOT excuse the seller's performance? a. The seller forgot to include the cost of freight in a C&F contract. b. The seller's source of supply is no longer available because of a governmental embargo prohibiting an export from another country. c. The seller cannot deliver because severe flooding wiped out three-fourths of the state's produce. d. The seller's workforce is out on an unexpected strike.

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Chap 23_9e_Standard 33. If a buyer does not receive goods by the contract deadline, remedies available include all of the following EXCEPT a. incidental and consequential damages. b. a cover. c. damages for non-delivery. d. a cure. 34. Neon orders one thousand 25-foot nylon ropes from Hang'em High Co. Upon inspection of the delivery, Neon learns that Hang'em sent five hundred 25-foot ropes and five hundred 20-foot ropes. Neon may a. demand that Hang'em send 500 additional 25-foot ropes and get to keep the 20-foot ropes as well. b. accept the 500 conforming ropes and reject the 500 nonconforming ropes. c. seek an installment contract. d. immediately "cure" by finding a substitute product. 35. Assume that Sherrie's Cherries contracts with Dessert World to sell and ship 600 pounds of cherries in three equal installments of 200 pounds each. If the first installment arrives with 5 pounds of spoilage, then Dessert World may a. reject the installment shipment because of the perfect tender rule. b. not reject the installment if those in the food industry expect a small percentage of spoilage with fresh fruits or vegetables. c. reject the entire contract. d. declare a breach and "cover." 36. Bluelight, Inc., an electronics manufacturer, with 4000 HD players in its warehouse, learns that a retailer

refuses to pay for the 800 units it contracted to buy. In order to recover damages when it resells the identified goods, Bluelight can a. attach a label to 800 units in its warehouse, identifying them to the contract. b. sue for specific performance. c. ask for incidental and consequential damages from its supplier. d. tell the court that the retailer’s action was unconscionable. 37. Buyer Bob breaches his contract for the sale of goods with Seller Suzie. Suzie still has possession of the goods at the time of the breach. Suzie can refuse to deliver the goods and a. resell the goods, and sue Bob for the total contract price. b. either resell the goods or sue, but not both. c. resell the goods, and sue for any loss on the sale plus incidental damages less expenses saved. d. resell the goods, and sue only for incidental damages. 38. If applicable, course of dealing will a. limit the buyer's right to reject for relatively routine defects. b. allow the seller to replace defective goods with conforming goods if time permits. c. permit a buyer to reject accepted goods if they substantially impair its value. d. allow either the buyer or the seller to void a contract. Copyright Cengage Learning. Powered by Cognero.

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Chap 23_9e_Standard 39. The UCC's requirement that contracting parties perform and enforce their deals honestly is termed a. conformance. b. acceptance. c. good faith. d. reasonable action. 40. Leonna orders five table settings of china from Elite China. Each set includes a dinner plate, cup & saucer, bowl, and dessert plate. The china is sold only in sets. When the delivery arrives, Leonna discovers that Elite China sent the wrong pattern. Leonna immediately calls Elite China and is instructed to send the shipment back. While repacking the shipment, Leonna changes her mind and decides to keep the cups and saucers. She returns everything else. Can she do this?

41. Define these terms: usage of trade, course of dealing, and course of performance, and identify how they are used according to the UCC.

42. What is the "perfect tender rule," and what restrictions has the UCC put into place that limit the perfect tender rule's effect?

43. Identify the possible remedies for a buyer when the seller breaches a contract.

44. What is the difference between incidental damages and consequential damages?

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Chap 23_9e_Standard 45. Identify the possible remedies for a seller when the buyer breaches a contract.

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Chap 23_9e_Standard Answer Key 1. False 2. True 3. True 4. False 5. False 6. True 7. False 8. True 9. False 10. True 11. False 12. True 13. True 14. True 15. True 16. d 17. c 18. a 19. a 20. b 21. a 22. b 23. a 24. b 25. c 26. c

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Chap 23_9e_Standard 27. a 28. a 29. b 30. b 31. a 32. a 33. d 34. b 35. b 36. a 37. c 38. a 39. c 40. Probably not. If the set is seen as a commercial unit, Leonna cannot break up a set. A commercial unit is any grouping of goods that the industry normally treats as a whole. Here, especially if Leonna knows that the dishes are not sold separately, she must send the entire set back. She may be able to buy one set and return the other four sets, as this would probably be a commercial unit. 41. Usage of trade is any practice that members of an industry expect to be part of their dealings. Course of dealing refers to previous commercial transactions between the same two parties. Course of performance refers to the history of dealings between the parties in a single contract, and thus assumes that it is the kind of contract demanding an ongoing relationship. These terms present three circumstances where the tender may not be perfect in a strict sense. In other words, the buyer may not be able to reject minor flaws if the tender is perfect according to industry standards, or prior contracts between the same parties, or based on a history of dealings between the parties in the same contract.

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Chap 23_9e_Standard 42. Under the perfect tender rule, the buyer may reject the goods if they fail in any respect to conform to the contract. In other words, the goods must be exactly as described in the contract. The UCC includes sections that limit the perfect tender rule’s effect. The UCC takes the commonsense view that a contract for the sale of goods does not exist in a vacuum. It requires courts to consider three things when they apply the perfect tender rule: “Usage of trade” means any practice that members of an industry expect to be part of their dealings. The perfect tender rule may not permit a buyer to reject goods with minor flaws. For example, the textile industry interprets the phrase “first-quality fabric” to permit a limited number of flaws in most materials. If a seller delivers 1,000 bolts of fabric and 5 of them have minor defects, the seller has not violated the perfect tender rule. The course of dealing between the two parties may also limit the rule. The term course of dealing refers to previous commercial transactions between the same parties. The UCC requires that a current contract be interpreted in the light of any past dealings that have created reasonable expectations. The course of performance has the same effect on contract interpretation. The term course of performance refers to the history of dealings between the parties in a single contract, and thus assumes that it is the kind of contract demanding an ongoing relationship. 43. If a seller breaches a contract, the buyer is entitled to cancel the contract. If the buyer has not received the goods, she may recover any money already paid to the seller. Also, the buyer may be able to: cover by reasonably obtaining substitute goods; obtain damages for non-delivery; accept the non-conforming goods and seek damages; obtain incidental and consequential damages; recover the goods themselves by an order for specific performance; or recover liquidated damages. 44. An injured buyer is generally entitled to incidental and consequential damages. Incidental damages for buyers include such costs as advertising for replacements, sending buyers to obtain new goods, and shipping the replacement goods. Consequential damages, or losses that are caused by a breach, can be much more extensive and may include lost profits caused by the seller’s failure to deliver. A buyer, however, only gets consequential damages for harm that was unavoidable. 45. If a buyer breaches a contract, the seller can always cancel the contract. The seller may be able to: stop delivery of the goods; identify goods to the contract (which will help it recover damages); reasonably resell the goods, and recover the difference between the resale price and contract price plus incidental damages minus expenses saved; obtain damages for non-acceptance; or obtain the contract price.

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Chap 24_9e_Standard Indicate whether the statement is true or false. 1. First Federal had a perfected security interest in Vicor's printing press. Second Credit had a security interest in the same press, but its interest was not perfected. First Federal takes priority over Second Credit. a. True b. False 2. Article 9 applies to any transaction intended to create a security interest in personal property or fixtures. a. True b. False 3. Article 9 of the UCC only applies to goods and does not include intangibles such as stocks, bonds, or bills of lading. a. True b. False 4. First Federal loaned Madeline $20,000 to purchase a new van. The van was for Madeline's personal and family use. First Federal's security interest is a purchase money security interest which perfects only upon filing a financing statement. a. True b. False 5. Great State Bank and First Federal Bank have a security interest in TriColor's equipment. If neither secured party is perfected, the first to sue or repossess has priority over the collateral. a. True b. False 6. Micky, a mechanic, repaired Daphane's Dodge. Daphane failed to pay the repair bill of $595. Since Micky was still storing the car, he could therefore claim a landlord’s lien on the car. a. True b. False 7. Masterview, Inc., purchased a new computer system, which included some computer programs. When Masterview developed financial troubles, two competing creditors of Masterview claimed the right to repossess the computer system and the programs. The UCC distinguishes “software” from “goods” and treats them differently for some purposes, which would be important in this situation. a. True b. False 8. Bagsby owns a business selling insects for organic gardening. Bagsby is seeking a loan from First Natural Bank. The loan officer is asking that the loan be secured by Bagsby's inventory of insects, now owned or hereafter acquired. In order to do this, a new security agreement will need to be signed each time Bagsby gets new insects or sells his insects. a. True b. False

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Chap 24_9e_Standard 9. There is no way to attach a security interest in electronic chattel paper. a. True b. False 10. Spicy & Hot, Inc., is interested in expanding its Mexican food restaurant into a Mexican food catering business. Spicy & Hot, Inc., buys a new delivery van from Van World. Spicy & Hot, Inc., is a buyer in the ordinary course of business when purchasing the van. a. True b. False 11. Maddie enters into a secured consumer debt transaction with Friendly Bank. When Maddie pays the loan in full, Friendly Bank is required to file a statement indicating that it no longer claims a secured interest in the collateral. This statement must be filed within one month from the date the debt is fully paid. a. True b. False 12. Under Article 9 of the UCC, electronic chattel paper may be used as collateral in a secured transaction. a. True b. False 13. For a security interest to attach, there must be an agreement. a. True b. False 14. A PMSI in consumer goods perfects automatically, without filing. a. True b. False 15. Pharm-Ace holds a patent on a drug. Pharm-Ace used the patent (evidenced by the patent certificate) to secure a $1 million loan from First Bank. The patent is chattel paper. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 16. To perfect a security interest in a negotiable document, Second State Savings and Loan should a. file a financing amendment. b. take possession of the instrument. c. do nothing. Perfection is automatic. d. secure a court order.

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Chap 24_9e_Standard 17. Wanderlust gave a security interest in his Conestoga wagon to Iowa Bank who perfected its security interest by filing a financing statement with the appropriate officials in Iowa. Five months later, Wanderlust hit the trail again, moving to Montana. If Iowa Bank wants to continue its perfected interest in the Conestoga wagon, it should a. file a continuation statement for another five years in Iowa before Wanderlust moves on. b. re-perfect by filing a financing statement in the appropriate place in Montana, according to Montana law, within four months of Wanderlust's entering Montana. c. repossess the Conestoga wagon. d. file a continuation statement for another four months in Iowa before Wanderlust moves on. 18. Byron bought a 50' yacht from Myrtle's Marina by entering into a note and security agreement promising the yacht as collateral for the purchase money security interest. When Byron faced some tough financial times, he failed to make three monthly payments. Myrtle's Marina repossessed the yacht by removing the yacht engine and advertised a public auction of the yacht. Byron appealed to his good friend Charles, and managed to pay off the debt balance and the Marina's expenses of repossessing and advertising the sale. Byron's actions represent a. strict foreclosure. b. redemption. c. silent bidding at the auction. d. an artisan's lien. 19. Eduardo is starting a floral shop and owns a 10-year-old delivery van. He borrows $50,000 from First National Bank, which takes a security interest in the van. When Eduardo purchases a greenhouse in which to grow plants and a large cooler to keep them fresh, the bank's security interest attaches to these items, which are referred to as a. fixtures. b. instruments. c. after-acquired property. d. inventory. 20. Dieter is a debtor to Maxwell, the secured party. Dieter lives in Ohio and works in Kentucky. Maxwell lives in Indiana and works in Iowa. Where must the secured party file the financing statement? a. Ohio b. Kentucky c. Indiana d. Iowa 21. Which of the following parties can defeat a perfected security interest? a. A "buyer in ordinary course of business." b. A buyer of consumer goods if the buyer is not aware of the security interest (gives value for the goods) will continue to use the goods as consumer goods, even if the secured party has not filed a financing statement. c. A buyer who purchases chattel paper or an instrument in the ordinary course of business, and then takes possession. d. All of these are correct.

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Chap 24_9e_Standard 22. Wedney, Inc., has a purchase money security interest in one of Yoro Chicken's meat processing machines. Wedney filed a financing statement on the day the machine was delivered, perfecting its interest. Great State Bank already had a security interest in the machine. Which party has superior priority rights in the meat processing machine? a. Wedney. A PMSI in collateral other than inventory takes priority over a conflicting security interest if the PMSI is perfected at the time the debtor receives the collateral, or within 20 days after he receives it. b. Great State Bank, since it had an earlier security interest. c. The party who is first to repossess the collateral has priority rights. d. The creditors have equal priority. 23. Donna defaulted on her loan owed to Second State Savings and Loan. The loan was secured with Donna's car. Donna used the car for personal and family reasons. Which statement is correct? a. Second State may take Donna's car without a court order if this can be done without a breach of the peace. b. Second State may take Donna's car without a court order even if it means a breach of the peace. c. Second State may not take Donna's car because it is a consumer good. d. Second State may not take Donna's car because perfection was automatic. 24. At her neighbor's garage sale, Constance buys a vanity dressing table from her neighbor, Carlos, for $160. Constance purchased the vanity table for her own personal use, without any knowledge that Carlos had signed a security agreement giving All Purpose Furniture, Inc., a security interest in the vanity table. All Purpose Furniture did not file a financing statement. Constance does not know that Carlos is still paying off the purchase money security interest and owes All Purpose Furniture, Inc., $400. Under these circumstances a. Constance takes the vanity table subject to All Purpose's security interest because All Purpose's security interest is automatically perfected. A perfected security interest takes priority. b. Constance takes the vanity table free of All Purpose's security interest because she is a buyer of consumer goods. c. Constance takes the vanity table free of All Purpose's security interest because she is a buyer in the ordinary course of business. d. Constance must pay All Purpose $400 or the table must be resold, and she and All Purpose will proportionately share the proceeds from the sale of the table. 25. Great State Bank loans money to Seth, securing the loan with property owned by Seth. Great State Bank is advised by its attorney to file a financing statement. Great State Bank doesn't understand why it should spend the extra money for this filing, since Seth has told them that he has no other creditors. Why should Great State Bank file a financing statement? a. There are criminal penalties for failing to file. b. The financing statement allows Great State Bank to repossess the collateral on default without a court order. c. The financing statement will protect Great State's priority rights with other creditors by giving notice to other creditors that it claims a security interest in the collateral. d. Filing the financing statement is necessary to complete the attachment requirement in order to create a security interest.

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Chap 24_9e_Standard 26. In terms of collateral, which of the following would be categorized as "equipment?" a. A mowing tractor used to mow personal property. b. Crops produced by a farming operation. c. Goods held by someone for sale or lease. d. A computer system used in a retail store. 27. Landscaper Lottie used her machinery, employee labor, and her expertise to landscape Opal's new guest home. Opal fails to pay for the landscaping because she has run out of money. Lottie files a lien against the real property. This lien is called a(n) a. artisan's lien; her landscape design is a work of art. b. landlord's lien; Opal is planning to rent the guest house to a tenant. c. mechanic's lien; it was created by improving real property. d. purchase money security interest. 28. The initial term for which a financing statement will be effective is a. one year. b. five years. c. ten years. d. two years. 29. What occurs when a secured party takes back collateral because the debtor has failed to make payments when due? a. repossession b. default c. authentication d. perfection 30. On April 10, Amy agreed to buy a riding lawn mower from Mowers Plus, signing a promissory note and security agreement giving Mowers Plus a security interest in the mower. On April 15, Amy took delivery of the mower. On May 1, Mowers Plus filed a financing statement. Which of the following is correct? a. Despite the agreement, Mowers Plus could not create a security interest in the mower since it is a consumer good. b. Mowers Plus has attachment of a security interest in Amy's mower. c. Mowers Plus completed the attachment of a security interest in the mower when it filed the financing statement on May 1. d. The security interest has not attached, but attachment is unimportant to enforce a security interest. 31. If repossessed collateral is sold or otherwise disposed of by the creditor, then the time, place, manner, and method of disposal must be a. commercially reasonable. b. scheduled with the debtor so that the debtor is able to attend. c. court ordered. d. perfected.

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Chap 24_9e_Standard 32. Florence borrows $1,500 from Fremont, leaving her gold necklace with Fremont as collateral. Two weeks earlier, Florence had borrowed $1,000 from Corner Bank. Florence signed a security agreement and a financing statement giving Corner Bank a security interest in the same gold necklace. The financing statement is filed in the appropriate location. If Florence defaults on both loans, which creditor has the superior rights to the necklace? a. Fremont, because his loan was the first to attach. b. Fremont, because possession takes priority over filing. c. Corner Bank, because Fremont did not perfect his interest. d. Corner Bank, because Fremont did not have a written security agreement. 33. Country Bank, located in Indiana, loaned Chmelik $5,000 and obtained a security interest in a copyright Chmelik owns. Chmelik lives in Illinois, but works in Indiana. In order to perfect its interest, Country Bank files a financing statement in Indiana. The financing statement provides Chmelik’s correct name, his business address, and a reasonable description of the copyright used as collateral. Is the financing statement sufficient? a. Yes, it meets the UCC requirements for contents and filing. b. No, if the debtor is an individual, the secured party must file in the state of the debtor’s principal residence, which in this case would be Illinois. c. No, the secured party needed to file a financing statement in both Indiana and Illinois. d. No, a security interest cannot be attached to a copyright. 34. Wedney, Inc., sold a meat processing machine to Yoro Chickens, taking a security interest in the machine. Yoro Chickens defaulted on the loan. Wedney repossessed the machine. Wedney would like to retain the machine to use as a model. Which of the following statements is correct? a. Wedney must notify the debtor that it intends to retain the machine and give Yoro 20 days to object. b. By taking possession, Wedney automatically foreclosed on the collateral. Wedney has valid title and need do nothing else. c. Since the machine is equipment, Wedney cannot retain the machine. Wedney must dispose of the collateral in a commercially reasonable manner. d. Wedney can retain the machine but must pay Yoro the surplus, the difference between the fair market value of the machine and the amount of the debt. 35. The property subject to a security interest is called a. a fixture. b. collateral. c. consideration. d. an account.

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Chap 24_9e_Standard 36. Which of the following is correct concerning termination statements? a. A termination statement must be filed by a secured party when a debtor has defaulted on a loan. b. For consumer debt, the secured party must complete a termination statement in every place that it filed a financing statement. c. The secured party must file a termination statement within 30 days of a consumer debtor's demand, provided the debtor has paid the full debt. d. A termination statement indicates that a secured party is transferring its rights to collateral to another party. 37. Hiram is a debtor to Central Credit Union, a secured party. If Hiram fails to maintain insurance on the collateral, he has likely a. attached the security agreement. b. defaulted on the security agreement. c. terminated the security agreement. d. perfected the security agreement. 38. Morefield Custom Design sends 30 recliners by rail to Danville Furniture. To show where the goods will be shipped and who gets them when they arrive, Morefield will obtain ____, which can be used as collateral in a secured transaction. a. a warehouse receipt b. a bill of lading c. chattel paper d. a deposit account 39. A security interest in money may be perfected by a. filing a financing statement. b. creating a PMSI. c. possession only. d. redemption. 40. Explain the difference between attachment and perfection.

41. Faith owns a copyright in a book she recently wrote. She applies for a $10,000 loan through Cumberland Bank and wants to use the copyright as collateral. Explain if and how the bank can perfect a security interest in such collateral.

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Chap 24_9e_Standard 42. Fowler Bros. has applied to Gibralter Bank for a $50,000 loan for its business expansion. If Fowler Bros. plans to use its account at Gibralter Bank as collateral, discuss what the bank needs to do for a security interest to attach.

43. Aubry purchased a washing machine, a freezer, and a refrigerator from Gateway Appliances on credit, giving Gateway a security interest in the appliances. The appliances were for Aubry's household use. Gateway did not file a financing statement. Six months later, Aubry had a garage sale and sold the appliances to Tam. Tam bought the appliances for her student rental property. Aubry left town owing money on the appliances. If Gateway can trace the appliances to Tam, can Gateway repossess the appliances? Explain in detail.

44. Ken decided to open a retail boat dealership. He expects that many of his sales will be credit sales. What should Ken do to protect his interests in the collateral from the credit sales that he makes?

45. Gateway sold a big-screen TV and entertainment center to Iris for $2,000 on credit. Iris signed a promissory note and gav Gateway a security interest in the TV and entertainment center. Gateway filed a financing statement in the appropriate pub office. When Iris defaulted on her monthly payments owing a balance of $1,780, Gateway's attorney made arrangements the TV and entertainment center repossessed. The attorney then placed classified ads in the local newspaper to sell the go The attorney's fees are $300, the repo company charged $150, and the advertising costs are $50. (A) If Iris chooses to redeem the property, how much must she pay to Gateway to recover the property? (B) If Iris does not redeem, and the TV and entertainment center are sold for $1,750, how will the money be disbur

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Chap 24_9e_Standard Answer Key 1. True 2. True 3. False 4. False 5. False 6. False 7. True 8. False 9. False 10. True 11. True 12. True 13. True 14. True 15. False 16. b 17. b 18. b 19. c 20. a 21. d 22. a 23. a 24. b 25. c 26. d

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Chap 24_9e_Standard 27. c 28. b 29. a 30. b 31. a 32. b 33. b 34. a 35. b 36. b 37. b 38. b 39. c 40. Attachment means that the secured party has taken all of the following steps to create an enforceable security interest: (1) the secured party and the debtor make a security agreement and either the debtor has authenticated a security agreement describing the collateral, or the secured party has obtained possession or control of the collateral; (2) the secured party has given value to obtain the security agreement; and (3) the debtor has rights in the collateral. Perfection of a security interest protects the secured party against parties other than the debtor. Perfection means letting the rest of the world know that the secured party claims a security interest in the debtor's collateral promised under the attachment. There are several kinds of perfection: perfection by filing, perfection by possession, perfection of consumer goods, and perfection of movable collateral and fixtures. The most common way to perfect is by filing a financing statement with the appropriate state agency. A valid security interest can be created even though the interest is never perfected. 41. A copyright is a part of a residual category of collateral called “general intangibles” under Article 9 of the UCC. Cumberland Bank could perfect a security interest in the copyright if the bank chooses to accept the copyright as collateral. Although there are several ways for a secured party to perfect a security interest, filing a financing statement is the only way to perfect an interest in general intangibles. The financing statement must give the names of all parties and reasonably describe the collateral. The bank must file the statement in the state of Faith’s principal residence.

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Chap 24_9e_Standard 42. Attachment is a vital step in a secured transaction. For an enforceable security interest to be created, or to attach, three steps must occur: the parties must make a security agreement and either the debtor has to authenticate a security agreement describing the collateral, or the secured party has to obtain possession or control of the collateral, the secured party must give value to obtain the security agreement, and the debtor must have rights in the collateral. Ordinarily the agreement is in writing and signed by the debtor (or electronically recorded) and authenticated by the debtor. In this case, however, it will be sufficient if the parties have an oral agreement since the bank (i.e., the secured party) has control of the deposit account being used for collateral. The second element, value, is the money the bank loans. The third element is that the debtor has rights in the collateral. Fowler Bros. has a legal right to its deposit account in Gibralter Bank. 43. Yes. Generally, with consumer goods, a buyer takes the goods free of a security interest if he is not aware of the security interest, he pays value for the goods, he is buying for his own family use, and the secured party has not yet filed a financing statement. Here, however, Tam bought these items for her business venture, the rental property. She is not buying the items for her personal use. So, even though Gateway did not file a financing statement, it can retrieve the property if the items can be traced to Tam. 44. The UCC gives special treatment to security interests in most consumer goods. Merchants cannot file financing statements for every consumer good they sell, so the Code provides that a purchase money security interest (PMSI) in consumer goods perfects automatically, without filing. However, the rules for perfection differ slightly for security interests in movable goods, such as boats. Because boats, cars, and motor vehicles are numerous and mobile, most states have created special laws to deal with security interests in these goods. Ken should check his state's laws, but in most states, a security interest is noted directly on the boat's certificate of title. 45. (A) Up to the time that the secured party disposes of the collateral, the debtor has the right to redeem it. This means that the debtor can regain possession of the collateral if she pays the full balance of the note, plus any expenses incurred by the secured party up to the time of the debtor's redemption. Here, if Iris wants to redeem the TV, she will need to pay Gateway $2,280 ($1,780 + $300 + $150 + $50 = $2,280.) (B) If Iris does not redeem and the TV and entertainment center sell for $1750, the sale proceeds will be distributed as follows: Sale Proceeds - Attorney's Fees - Repo Co. - Advertising

$1,750.00 -$300.00 -$150.00 -$50.00

Balance

$1,250.00

to be applied to the loan balance of $1,780.

This leaves a deficiency balance of $530. Gateway can sue Iris to obtain a general unsecured judgment for this deficiency balance.

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Chap 25_9e_Standard Indicate whether the statement is true or false. 1. Margo is in possession of a check issued to her by Felix. The check states, "Pay to the order of Margo." If Margo wishes to transfer the check to Pete to pay a debt she owes him, all she needs to do is strike out her name on the front of the check, write in Pete’s name, and give it to him. a. True b. False 2. A & D, Inc. wrote a negotiable note payable to Vicy, Inc., for the purchase of some satellite receivers. A & D left the amount of the note blank because it was uncertain as to the amount of the applicable tax. Vicy completed the note for $3,000 more than A & D actually owed for the receivers it purchased. The note was negotiated to a holder in due course. A & D will not have to honor the note as this constituted fraud in the execution. a. True b. False 3. With non-negotiable commercial paper, a transferee’s rights are conditional. a. True b. False 4. Tyron purchased a $2,900 promissory note from Jared for the discounted amount of $2,500. Tyron paid value, in good faith and without notice of any outstanding claims against this promissory note that read, "Pay to the order of Jared $2,900 on July 1, 2021, for the purchase of a 2011 Ford Taurus provided no major problems with the car arise prior to said payment date." Tyron is a holder in due course of a negotiable note. a. True b. False 5. Charlene Brown has possession of a check made out to the order of Charlene Brown (herself) which she received in payment for writing a manuscript for her publisher. Charlene is a holder in due course and the publisher cannot claim any “real” defenses to payment. Charlene has an unconditional right to be paid for the check. a. True b. False 6. There are two kinds of commercial paper: negotiable and non-negotiable instruments. a. True b. False 7. Commercial paper is a contract to pay money. a. True b. False 8. A possessor of non-negotiable commercial paper has the same rights as the person who made the original contract. a. True b. False

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Chap 25_9e_Standard 9. Tim wrote a negotiable note. Subsequently, Tim's debts were discharged in bankruptcy. If a holder in due course presents the note for payment, Tim does not have to pay. a. True b. False 10. There are two types of commercial paper: express and implied. a. True b. False 11. All checks are drafts, but not all drafts are checks. a. True b. False 12. Personal and real defenses are valid against an ordinary holder; only real defenses can be used against a holder in due course. a. True b. False 13. Trisha loaned Brian $600 evidenced by a promissory note. When Brian paid off the loan, he did not ask Trisha for the note. She sold it to Carin, a holder in due course. Brian does not have to pay Carin since he already paid Trisha the full $600. a. True b. False 14. To be negotiated, bearer paper must simply be delivered to the recipient. a. True b. False 15. A claim in recoupment can be used against a holder in due course. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 16. In which case would the holder in due course not receive payment? a. Nineteen-year-old Dylan signs a promissory note to pay $500 to Alice and hands her the note. b. Ricardo forges Amberly's name to a promissory note and sells it to Divine. c. Yoko borrows money from Carole, and signs a promissory note to repay the amount with interest. d. All of these are correct.

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Chap 25_9e_Standard 17. Under the UCC, a holder in due course is a holder who has given value for the instrument. Which of the following holders have given value for the instrument? a. Beth promises to paint the neighbor's house in exchange for a promissory note as an advance payment for the job. b. Steve gives a note and mortgage on his house to his attorney as a retainer to handle his pending divorce. c. Todd, a newspaper carrier, accepts a properly indorsed two-party check for the past two months of deliveries. d. All of these are correct. 18. A "holder" of order paper can be described as a. the payee. b. any person in possession of the instrument. c. any person in possession of the instrument if it is payable to or indorsed to him. d. the first party to come in contact with a negotiable instrument. 19. Generally, Rita signs her name using an infinity symbol rather than her legal name. Rita signed an instrument using this symbol. Which statement is correct? a. The instrument cannot be negotiable. To be negotiable, the instrument must be signed in Rita's legal name. b. The instrument cannot be negotiable. To be negotiable, the instrument must be signed in Rita's given name. c. The instrument cannot be negotiable. To be negotiable, the instrument must be signed using letters from the alphabet. d. The instrument can be negotiable. Rita intended to indicate her signature. 20. Cigna Insurance Company sent James Mills a check for $484.12 in payment for his insurance claim. Dishonest fellow that he was, Mills told Cigna that the check never arrived. Cigna stopped payment and issued a new check. Mills took the old check to Sun’s Market and used it to buy goods there. At this point, Sun was a holder in due course and was entitled to payment from Cigna. When Sun deposited the check at its bank, the bank refused to pay and stamped the check “Stop Payment.” Instead of presenting the check to Cigna and having a fight over whether the insurance company was liable on the instrument or not, Sun sold the check to Robert Triffin, who was in the business of buying dishonored instruments. Triffin then sued Cigna for payment. Under the “Shelter Rule” the following is true: a. Triffin has acquired Sun’s rights as a holder in due course and is entitled to payment. b. Triffin has not acquired Sun’s rights, but is entitled to payment. c. Triffin has acquired Sun’s rights, but is not entitled to payment. d. Triffin will not prevail because he has no rights as a holder in due course. 21. Sprock is a holder in due course on an instrument issued by Klingon. Which of the following defenses could be successfully raised by Klingon? a. mental incapacity b. prior payment c. breach of contract d. fraud in the inducement Copyright Cengage Learning. Powered by Cognero.

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Chap 25_9e_Standard 22. Kent Weston wrote a check for $500 payable to the order of Chester Jones. Chester indorsed the back of the check as follows: "Chester Jones." The check is now a. order paper. b. bearer paper. c. a cashier's check. d. special paper. 23. Which is an unconditional order to pay? a. "I will pay $5,000 for the painting." b. "I will pay $2,500 for the truck, if it is still running." c. "I will pay $400, if I have the money by Friday." d. All of these are correct. 24. Which statement about notes and drafts is accurate? a. With a draft, two people are involved: drawer and drawee. b. With a note, you order someone else to pay. c. With a note, two people are involved: maker and payee. d. With a draft, you make a promise that you will pay. 25. A bank that draws a check on itself has issued a. a special indorsement. b. a claim in recoupment. c. a certificate of deposit. d. a cashier's check. 26. In June, The Seascape Gallery sells an oil painting to Collegiate Systems, Inc. Collegiate promises to pay for the painting in three months. The gallery prepares a draft ordering Collegiate Systems to pay $3,000 to First Bank on September 15. Collegiate Systems signs the draft. The draft is a a. sight draft. b. time draft. c. trade draft. d. future draft. 27. Value means that the holder of an instrument a. has already done something in exchange for the instrument. b. cannot transfer the instrument to another person. c. is not in physical possession of the instrument. d. believes the transaction was honest in fact.

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Chap 25_9e_Standard 28. Felicia, an elderly woman, does not speak or read English well. Felicia is a recent immigrant to this country. A dishonest immigration officer tells Felicia to sign several documents as being necessary to maintain her legal immigration status. Unknown to Felicia, she signs a promissory note. The immigration officer thereafter sells the note to Neighborhood Bank, a holder in due course, who goes after Felicia for payment of the note. Felicia's defense to the Neighborhood Bank is a. fraud in the inducement; a real defense. b. fraud in the execution; a real defense. c. unauthorized completion; a personal defense. d. breach of contract; a real defense. 29. The evening news was full of stories about how Levine sold fraudulent negotiable instruments to investors around the country. Two days later, Brighty, who did not hear the news reports, bought some of the fraudulent negotiable instruments from a swindled investor. Can Brighty claim the position of a holder in due course considering the publicity of the scam? a. Brighty is presumed to have knowledge of the scam, and therefore did not purchase the instruments in good faith. b. Although Brighty passes the subjective test of good faith, he fails the objective test and therefore cannot claim to have purchased the instruments in good faith. c. Brighty can claim to have purchased the instruments in good faith if he subjectively believed the instruments were valid, and if objectively his purchase of the instruments was commercially reasonable. d. Brighty cannot be a holder in due course because once an action of fraud is discovered, no additional claims against that party can be sought. 30. An instrument is negotiable if it satisfies six standards. Which of the following is a standard of negotiability? a. The instrument can be oral provided there is proof beyond a reasonable doubt. b. The instrument must be signed by the payee. c. The instrument must be conditional. d. The instrument must state a definite sum of money. 31. To be negotiable, a check must be in writing. Under the UCC, a check a. must be written on standard size paper of 6" × 2.5." b. must be written on an official bank form. c. need not be on any official form or even on paper. d. must be written on a pre-printed bank issued check. 32. Maia wrote a check which said, “Pay to the order of Kevin Mathews $10.97.” The next line of the check stated, “One thousand ninety-seven dollars.” In applying the rules of interpretation, how much should the drawee pay? a. Nothing; when the instrument is ambiguous it is declared non-negotiable. b. Ten dollars and 97 cents. Numbers control over words. c. One thousand, ninety-seven dollars or $1,097.00. Words control over numbers. d. Parol evidence would be needed to determine the purpose of the check.

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Chap 25_9e_Standard 33. An indorsement is the signature of the a. drawer. b. payer. c. issuer. d. payee. 34. George's Wholesaling agrees to purchase 1,000 pounds of bananas from Chickadee Exports at 39 cents per pound. George's does not have the money for the bananas now, but promises to pay in two months. Chickadee Exports wants George's business but needs the money now. Chickadee (as drawer) prepares an instrument ordering George's (as drawee) to pay $390 to Primary Bank (the payee). This is an example of a. a check. b. a trade acceptance. c. a promissory note. d. an outstanding claim. 35. Tim buys a high-powered tool from Binford Tools to use on the construction of his own garage. Binford Tools provides a full warranty on the tool for the first six months. To pay for the tool, Tim signs a negotiable promissory note which contains the FTC Consumer Credit Notice. Binford properly negotiates the note to First Finance. Within three weeks, the tool stops working and Binford refuses to repair or replace it. In the meantime, First Finance demands payment from Tim. Under the Federal Trade Commission rules, this consumer credit situation means First Finance a. can collect if it is a holder in due course. b. can collect if it is not a holder in due course. c. can collect whether or not it is a holder in due course. d. cannot collect. 36. Laurel Speckle received a check from State University. She indorsed the check as follows: "For Deposit only, /s/ Laurel Speckle." Laurel's indorsement is a(n) a. blank indorsement. b. special indorsement. c. restrictive indorsement. d. improper indorsement. 37. The term “issuer” a. is not used in relation to commercial paper. b. is an all-purpose term that means both maker and drawer. c. is synonymous with drawee. d. is used in relation to commercial paper only to indicate the bank which creates a certificate of deposit.

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Chap 25_9e_Standard 38. Sophie issues a promissory note made "payable to the order of Molly." Molly indorses the note by signing her name and gives the note to Dana. Which of the following is correct? a. Sophie issued a bearer instrument, and Molly kept it in bearer form. b. Sophie issued an order instrument, but Molly changed it to bearer form. c. Sophie issued an order instrument, but Molly changed it to bearer form. d. Sophie issued a bearer instrument, and Molly changed it to bearer form. 39. Valley National Bank issued a note promising to repay an investor on October 1, 2024, three years from the date of issue, plus interest. The note a. is a certificate of deposit, and it will pay a lower rate of interest than a regular savings account at Valley. b. is a certificate of deposit, and it will pay a higher rate of interest than a regular savings account at Valley. c. is a certificate of deposit, and whether the bank pays a higher or lower rate of interest than it pays on its regular savings accounts depends upon particular bank policy. d. constitutes a trade acceptance. 40. 44. It was payday. Navidida decided to run some errands and then deposit her check in the bank over her lunch hour. So that she wouldn't have to spend too long at the bank, Navidida indorsed the back of the paycheck as follows, "Navidida Jones," before leaving work. While window shopping, Navidida lost the check. Roger finds Navidida's paycheck. (A) Will Roger be able to cash Navidida's check? How could have Navidida indorsed the check so that she would not have to be (B) concerned about losing the check?

41. On March 1 Donna wrote a check for $296 to Sun Services. When will the check be overdue? What is the effect of the check’s being overdue? What is the effect if the check is stamped “Insufficient Funds” by Donna’s bank?

42. Discuss the effect on an instrument of: (a) contradictory amounts between the numerals and amount written in words on a check; (b) the interest rate left blank on a promissory note; and (c) contradictory terms that are typed or printed onto a promissory note and terms that are handwritten.

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Chap 25_9e_Standard 43. Because negotiable instruments are more valuable than non-negotiable ones, it is important for buyers and sellers to be able to tell, easily and accurately, if an instrument is indeed negotiable. What six standards must an instrument meet in order for it to be negotiable?

44. TriColor purchased an industrial stamping machine from Vicy, Inc. TriColor paid for the machine with a negotiable note. The note was payable to the order of Vicy, Inc. Vicy, Inc., indorsed the note and gave it to CCLoans to satisfy a debt. CCLoans knew nothing about the contract between TriColor and Vicy, Inc. CCLoans indorsed the note and gave it to Great River Youth Club as a charitable donation. When Great River Youth Club presented the note for payment on its due date, TriColor refused to pay, claiming that the stamping machine was defective. (A) Is Great River Youth Club a holder in due course? Will TriColor be able to avoid liability to Great River Youth Club on the basis that the (B) machine was defective?

45. Matt wrote a $500 check to Alistar for some yard work that Alistar had done. What will Alistar have to do negotiate this instrument to Totally Tough, Inc., in payment for some yard equipment Alistar had bought?

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Chap 25_9e_Standard Answer Key 1. False 2. False 3. True 4. False 5. True 6. True 7. True 8. True 9. True 10. False 11. True 12. True 13. False 14. True 15. False 16. b 17. c 18. c 19. d 20. a 21. a 22. b 23. a 24. c 25. d 26. b

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Chap 25_9e_Standard 27. a 28. b 29. c 30. d 31. c 32. c 33. d 34. b 35. d 36. c 37. b 38. b 39. b 40. (A) The check is bearer paper. This means that anyone who is in possession of the instrument can cash the check. Negotiation of bearer paper is completed by delivery of the instrument; no indorsement is necessary. Roger is a holder of the check and could cash it. (B) Navidida should have used a restrictive indorsement such as "For deposit only," before she signed her name. With a restrictive indorsement, the check could only be deposited into her account. Roger would not have been able to cash it or deposit it into his own account. 41. A check is overdue 90 days after its date. When an instrument is overdue, a recipient is on notice that it may have a defect. The UCC states that a holder in due course is a holder who has given value for the instrument, in good faith, without notice of outstanding claims or other defects. If a check is marked “Insufficient Funds” by a bank, it has been dishonored. No one who obtains it afterward can be a holder in due course. 42. Rather than invalidating the defective documents, the UCC favors negotiability and provides rules to resolve uncertainty and supply missing terms. In situation (a), where terms in a negotiable instrument contradict each other, words take precedence over numbers. In situation (b), the UCC provides that the judgment rate applies. The judgment rate is the rate that courts use on court-ordered judgments. In situation (c), handwritten terms prevail over typed and printed terms.

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Chap 25_9e_Standard 43. In order for an instrument to be negotiable, it must meet the following six criteria: The instrument must be in writing. The instrument must be signed by the maker or drawer. The instrument must contain an unconditional promise or order to pay. The instrument must state a definite amount of money. The instrument must be payable on demand or at a definite time. The instrument must be payable to Order or to Bearer.

44. (A) Great River Youth Club is not a holder in due course. A requirement of a holder in due course is that the holder must give value for the instrument. Great River Youth Club did not give value for the note. It was a gift to the organization. (B) TriColor will not be able to successfully raise the defense that the machine was defective. Even though Great River Youth Club is not a holder in due course, it is a holder with the rights of a holder in due course. CCLoans was the holder in due course, and since Great River Youth Club took the note through CCLoans, Great River Youth Club is a holder with the rights of a holder in due course under the shelter rule. Consequently, TriColor can only raise real defenses to payment on the note. The defense that the machine was defective, a breach of contract, is a personal defense. TriColor will have to pay the amount of the note to Great River Youth Club.

45. A check is order paper. To negotiate order paper, the instrument must be indorsed and then delivered to the transferee. Thus, Alistar needs to sign the check on the back and give it to Totally Tough.

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Chap 26_9e_Standard Indicate whether the statement is true or false. 1. An accommodation party and a co-maker of a note have the same liability on an instrument. a. True b. False 2. Nelson writes Leah a check for mowing his lawn. Leah deposits the check in her bank, but it is not paid by Nelson’s bank. Leah calls Nelson to notify him that her bank returned his check to her unpaid. Leah’s notice of the dishonor is insufficient; she must provide written notice. a. True b. False 3. Maurina Barker is an agent of Southland, and she is authorized to sign checks on Southland’s bank account. If Maurina signs a check as "Maurina Barker, as agent for Southland" she is not liable on the instrument. a. True b. False 4. When signing a company check, an agent must clearly indicate that he or she is signing on behalf of the company in order to be free of liability. a. True b. False 5. The accidental destruction of a negotiable instrument will not result in its cancellation. a. True b. False 6. Drawers and indorsers are secondarily liable on negotiable instruments. a. True b. False 7. A drawee has primary liability on a draft. a. True b. False 8. Negotiable instruments are normally issued to fulfill a contract. a. True b. False 9. An indorser who writes "without recourse" next to her signature on a negotiable instrument is not liable for payment. a. True b. False

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Chap 26_9e_Standard 10. Suppose that Emmett impersonates a famous clown. He goes into an advertising agency and convinces the manager to issue a check to him in the name of the famous clown, purportedly as part of a fund-raising campaign for a nursing home for old retired clowns. If Emmett negotiates the check to a check-cashing store by forging the name of the famous clown, then the ad agency will be able to argue that the bank must reimburse the account because the bank paid a check on a forged signature. a. True b. False 11. Warranty liability is the liability of someone who gives payment on a negotiable instrument. a. True b. False 12. Conversion means that someone has stolen an instrument or a bank has paid a check that has a forged indorsement. a. True b. False 13. Lance indorses a promissory note to Connie in exchange for consideration. Unknown to Lance, the note is not good because the maker's signature was forged. Connie later attempts to present the instrument for payment to the original alleged maker, Lilly, who is able to deny liability for payment due to the forged signature. Connie may later sue Lance for breach of a transfer warranty. a. True b. False 14. Assume that Joel signs a promissory note to Andrew, who in turn negotiates the instrument to Luke. Of the three, Joel is the only person who has primary liability. a. True b. False 15. Sandy may be charged a fee, but will not face criminal penalties for writing checks on an account with insufficient funds to pay them. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 16. When a negotiable instrument is transferred, the transferor warrants all of the following EXCEPT a. the instrument is bearer paper. b. all signatures are authentic. c. as far as she knows the issuer is solvent. d. the instrument has not been altered.

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Chap 26_9e_Standard 17. If an employee with responsibility for issuing instruments forges a check or other instrument, then any indorsement in the name of the payee, or a similar name, is valid as long as the person who pays the instrument doesn't know of the fraud. This is called a. the Imposter Rule. b. the Conversion Rule. c. the Employee Indorsement Rule. d. the Fictitious Payee Rule. 18. Tom indorsed a check made payable to the order of Tom Jones as follows: Pay Raymond Berry /s/ Tom Jones Raymond negotiated the check to his landlord for his rent. Raymond indorsed the check as follows: Without Recourse /s/ Raymond Berry With regard to Tom's indorsement, which statement is correct? a. Tom has secondary contractual liability on the check as an indorser. b. Tom has no contractual liability on the check because he is the payee. c. Tom has primary contractual liability on the check as payee. d. Tom eliminated his liability as an indorser by the type of indorsement he used. 19. What term is used to indicate the passing on of an instrument that one knows to be forged? a. discharge b. utter c. kite d. bounce 20. Which of the following is NOT one of the five ways to discharge a negotiable instrument? a. payment b. cancellation c. alteration d. presentation 21. Lana wrote a check knowing that she did not have sufficient funds in her account. What is this practice called? a. check kiting b. bouncing a check c. check forgery d. check covering 22. Verne has possession of a draft that has been validly negotiated to him. His payment process necessarily includes a. presentment of the draft, dishonor, and notice of dishonor. b. exhibiting the instrument, showing reasonable identification, and surrendering the draft if it is paid in full. c. exhibiting the draft, providing a thumbprint signature, and giving a receipt. d. suspending the underlying debt, applying the shelter rule, and making a demand for payment.

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Chap 26_9e_Standard 23. Which of the following statements regarding instrument liability is TRUE? a. The holder of an instrument must first ask for payment from those who are secondarily liable. b. For any given instrument, only one person can be liable at a time. c. A person with primary liability is unconditionally liable, and must pay unless he or she has a valid defense. d. A person with secondary liability has the same liability to the holder as a person with primary liability. 24. Check kiting is defined as a. indorsing a check while knowing that the check is a stolen check. b. carelessly paying an unauthorized instrument. c. a scheme of overdrawing account "A" by depositing a check in account "B," then overdrawing account "B" to cover the insufficient funds in account "A." d. issuing an instrument to an impostor who negotiates the instrument to a bank that is unaware of the fraud. 25. Which of the following will discharge an instrument? a. John asks Bev, an employee, to take money to the bank to pay off a note, but she keeps the money instead. b. Two people make an oral agreement to discharge. c. Chet accidentally leaves a check in his pocket and it is destroyed in the washing machine. d. The terms of the instrument are intentionally changed. 26. Mack writes a check to his maid, Marianne, in payment for services rendered. Marianne indorses the check in blank and gives the check to her masseuse, Janet, in exchange for a neck massage. Without indorsing the check, Janet gives the check to Martin, her newspaper carrier, in payment for the next four months' delivery charges. Martin indorses with a special indorsement and negotiates the check to his church, St. Mark. The church indorses the check and deposits it in its bank account. If Mack's bank later dishonors the check, to whom may St. Mark's look for recovery? a. Martin only b. Mack only c. Mack, Marianne, Janet, and Martin d. Mack, Marianne, and Martin 27. An accommodation party on a negotiable instrument a. typically receives a direct benefit from the instrument. b. is always primarily liable for the instrument. c. is the same as a “guarantor” under the UCC. d. has the same liability to a holder as the person for whom he signed. 28. Anyone who presents a check for payment makes certain warranties. Which of the following is NOT one of those warranties? a. That he or she is a holder. b. That the check has not been altered. c. That the drawee is a solvent institution. d. That all signatures are authentic.

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Chap 26_9e_Standard 29. Cecilia made a check out to Gideon for $15. Gideon fraudulently changed the check to read $150, and cashed it at Corner Bank. Is Cecilia discharged from liability on the check? a. Yes, Cecilia owes nothing on the check because alteration of a check is a real defense and real defenses are good even against holders in due course. b. No, Cecilia pays $150 because of the impostor rule. c. No, Cecilia pays $150 because she is not an indorser or accommodation party. d. Yes, Cecilia owes nothing unless Corner Bank is a holder in due course, in which case she owes the original $15. 30. Ivy wants to buy a necklace from Bethany for $500 and offers to write a check. To protect herself, Bethany insists that Ivy give her a certified check. If Ivy does this, who then becomes primarily liable? a. Bethany b. the bank c. Ivy d. both Ivy and the bank 31. Jessie is the maker of a $1,000 promissory note in favor of Tyler. Tyler subsequently indorses the note to Ryan by signing just his name. Ryan in turn indorses it to Breanna by indorsing the back of the note, "Without recourse, Ryan." Breanna then indorses it to Liz, the present holder, with a special indorsement. If the note is dishonored by Jessie after it is properly presented to her for payment by Liz, then Liz, after giving timely notice to Tyler, Ryan, and Breanna, may collect payment under signature liability from a. Tyler only. b. Breanna and Tyler only. c. either Tyler, Ryan, or Breanna. d. neither Tyler, Ryan, nor Breanna. 32. Alejandro signs on the back of an instrument; he is considered to be a. an indorser. b. an acceptor. c. an issuer. d. None of these are correct. 33. Discharge means that a. someone has stolen an instrument. b. an obligor refuses to pay an instrument that is due. c. liability on an instrument terminates. d. a bank has paid a check that has a forged indorsement. 34. An instrument ordering someone else to pay money is called a(n) a. accommodation. b. transfer warranty. c. discharge. d. draft.

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Chap 26_9e_Standard 35. A check was indorsed as follows: Jessica Hall without recourse Paul Samuels Collection guaranteed Melissa Liston Which of the following will discharge all of the indorsers? a. Notice of dishonor after 30 days' time. b. The “without recourse” indorsement within the chain. c. An insolvency of drawer. d. The certification of the check. 36. Paula is a sales agent for The Rock Insurance Company. Paula accepts a check from a customer made payable to her in payment for the premium on an insurance policy. Prior to depositing the check in The Rock's bank account, Paula indorses the check as follows: "The Rock Insurance Company, by Paula Beck, agent." Assuming that Paula has authority to indorse company checks, if the check is dishonored, then between Paula, The Rock, and the bank a. Paula only will be liable. b. Paula and The Rock will be liable. c. the Rock only will be liable. d. the bank will be stuck with the dishonored check. 37. Which of the following parties has primary liability on a draft? a. the drawee b. the maker c. the drawer d. the indorser 38. Under the UCC, all of the following have the right to enforce payment of an instrument EXCEPT a. a holder of the instrument. b. anyone to whom the shelter rule applies. c. a holder who has lost the instrument. d. a holder who intentionally destroys the instrument. 39. When a person indorses a check, the indorser assumes contractual liability based on the indorsement. This liability expires unless presentment is made a. within 3 days of indorsement. b. within 7 days of indorsement. c. within 30 days of indorsement. d. within a reasonable time after the indorsement.

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Chap 26_9e_Standard 40. Generally, indorsers are not liable under signature liability if a. they write the words "without recourse" next to their signatures on the instrument. b. they are not the drawee. c. a check is presented for payment within 30 days after the indorsement. d. they are an accommodation party. 41. Explain when presentment warranties apply. Identify the presentment warranties on a check and a promissory note.

42. List and explain the five different ways to discharge an instrument according to Article 3 of the UCC.

43. Dwight Stringer signed three promissory notes as an agent for his company. The first, he signed “Dwight Stringer, agent for Park Systems, Inc.” The second, he signed “Dwight Stringer, Agent.” The third note was signed merely “Park Systems, Inc.” Discuss the liability of Dwight and Park Systems, Inc., on each of the notes.

44. List the warranties a transferor of a negotiable instrument makes.

45. James Packard, a lawyer representing Robert Marino, received a check for $16,000 in settlement of Robert’s case. Instead of turning over the money to Robert or putting it into a trust fund for him, James forged Robert’s indorsement and deposited the money into his own account without notifying Robert. Discuss the claims the parties have.

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Chap 26_9e_Standard Answer Key 1. False 2. False 3. True 4. False 5. True 6. True 7. False 8. True 9. True 10. False 11. False 12. True 13. True 14. True 15. False 16. a 17. c 18. a 19. b 20. d 21. b 22. b 23. c 24. c 25. d 26. d

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Chap 26_9e_Standard 27. d 28. c 29. d 30. b 31. b 32. a 33. c 34. d 35. d 36. c 37. b 38. d 39. c 40. a 41. Presentment warranties apply to someone who demands payment of an instrument from anyone liable on it. Presentment warranties apply when an instrument is returned to the maker or drawee for payment. Someone who presents a check for payment warrants that he is a holder, the check has not been altered, and he has no reason to believe the drawer’s signature is forged. If any of these warranties are untrue, the bank has the right to demand a refund from the presenter. For a promissory note, the presenter makes only one warranty, and that is that he is a holder of the note. The presenter does not need to warrant that the note is not altered or that the maker’s signature is authentic because a note is presented for payment to the maker himself. 42. By payment:payment discharges an instrument, as long as the payment is fromsomeone obliged to pay and goes to the holder. By agreement:the parties to the instrument canagree to a discharge, even if the instrument is notpaid. The discharge, however, must be in writing; itcannot be oral. By cancellation:cancellation means the intentional, voluntary surrender,destruction, or disfigurement of an instrument. By certification:when a bank certifies or accepts a check, the drawer and allindorsers of the check are discharged, and only the bank is liable. By alteration:an instrument is discharged if its terms are intentionally changed.

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Chap 26_9e_Standard 43. In order to avoid personal liability when signing an instrument, an agent must indicate he is signing as an agent and also give the name of the principal. On the first note, Dwight signed correctly, indicating his position as agent and giving the name of the principal. In this case, he is not personally liable, and Park Systems, Inc., is liable. On the second note, Dwight will be personally liable to a holder in due course unless he can prove that the holder in due course knew Dwight was acting for someone else when it acquired the note. Even if the note is held by a mere holder, Dwight will be liable unless he can prove that the original parties never intended him to be liable. Park Systems is also liable since the note was made on its behalf. On the third note, the principal, Park Systems, is liable. A principal is liable if the agent signs correctly, the agent signs just his own name, or the agent signs only the name of the principal. Dwight would also have liability. 44. When someone transfers a negotiable instrument, he is deemed to make the following warranties: He is a holder of the instrument. All signatures are authentic and authorized. The instrument has not been altered. No defense can be asserted against the transferor. He has no knowledge of the issuer's insolvency.

45. Robert has a claim against the bank for paying a check with a forged indorsement. If the bank pays Robert, it can recover from James for violation of his presentment warranties. Robert could not sue James for violating either presentment or transfer warranties, because he did not present the check to Robert nor did he transfer the check to him. Robert does have a claim for conversion against James because James stole the check from him.

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Chap 27_9e_Standard Indicate whether the statement is true or false. 1. Manue (an accountant), in conducting an audit, must rely most heavily on rules found in generally accepted accounting principles (GAAP). a. True b. False 2. To avoid liability, the less than clean opinion must be issued for the right reasons. a. True b. False 3. After completing an audit, the most unfavorable opinion an auditor can issue is a disclaimer of opinion. a. True b. False 4. Teresa is suing her accountant for fraud. To win, Teresa must show that she justifiably relied on the accountant’s fraudulent statement. a. True b. False 5. The accounting firm of Griggs, Macon, and Fiurre audits the financial records of Chasse, a public company. The Sarbanes-Oxley Act prohibits the accounting firm from providing consulting services to Chasse on human resource matters. a. True b. False 6. Accounting contracts can be either written or oral. a. True b. False 7. One of the accountant's most important roles is to serve as an independent evaluator of the financial statements issued by management to investors and creditors. a. True b. False 8. An auditor for Ralco Accounting firm was auditing the financial statements of E-prise. The auditor suspected that E-prise was engaged in illegal activity. Under Section 10(a) of the 1934 Act, the auditor is required to notify E-prise's board of directors of the suspicions. a. True b. False 9. Ralco was preparing Heidi's tax return. In confidence, Heidi revealed some information to Ralco. Under the federal accountant–client privilege, the information Heidi disclosed is protected from disclosure in a criminal action by the U.S. government. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 27_9e_Standard 10. Generally accepted accounting principles (GAAP) are the rules for preparing financial statements. a. True b. False 11. Under the amended Securities Exchange Act of 1934, accountants are liable jointly and severally whether or not they knew they were violating the law. a. True b. False 12. BGH Accounting firm audited the financial statements that were included in E-prise's registration statement. The financial statements overstated sales by 2,000%. In conducting the audit, BGH did not comply with generally accepted auditing standards (GAAS). Under Section 11 of the 1933 Act, BGH is liable for any material misstatement or omission in the financial statements it prepared for E-prise. a. True b. False 13. To verify transactions, accountants use two mirror-image processes: vouching and tracing. Tracing is a process where the accountant begins with an item of original data and checks out all the activity that has occurred from beginning to end to make sure it has been properly recorded throughout the bookkeeping process. a. True b. False 14. Halbeck, LLC was negligent in its audit of E-treme, Inc. Unbeknownst to Halbeck, E-treme used the financial statements to secure a loan from Great State Bank. Under the Foreseeable doctrine, Halbeck will be liable to Great State Bank for its losses on the loan. a. True b. False 15. Halbeck, LLC was negligent in its audit of E-treme, Inc. Unbeknownst to Halbeck, E-treme used the financial statements to secure a loan from Great State Bank. Under the Ultramares doctrine, Halbeck will be liable to Great State Bank for its losses on the loan. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 16. An auditor who determines a company is materially misstating certain items on its financial statements should issue a(n) a. unqualified opinion. b. qualified opinion. c. adverse opinion. d. disclaimer of opinion.

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Chap 27_9e_Standard 17. Under SOX, accountants for public companies must keep all audit work papers for at least a. two years. b. five years. c. seven years. d. ten years. 18. Penalties on accountants for wrongdoing in the preparation of tax returns are imposed by the a. Internal Revenue Code. b. Federal Bureau of Investigation. c. Sarbanes-Oxley Act. d. GAAP. 19. The accounting firm of Gray & Co. did accounting work for both Regional Bank and Carter Electronics. Without Carter’s knowledge or approval, Gray & Co. discussed Carter’s financial problems with Regional Bank. In this situation, Gray & Co. a. breached a legal obligation to keep all client information confidential. b. breached a moral, but not a legal, obligation of confidentiality. c. did not breach any obligations to its clients. d. acted properly because it was protecting its client, Regional Bank, from possibly making an unwise loan to Carter Electronics. 20. An accountant is liable for fraud to a. only her client. b. only her client and any known user of her information. c. any foreseeable user of her work product who justifiably relied on it. d. any third party with the exception of investors or creditors. 21. The Big Four accounting firms spend about what percentage of their revenue on litigation, including settlements and insurance? a. less than five percent b. between 10 and 20 percent c. between 25 and 35 percent d. over 50 percent 22. Rick prepared financial statements for MegaCorp knowing that it was going to use his statements to apply for a loan with Big Bank. When Big Bank turned MegaCorp down, it applied to Fourth Bank for a loan. MegaCorp presented the statements prepared by Rick to Fourth Bank, which gave the company a loan. It was discovered that Rick was negligent in preparing the statements, and Fourth Bank sued Rick. Under which of the following tests is Rick liable? a. Ultramares doctrine b. Foreseeable doctrine c. Restatement doctrine d. both the Foreseeable doctrine and the Restatement doctrine

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Chap 27_9e_Standard 23. If a plaintiff is successful in proving that an auditor has violated Section 10(b) of the 1934 Securities Exchange Act, the auditor has a. primary liability. b. secondary liability. c. contingent liability. d. rebuttable liability. 24. Which statement best describes the 1934 Act's position on whistleblowing? a. Auditors who suspect that a client has committed an illegal act must notify the client's board of directors. b. Whistleblowers receive no protection under the Act and must decide for themselves if disclosure is worthwhile. c. If a client's board is notified of potential wrongdoing and does nothing, the auditor need do nothing more. d. Auditors are advised to avoid direct contact with the SEC regarding potential client wrongdoing. 25. The IRS files criminal charges against Rich for evasion of federal taxes. Rich's accountant, Sonya, is summoned to appear in court to testify against Rich. The state where the incident occurred recognizes an accountant–client privilege. Does Sonya have to testify in federal court against her client? a. Yes. b. Yes, but only if she is granted immunity by her state. c. No, the federal court must recognize her state's accountant–client privilege. d. No, the federal accountant–client privilege will protect her from testifying. 26. John is a CPA in charge of auditing his client, McMillen & Co. John's duty of care to McMillen will most likely be breached if John a. gives his client an oral report instead of a written report. b. gives his client incorrect advice based on an honest error in judgment. c. fails to give tax advice that would save his client money. d. fails to follow generally accepted auditing standards (GAAS). 27. GBH, an accounting firm, was hired to prepare financial statements for E-treme. Great State Bank has asked to see GBH's working papers since it is thinking about extending a $4 million line of credit to E-treme. Which of the following statements is correct? a. GBH can show the bank the working papers because Great State Bank has a proper purpose. b. GBH can show the bank the working papers because Great State Bank is a known third party. c. GBH cannot show the bank the working papers under any circumstances as they are not finalized. d. GBH cannot show the bank the working papers unless E-treme gives permission. 28. Adam claimed that N & A, its accounting firm, negligently prepared an audit. To hold the accounting firm liable, which of the following elements must be established? a. scienter or guilty knowledge b. a fiduciary relationship c. failure to exercise due care d. an executed engagement letter

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Chap 27_9e_Standard 29. What was at issue in the case Oregon Steel Mills, Inc. v. Coopers & Lybrand, LLP? a. whether an accounting firm was liable for its client's loss b. whether the Securities Act of 1933 was constitutional c. the extent of liability a fraudulent accountant should assume d. breach of the accountant-client privilege 30. In which of the following cases will the federal accountant–client privilege protect the information from being disclosed? a. a criminal case b. a case involving the SEC c. a case concerning the preparation of tax returns d. a civil case involving the IRS 31. John is auditing MegaCorp. He finds an accounts payable for 10,000 cases of ball bearings. He checks to make sure the paper actually arrived, and that the receiving department signed and dated the invoice. He also checks the original purchase order to make sure the purchase was properly authorized. This illustrates a. tracing. b. vouching. c. following. d. monitoring. 32. Sally prepared financial statements for MegaCorp knowing that the company would be using her statements when applying for a loan at Big Bank. It is discovered she was negligent in preparing the statements, and Big Bank sues her. Sally is liable under the a. Ultramares doctrine. b. Foreseeable doctrine. c. Restatement doctrine. d. All of these are correct. 33. An engagement letter is a written contract a. between an accountant and client. b. in anticipation of marriage. c. between a corporation and the AICPA. d. intended to create a fiduciary duty of an accountant to his client. 34. Criminal liability for accountants a. is not an option under securities law; there is only civil liability. b. is possible under the Securities Act of 1933, the 1934 Act, state securities laws, and the Internal Revenue Code. c. may result in fines but not imprisonment from violation of the federal securities laws. d. will result from violation of the accountant–client privilege under federal law.

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Chap 27_9e_Standard 35. Which of the following correctly lists auditor opinions from most to least favorable? a. disclaimer, unqualified, adverse, qualified b. unqualified, qualified, adverse, disclaimer c. qualified, unqualified, disclaimer, adverse d. unqualified, qualified, disclaimer, adverse 36. In 2007, the Securities and Exchange Commission (SEC) began to allow foreign companies to use which of the following for its reporting standards? a. SOX b. GAAP c. GAAS d. IFRS 37. GBH, an accounting firm, was hired to prepare financial statements for E-treme. GBH a. cannot show the working papers to E-treme unless there is a valid court order. b. cannot show the working papers to E-treme unless it obtains permission from the AICPA. c. can show the working papers to anyone that asks, since the accountant owns them. d. must allow E-treme access to the working papers. 38. Which of the following is NOT a provision of the Sarbanes-Oxley Act of 2002? a. Congress established the Public Company Accounting Oversight Board, which has the authority to regulate public accounting firms, establishing audit rules and ethics guidelines. b. After five years with a client, the lead audit partner must rotate off the account for at least five years. c. Congress established the American Institute of Certified Public Accountants to develop ethical guidelines in a Code of Professional Conduct. d. Auditors must communicate regularly and completely with audit committees of their clients and must describe options the firm considers in preparing financial statements. 39. Larry is a certified public accountant in a firm that audits public companies. Larry is accused of unethical conduct. Is Larry required to abide by the ethical standards of the Public Company Accounting Oversight Board? a. Yes. b. He can be held liable only if he had actual knowledge of the particular guideline he is accused of violating. c. No, the PCAOB establishes audit rules, not ethical guidelines. d. No, the PCAOB has no authority over Larry. 40. Discuss how SEC rules affect the legal and the ethical relationship between accountants and the companies they audit.

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Chap 27_9e_Standard 41. Ron is an accountant who was contacted by Zebra Toy Company to prepare financial statements. Zebra Toy Company told Ron that it wished to present these documents to Lion Wholesalers, Inc., a large supplier of toys. If Lion is convinced that Zebra Toy Company is financially solid, it will issue Zebra a large line of credit. After Ron prepares the financial documents, Zebra presents the information to Lion Wholesalers and also to Tiger Toy Company, another wholesaler of toys. Zebra wishes to obtain a line of credit from Tiger as well as from Lion. If Ron committed a serious error by overstating Zebra Toy Company's financial soundness and the two creditors, Lion and Tiger, are damaged as a result, can these third parties recover damages from Ron? Explain.

42. An auditor suspects its client is committing illegal acts that will have a material impact on its financial statements. What is the auditor legally required to do and under what circumstances would the auditor directly notify the SEC?

43. Under what circumstances are accountants liable to their clients for fraud?

44. Nancy is an auditor. She works in a state that uses the Ultramares doctrine. She fraudulently prepared financial documents for her client, Star, Inc. Her client presented the information to Moonglow, Inc. Moonglow was a potential creditor of Star, Inc. and was seriously damaged by the fraudulent financial information. Moonglow sued Nancy. She claims she is not liable to Moonglow, a third party, since she was not provided with its name at the time the audit was prepared. Is she liable to Moonglow? Explain.

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Chap 27_9e_Standard 45. Fast Auditors prepared audited financial statements for Mega Company's registration statement in compliance with the 1933 Securities Act. John bought stock in Mega Company. It was discovered that the financial statements prepared for the registration statement contained some important omissions. John sued Fast Auditors to recover his investment when Mega Company turned out to be a bad investment. What must John prove to recover from Fast Auditors?

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Chap 27_9e_Standard Answer Key 1. False 2. True 3. False 4. True 5. True 6. True 7. True 8. True 9. False 10. True 11. False 12. True 13. True 14. True 15. False 16. c 17. c 18. a 19. a 20. c 21. b 22. d 23. a 24. a 25. a 26. d

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Chap 27_9e_Standard 27. d 28. c 29. a 30. d 31. b 32. d 33. a 34. b 35. d 36. d 37. d 38. c 39. a 40. The SEC rules require accountants to maintain independence from their clients. The accountant must be able to exercise objective and impartial judgment on all issues. One way to ensure this is by forbidding an auditor or the auditor’s family from maintaining a financial or business relationship with the client. Specifically, the SEC rules prohibit accountants or their families from owning stock in a company that their firm audits. SEC rules of practice say that an accountant who engages in unethical or improper professional conduct may be banned from practice before the SEC. Banned or suspended auditors cannot perform the audits required by the 1933 and 1934 Securities Acts. 41. The answer depends on what rule the state follows in determining an accountant's liability for negligence to third parties. Under the Restatement doctrine, both creditors can recover. Under this doctrine, a third party can recover if it can prove the accountant failed to use due care and if the creditor was either (1) a party the accountant knew would rely on this information or (2) a party in the same class who relied on the information. Lion was a known third party and Tiger was in the same class, a potential creditor of Zebra Toy. Under the Ultramares doctrine, Ron is liable to Lion, a known third party. Tiger could not collect under this doctrine since its identity was not known to Ron. Under the Foreseeable doctrine, Ron is also liable to both Lion and Tiger since both Lion and Tiger were foreseeable parties who would use Ron's information. 42. Under Section 10A of the 1934 Act, the auditor must first contact the company's board of directors. If the board refuses to take corrective action, the auditor is required to issue a formal report to the board. If the board receives such an official report from the auditor, it is required to notify the SEC within one business day. If the auditor does not receive a copy of this SEC notice, it must notify the SEC directly. Copyright Cengage Learning. Powered by Cognero.

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Chap 27_9e_Standard 43. Accountants are liable to their clients for fraud if (1) they make a false statement of a material fact, (2) they either know it is not true or recklessly disregard the truth, (3) the client justifiably relies on the statement, and (4) the reliance results in damages. 44. Yes. Any time an accountant or auditor commits a fraudulent act that injures a third party, the accountant or auditor is liable to any third party who could have foreseeably used the information and who justifiably relied on it. This applies even in states that use the Ultramares doctrine. The Ultramares doctrine deals with negligent conduct on the part of the accountant. Since fraud, an intentional tort, is a very serious act, courts hold accountants or auditors liable to any foreseeable parties who justifiably relied on the work product and were harmed by the fraudulent conduct of the professional. 45. To prevail under Section 11 of the 1933 Act, John must prove only that the registration statement contained a material misstatement or omission and he lost money.

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Chap 28_9e_Standard Indicate whether the statement is true or false. 1. A principal must indemnify an agent for any reasonable expenses incurred in carrying out his or her responsibilities. a. True b. False 2. Generally, either party to an agency relationship has the power to terminate it at any time. a. True b. False 3. Jolene hired Lacy to find a buyer for her house. Adam was interested in buying the house. If both Jolene and Adam agree, Lacy, a real estate agent, may represent both parties. a. True b. False 4. The bankruptcy of an agent automatically terminates an agency relationship. a. True b. False 5. As a general rule, an agent is liable on contracts entered into on behalf of a fully disclosed principal. a. True b. False 6. Erica's supervisor told her to arrange for a conference room at the Kelly Inn. Erica has express authority to contract for the room. a. True b. False 7. An agent must obey all instructions of the principal. a. True b. False 8. Kaiya is a sales representative of TriColor. Kaiya owes a fiduciary duty to TriColor. a. True b. False 9. Rob agrees to act as an agent for Diane in selling her car. Diane has a duty of loyalty to Rob. a. True b. False 10. If Denise is hired to work as a cashier, she has the implied authority to do acts reasonably necessary to carry out her job. a. True b. False

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Chap 28_9e_Standard 11. If a person accepts the benefits of an unauthorized transaction, or fails to repudiate it, then he is bound by the act as if he had originally authorized it. a. True b. False 12. You cannot be held liable for the actions of your agents if the agents are violating your instructions. a. True b. False 13. Larry decided to relocate to Germany. Larry hired Happy Homes, Inc., to find a buyer and contract for the sale of his house in the United States. The agency relationship between Larry and Happy Homes must be evidenced with a written agreement. a. True b. False 14. If apparent authority is present, the principal is liable for even the unauthorized acts of the agent. a. True b. False 15. An agent is always liable for his or her own torts committed within the scope of the agency relationship. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 16. Luther (i.e., principal) and Marcia (i.e., agent) have an agency relationship. Under which circumstances will the relationship end "at will." a. Luther and Marcia agree their agency relationship will last two years. At the end of that time, the agency relationship is terminated. b. Luther and Marcia made no agreement in advance about the term of the agreement. One afternoon, Marcia is tragically killed in an automobile accident. c. Luther and Marcia agree their agency relationship will last two years. One year into the relationship, they meet for lunch and decide the relationship isn't working and both agree to end it. d. Luther and Marcia made no agreement in advance about the term of the agreement. One day, Luther calls Marcia and tells her he no longer wishes her to be his agent. 17. Someone who is not paid for performing duties is a(n) a. fiduciary agent. b. charitable agent. c. implied agent. d. gratuitous agent.

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Chap 28_9e_Standard 18. Cameron, editor of the local newspaper, assigned to Jim the writing of a story about pollution of a nearby stream. Although Jim used reasonable care in gathering and checking his information, unknown to Jim, the story contained a defamatory statement about Maureen. Maureen reads the story and sues Jim for libel. Cameron, who read and published the story a. must indemnify Jim for Maureen’s claim. b. need not indemnify Jim for Maureen’s claim, because Jim should have checked his facts more carefully. c. need not indemnify Jim for Maureen’s claim, because Jim breached his duty to obey instructions. d. can recover damages from Jim for any injury to the newspaper resulting from Jim’s story. 19. Pamela hired Lena to sell her business. Lena a. can buy the business as long as the price is fair. b. can buy the business as long as she qualifies for financing. c. can buy the business only with Pamela's permission. d. cannot buy the business under any circumstances. 20. Mohammad was an employee in the new product development department of Estay Inc. Mohammad was directly involved in the development of a new product that Estay intended to launch in 6 months. Estay took great care to keep information concerning the new product a secret. Ceries, Inc., a competitor of Estay, persuaded Mohammad to leave Estay to direct Ceries's marketing department. Which statement is correct? a. Mohammad can share with Ceries the confidential information he knows about Estay's new product because he was directly involved in its development. b. Mohammad can share with Ceries the confidential information he knows about Estay's new product because his agency relationship with Estay is terminated. c. Mohammad cannot share with Ceries the confidential information he knows about Estay's new product because of the equal dignities rule.. d. Mohammad cannot share with Ceries the confidential information he knows about Estay's new product because he has a duty not to disclose confidential information he acquired during the agency. 21. The principle of liability stating that an employer is liable for a physical tort committed by an employee acting within the scope of employment, and a nonphysical tort of an employee acting with authority is called a. the equal dignities rule. b. respondeat superior. c. fiduciary control. d. apparent authority. 22. In the case of an undisclosed principal, a third party a. can only recover from the principal. b. can only recover from the agent. c. cannot recover at all. d. can recover from either the agent or the principal.

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Chap 28_9e_Standard 23. How is consent established in an agency relationship? a. The principal must ask the agent to do something and the agent must agree. b. The principal gives consideration to the agent. c. The principal and agent must have a written, notarized agreement. d. All of these are correct. 24. Tom, the production manager at Esday, was told by his supervisor to hire Elton, a 15-year-old boy, to operate an industrial machine. Hiring the 15-year-old violates the child labor laws. What should Tom do in this situation? a. Tom should hire Elton; he has a duty to obey Esday's instructions. b. Tom should hire Elton; he has a duty of care to ensure that the government does not discover that Elton is 15 years old. c. Tom should not hire Elton; he has a duty of care and he would not be caring for Elton. d. Tom should not hire Elton; he has a duty to obey Esday's instructions only if they are legal and ethical. 25. An agent may not engage in inappropriate behavior that reflects badly on the principal. This rule applies to conduct a. during working hours. b. during off-duty time. c. during both working hours and off-duty time. d. only by public officials. 26. What is the best definition of a fiduciary relationship? a. The principal pays the agent to act on his or her behalf. b. The principal grants an agent permission to act, either by words or conduct. c. A principal is liable for certain torts committed by an agent. d. The trustee must act in the best interests of the beneficiary. 27. Which of the following is a duty of a principal to an agent? a. The duty of loyalty. b. The duty to indemnify for reasonable expenses. c. The duty to provide information. d. All of these are correct. 28. In its most basic terms, a fiduciary relationship is one of a. trust. b. control. c. competition. d. disclosure.

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Chap 28_9e_Standard 29. Jim agreed to show Donna's car to a potential buyer. Donna was not able to be home since she had to attend a meeting. After showing the car, Jim left the keys in it and the car was stolen. Which statement is correct? a. Since Jim is a gratuitous agent, he will only be liable for the loss of the car if his conduct constitutes gross negligence. b. Since Jim is a gratuitous agent, he will be liable for the loss of the car if his conduct constitutes ordinary negligence. c. Since Jim is a gratuitous agent, he has no liability for the car. d. Since Jim is a gratuitous agent, he is strictly liable for the loss of the car. 30. John hired Tim to sell his house. Which statement is correct? a. John is Tim's principal. b. Tim, but not John, can terminate the agency relationship. c. John, but not Tim, can terminate the agency relationship. d. Tim is John's principal. 31. Chance is a traveling marketing representative for a publishing company. He is an independent contractor and was hired without negligence. One afternoon while driving to a meeting, Chance negligently runs a stop sign and causes an accident. Judy is injured. Judy can a. hold both Chance and his company liable for her injury. b. hold the company, but not Chance liable.. c. hold Chance, but not the company liable. d. not hold Chance or his company liable for her injury. 32. When a principal is partially disclosed a. the agent and principal will be jointly and severally liable on the contract. b. the agent and principal will be only jointly liable on the contract. c. only the principal can be liable. d. only the agent is liable. 33. HBR Accounting hired Denise, a CPA, to prepare tax returns. Which statement is correct? a. Denise is a gratuitous agent, and has a duty not to commit gross negligence. b. Denise is a gratuitous agent, and has a duty not to commit ordinary negligence. c. Denise, as a CPA, is an agent with special skills. She is held to a higher standard than ordinary negligence. d. Denise, as a CPA, is an agent with special skills. She is held to a lower standard than ordinary negligence.

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Chap 28_9e_Standard 34. Becky asks her friend Maggie to walk her dog for her, and Maggie agrees. While out walking, the dog gets away from Maggie and runs into Mr. Edwards' garden, digging up some expensive plants. Which statement best characterizes this situation?b a. Becky is liable for the damages to Mr. Edwards' garden, because she exercised control over her agent, Maggie. b. Maggie is liable for the damages to Mr. Edwards' garden, because she was walking the dog at the time of the damage. c. Neither Becky nor Maggie is liable for the damages to Mr. Edwards' garden because no agency relationship existed between Becky and Maggie.. d. Both Becky and Maggie are equally liable for the damages to Mr. Edwards' garden—the dog belongs to Becky, but Maggie was walking him at the time of the damage. 35. An agency will be terminated in all but which one of the following situations? a. The principal and agent agree on an agency relationship to sell a boat, and the boat is sold. b. A travel agent files for individual bankruptcy under Chapter 13. c. The agent violates his duty of loyalty. d. An electrician, an agent of a contractor, has her license revoked. 36. Mrs. O'Leary hired Jenna to sell her house in Michigan. She executed a power of attorney in favor of Jenna authorizing her to do "anything and everything associated with the sale of real estate, acting as a prudent person." On May 30, Jenna finalized a deal with Brandon for the purchase of the house. Brandon and Jenna signed the real estate contract that day. Jenna learned the next day that Mrs. O'Leary had died May 29. a. The contract is void since the agency terminated May 29. b. The contract is valid since the agency’s purpose was achieved before Jenna was notified of Mrs. O'Leary's death. c. The contract is voidable at the option of Mrs. O'Leary's estate. d. The contract is voidable at the option of Brandon. 37. Which of the following persons is NOT an agent? a. Diane, a shoe salesperson for a retail store. b. Tim, a real estate broker for a large real estate company. c. Craig, a telephone marketing employee. d. Harold, a trustee to the beneficiaries of an estate. 38. Which of the following states that if an agent is empowered to enter into a contract that must be in writing, then the appointment of the agent must also be written? a. The duty to obey instructions. b. The balanced contract rule. c. A fiduciary duty. d. The equal dignities rule.

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Chap 28_9e_Standard 39. Janelle has an art collection that she wants to sell. She calls Amber and tells her to sell the art collection for her at an upcoming auction. Amber agrees. This is an example of a. apparent authority. b. respondeat superior. c. intermediary agency. d. express authority. 40. Circus Pizza contracted with Art to run its birthday parties. Art's responsibilities included supervising the children and organizing the games. Circus did not investigate Art's background, which included a history of assaulting children. Art assaulted a 7-year-old girl in the restaurant's kitchen during a birthday party. Circus Pizza a. cannot be liable for the damages because Art committed an unforeseeable intentional tort. b. cannot be held liable for the damages because Art's conduct was not in the scope of employment. c. may be held liable on the basis of negligent hiring. d. may be held liable only if Circus actually knew of Art's background. 41. Alex worked for years for MegaCorp. During his employment with MegaCorp, he learned a great deal of confidential information and knew that if this information got into the hands of competitors or the general public, MegaCorp could suffer great business losses. Alex claims that he was wrongfully fired by MegaCorp, and accordingly, he believes he has no obligation to MegaCorp to keep any information he acquired with them as confidential. MegaCorp claims that Alex is under a continuing duty to keep confidential information secret, even though he is no longer with the company. Who is right? Why?

42. A principal is bound by contracts that an agent enters into with authority. Discuss the various types of contractual authority an agent may have.

43. Andrew has been hired to do some work for Rossi Enterprises. What factors would a court consider in determining if Andrew is an employee or an independent contractor? Why does the designation matter?

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Chap 28_9e_Standard 44. Betsy's elderly father gave her written authority to sell the family house. Her father lived in Arizona, and she lived in Minnesota. After about two months she found a buyer for the house and signed an acceptance of the offer on March 21. Later that same day, she learned her father had died the day before (March 20). Other members of the family did not want the family house sold and claimed that the acceptance Betsy signed was void. The buyer of the house claims Betsy had the legal authority to sell the house and that the contract is binding. Who is right?

45. Grant is a delivery person for Watkins Furniture. One day, after delivering a chair to Nadine’s house, he stopped at a fast food restaurant to get a sandwich at the drive-through window. As he was leaving the parking lot, he accidentally hit the rear of Blanche’s car. Discuss the possible liability of Watkins for Grant’s accident. Would there be any difference in the potential liability of Watkins if Grant had the accident after driving 30 miles away to visit a friend?

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Chap 28_9e_Standard Answer Key 1. True 2. True 3. True 4. False 5. False 6. True 7. False 8. True 9. False 10. True 11. True 12. False 13. True 14. True 15. True 16. d 17. d 18. a 19. c 20. d 21. b 22. d 23. a 24. d 25. c 26. d

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Chap 28_9e_Standard 27. b 28. a 29. a 30. a 31. c 32. a 33. c 34. a 35. b 36. a 37. d 38. d 39. d 40. c 41. MegaCorp. is right. Regardless of why Alex no longer works for MegaCorp, he is under a continuing duty not to

use or disclose the company's confidential information after he leaves the company. Alex had a fiduciary duty of loyalty to his employer when he worked for it, and such duty does not terminate relative to trade secrets or confidential information after he is no longer employed by that company. 42. Authority is the legal ability of an agent to bind a principal. The types of authority include: express, implied, and apparent authority. Express Authority is when the principal, by words or conduct reasonably interpreted, actually gives the agent the authority. Implied Authority is the authority to do the things reasonably necessary to carry out the expressly authorized tasks. Apparent Authority arises when the principal does something to make a third party believe that a person has authority to act. Express and implied authority are categories of actual authority. In apparent authority, the principal is liable for the agent’s actions even though the agent was not authorized. 43. In determining if agents are employees or independent contractors, courts consider whether: the principal supervises the details of the work; the principal supplies the tools and place of work; the agents work full-time for the principal; the agents receive a salary or hourly wages, not a fixed price for the job; the work is part of the regular business of the principal; the principal and agents believe they have an employer-employee relationship; and the principal is in business. The distinction affects the potential liability of the principal. A principal may be liable for the torts of an employee or servant, but generally is not liable for the torts of an independent contractor. 44. The contract is void since Betsy's authority to act for her father terminated at the moment he died. An agent only has the power to perform acts that the principal could do himself. Accordingly, once a person dies, his capacity to contract terminates at that time. Since Betsy's father could not have contracted to sell the house at the time Betsy signed the acceptance of the offer, Betsy, as her father's agent, had no capacity to do so either. Copyright Cengage Learning. Powered by Cognero.

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Chap 28_9e_Standard 45. The major issue here is abandonment. Watkins is liable for the actions of its employee that occur while the employee is at work, but not for actions that occur after the employee has abandoned the principal’s business. Here, the accident at the local restaurant would probably result in liability for Watkins because Grant would likely be considered to simply be on a detour from company business. If Grant had driven 30 miles away to visit a friend before having the accident, Watkins would probably not be liable. Grant would probably be considered to be “off on a frolic of his own” and therefore not acting within the scope of his employment at the time of the accident.

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Chap 29_9e_Standard Indicate whether the statement is true or false. 1. As a general rule, employers have a legal obligation to disclose information about former employees to potential future employers. a. True b. False 2. The management and union at TriColor have bargained for two years without reaching an agreement. After notifying the union, TriColor prohibits the workers from entering the factory to work. This is a lockout. a. True b. False 3. If employees wish to organize a union, the employer is prohibited from distributing written notices to employees stating it is opposed to union activity within the company. a. True b. False 4. The Employee Retirement Income Security Act (ERISA) requires employers to establish pension plans for employees. a. True b. False 5. Some courts have held that employee handbooks create binding contract terms. a. True b. False 6. The National Labor Relations Act guarantees employees the right to join unions. a. True b. False 7. In almost half of all states, Bring Your Gun to Work Laws prohibit companies from banning firearms in their parking lot. a. True b. False 8. Valley Mart told its employees that they would be fired if they actively supported a unionizing effort. Valley Mart has committed an unfair labor practice. a. True b. False 9. Prior to the Industrial Revolution, the primary English law of employment was that, in the absence of a contract, a worker was hired for a year at a time. a. True b. False

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Chap 29_9e_Standard 10. As a general rule, an employer may not discharge a worker for exercising a legal right if that right supports public policy. a. True b. False 11. In the absence of a specific law to the contrary, employers have the right to fire workers for off-duty conduct. a. True b. False 12. There is a higher percentage of workers in labor unions now than at any other point in history. a. True b. False 13. Wrongful discharge in essence, is the public policy rule that prohibits an employer from firing a worker for reasons which would violate fundamental social rights, duties, or responsibilities. a. True b. False 14. Under the Family and Medical Leave Act, an employee can take up to 12 weeks of paid leave each year for certain personal and family illness situations. a. True b. False 15. Sit-down strikes, in which members stop working but remain at their job posts, physically blocking replacement workers from taking their places are legal. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 16. What is a whistleblower? a. an employee who thwarts an attempt by fellow employees to form a union b. an employee who crosses the picket line to return to work c. an employee who discloses illegal behavior on the part of his or her employer d. an employee who secretly gives information to his or her employer about union activity 17. A company's collective bargaining agreement has expired and negotiations are underway for a new one. After one exhausting session, union leaders have decided management will not bargain in good faith. The union declares it will be going out on strike the following midnight if an agreement is not reached. The union a. is allowed to go out on strike the following midnight. b. must give the employer at least seven days' notice before going out on strike. c. must give the employer at least 30 days' notice before going out on strike. d. must give the employer at least 60 days' notice before going out on strike.

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Chap 29_9e_Standard 18. Secondary boycotts a. are generally legal provided the boycott is peaceful. b. are generally legal provided the boycott does not involve public employees such as nurses or school teachers. c. are not expressly permitted nor prohibited under federal law. d. are generally illegal. 19. Orson was fired from his job behind the ticket counter at the airport. He was loudly told to put his personal belongings into a plastic bag and was led out by security guards in front of his coworkers and customers. His supervisor told him not to return. Orson’s employer faces potential liability for a. intentional infliction of emotional distress. b. whistleblowing. c. defamation. d. violation of the FLSA. 20. Employees of Mega Corp. have gone out on strike seeking better pay. Mega Corp. announces that if the union does not end the strike, it will begin hiring replacement workers. Which statement is correct? a. Hiring replacement workers during a strike is an unfair labor practice. b. Mega Corp can only hire replacement workers if the collective bargaining agreement expressly gives the company the right to do so. c. Mega Corp can only hire replacement workers if it gives the union 14 days' notice prior to actually bringing in the replacement employees. d. Mega Corp can hire replacement workers at any time during a strike. 21. Ron and several fellow workers of Vicy, Inc., a small manufacturing company, wished to organize a union. When Vicy learned of this activity, it issued a bulletin to all workers stating that a union would only hurt the company and that "we are a family that can solve any problems ourselves -- we do not need union activists from outside our company trying to tell us what to do!" Which statement is correct concerning the bulletin issued by Vicy? a. Vicy has committed an unfair labor practice. Vicy must remain neutral during the organizing drive. b. Vicy has committed an unfair labor practice. The bulletin constitutes outrageous interference with the union organizing campaign. c. Vicy has not committed an unfair labor practice. An employer may vigorously present anti-union views to its employees. d. Whether Vicy has committed an unfair labor practice depends on whether the bulletin was approved by the NLRB. 22. The following are all characteristics of Fair Workweek Laws except: a. Allows retaliation against workers who ask for changes in their work schedule. b. Provide 14 days’ notice of work schedules. c. Pay workers extra for each shift cancelled on short notice. d. Pay extra for split shifts.

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Chap 29_9e_Standard 23. Under the federal legislation known as OSHA, a. employers must keep records of all workplace injuries. b. employers must keep records of positive results of workplace drug tests. c. employers must keep a record of recognized hazards used in the workplace. d. employers may monitor workers’ email messages if the monitoring is done in the ordinary course of business and the employer provides the email system. 24. Maxine lost her job as an electrical engineer with a large company that had provided health insurance benefits for Maxine and her family. She now a. must try to find insurance on her own or try to find another job with health insurance benefits. b. is protected under COBRA, which allows her continued health insurance coverage for 18 months as long as she pays the cost. c. is protected under COBRA, which requires her employer to continue her health insurance coverage for six months under whatever copayment arrangements she had while she was employed. d. has some protection under the NLRA, which requires her employer to pay for continued health insurance for three months following her termination if she did not leave the company voluntarily. 25. Zoe, who works as a retail clerk, wishes to talk with her coworkers about organizing a union. Her employer forbids her from talking with other workers about union activity in the presence of customers and threatens to fire her if she joins the union. Does the employer have a legal right to make this threat to Zoe? a. Yes, the employer may prohibit its employees from discussions about union organizing. b. Yes, but only if expressly authorized by state law. c. No, an employee has the right of free speech at any time. d. No. An employer may limit the time and place of conversation, but may not threaten to fire the employee. 26. Which of the following laws provides support to unemployed workers? a. FUTA b. OSHA c. FLSA d. NLRA 27. A union declares its workers are going on strike. The employer states the collective bargaining agreement is still in force for another eight months and that it contains a no-strike clause. The union claims the CBA's no-strike provision is not binding since new union leadership is in place. Which of the following statements is correct? a. The union can strike since new leadership is now in control. b. The union can strike since no-strike provisions have been ruled by the courts to be unenforceable. c. The union can strike since no-strike provisions have been ruled by the courts to be unenforceable. d. The union cannot strike because of the no-strike clause in the contract.

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Chap 29_9e_Standard 28. A union declares it will be engaging in a partial strike whereby its employees will alternate between working for a period of time and then walking off the job for an indefinite time. Thus, employees may work for a few days or only a few hours before walking off the job again. The employer claims the union does not have the legal right to engage in a partial strike. Which statement is correct? a. The employer is correct. The union must either strike or work, it cannot alternate between working and striking. b. The employer is correct only if the union does not state the specific hours or days workers will be off the job. The law requires the union to provide the employer with at least seven days' notice of when workers will be off the job. c. The employer is not correct since the NLRA expressly states workers have a right to engage in a partial strike. d. Whether the employer is correct depends on state law. 29. When may an employer require an employee to submit to a lie detector test? a. when the employee has been hired for less than 90 days b. when the test is part of an ongoing investigation into crimes that have occurred c. when the employer has reason to believe the employee is using illegal drugs on the job d. when all employees are being questioned using a lie detector 30. Megan was employed by a large company. Her supervisor told her to falsify government reports. She refused and was fired. She sued for wrongful discharge. Her employer claimed that, since Megan was an at-will employee, she had no legal right to claim the company was liable for damages. Is the employer right? a. Yes. An at-will employee does not have a legal right to claim wrongful discharge of employment. b. Yes. As an employee, Megan owes a duty of loyalty to her employer. If the company was found to have acted illegally by falsifying the reports, it (not Megan) would be liable. c. No. Even though Megan was an at-will employee, such employees may not be fired without just cause. d. No. Though at-will employees do not have extensive rights relative to job security, they may not be legally fired for refusing to perform an illegal act. 31. In some states, an employer can discipline or fire employees for a. smoking cigarettes, even in the privacy of their own home. b. posting an unflattering comment about the employer on social media. c. dating coworkers, even if the relationship is consensual. d. All of these are correct. 32. Jim was a mechanic. One day when he attempted to weld a car's gasoline tank, it exploded and he was hurt. He filed to collect workers' compensation. His employer resisted on grounds that Jim had been negligent and had also violated the express regulations of the company when he attempted to weld a gasoline tank. Which statement is correct? a. Jim cannot recover if it is shown that his negligent conduct caused the explosion. b. Jim cannot recover if it is shown that he violated the express regulations of his employer. c. Workers' compensation doesn't apply in situations like this. d. Jim can recover even if he was negligent and violated the employer's rules.

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Chap 29_9e_Standard 33. Jessica was a former employee of Mark. When potential employers called Mark for a reference about Jessica, he stated she was not a very good worker and had been fired for excessive absences. He said he had reason to believe Jessica was on drugs, but he wasn't absolutely certain. Jessica learned what Mark was saying and sued him. In most states a. under the qualified privilege rule, it was legal for Mark to say what he said if it was true and Mark was not motivated by ill will. b. it was legal for Mark to say what he said, since courts have consistently ruled that former employers are immune from lawsuits for giving references. c. it was not proper for Mark to say what he said, since courts have consistently ruled that former employers should not give references over the telephone or in writing without the former employee's written authorization. d. though it was proper for Mark to talk about Jessica's work-related history, he should have refrained from talking about her potential drug use. 34. Which is the best definition of "employment at will"? a. In the absence of a specific legal exception, an employee can be fired for any reason. b. Once hired, employees are free to choose whatever job they want to have. c. An employee can leave a company at any time and for any reason. d. Employees have a legal right to organize and join labor unions. 35. Under the Fair Labor Standards Act, which of the following scenarios is legal? a. 12-year-old Molly works several hours per day on her family's farm picking vegetables b. 14-year-old Luis works full time bagging groceries at a supermarket c. 13-year-old Dianna works five hours per week stocking shelves at a drugstore d. 17-year-old Cole has taken a part-time job as a coal miner working alongside his dad 36. Employees of Truan went on strike because of unfair labor practices. After the strike, the striking workers are a. entitled to get their jobs back. b. not entitled to get their jobs back. c. entitled to get their jobs back but only as they become available. d. fired. 37. What is it called when union organizers talk with employees and try to persuade them to form a union? a. Campaign b. Petition c. Election d. Authorization Cards 38. Which of the following workers is entitled to unpaid leave under the Family and Medical Leave Act? a. Stanley, who works part time for a small coffee shop with 10 employees. b. Marianne, who has worked full time for five years with Microsoft. c. Dakota, who works part time for Delta Air Lines. d. All of these are correct.

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Chap 29_9e_Standard 39. Which of the following statements regarding workplace bullying is accurate? a. Bullying in the workplace does not subject employers to any real liability claims. b. The Supreme Court in Indiana ruled that "workplace bullying" cannot be considered a form of intentional infliction of emotional distress. c. Studies show that workplace bullying is not a serious issue; only 10 percent of employees have admitted to being bullied at work. d. Not a single state has been able to pass anti-bullying legislation. 40. Mega Corp. hired permanent replacement workers when its union went out on strike seeking better medical and retirement benefits. After the strike is over, Mega Corp. a. must give the striking employees their jobs back since this was an economic strike. b. must give the striking employees their jobs back since this was an unfair labor practices strike. c. may hire additional workers without considering the striking employees who want their jobs back. d. does not have to give the striking employees their jobs back since this was an economic strike. 41. What is wrongful discharge and under what circumstances does the law prohibit the discharge of a worker?

42. Discuss the requirements of the Family and Medical Leave Act.

43. Rick and Allan want to start a union in the small factory where they work. Outline the basic procedures they will need to follow to get a union recognized as the exclusive bargaining unit for the company employees.

44. Connie and her fellow union employees went out on strike when the company refused to meet the union's demands for higher wages and better benefits. Shortly thereafter, the company began hiring permanent replacement workers. After a hard eight-month strike, the union and the company reached an agreement. When the strike was over, Connie was upset that she was not given her job back. The replacement worker that took over her job was retained. She believes she has a legal right to her job, especially since she was a faithful employee for over 20 years. Is Connie right? Explain.

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Chap 29_9e_Standard 45. Jenna works for Mega Corp as a production employee. She is paid an hourly wage. She wishes to negotiate her own employment contract with management since she does not agree with the terms of her union's collective bargaining agreement. Can Jenna negotiate her own contract? Explain.

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Chap 29_9e_Standard Answer Key 1. False 2. True 3. False 4. False 5. True 6. True 7. True 8. True 9. True 10. True 11. True 12. False 13. True 14. False 15. False 16. c 17. d 18. d 19. a 20. d 21. c 22. a 23. a 24. b 25. d 26. a

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Chap 29_9e_Standard 27. d 28. a 29. b 30. d 31. d 32. d 33. a 34. a 35. a 36. a 37. a 38. b 39. d 40. d 41. Wrongful discharge means that an employer may not fire a worker for a reason that violates basic social rights, duties, or responsibilities. Under the principle of wrongful discharge, employers: may not discharge an employee for refusing to break the law; may not fire an employee for serving on a jury; and may not discharge a worker for exercising a legal right if that right supports public policy. Courts are sometimes willing to protect employees who do the right thing, even if they violate the boss’s orders. 42. Employers with 50 or more employees are required to provide up to 12 weeks of unpaid leave for employees who have worked full time in the preceding 12 months. The leave may be for birth or adoption of a child or for a serious health condition of their own or in their immediate family. The statute defines an immediate family member as a spouse, child, or parent -- but not a sibling, grandchild, or in-law. The employee must be allowed to return to the same or an equivalent job with the same pay and benefits.

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Chap 29_9e_Standard 43. A union organizing effort generally involves the following pattern: Campaign: Union organizers talk with employees and persuade them to form a union. The organizers may be employees of the company, who simply chat with fellow workers about unsatisfactory conditions; or a union may send nonemployees of the company to hand out union leaflets to workers as they arrive and depart from work. Authorization cards: Union organizers ask workers to sign authorization cards, which state that the particular worker requests the specified union to act as her sole bargaining representative. If a union obtains authorization cards from a sizable percentage of workers, it seeks recognition as the exclusive representative for the bargaining unit. The union may ask the employer to recognize it as the bargaining representative, but most of the time, employers refuse to recognize the union voluntarily. Petition: Assuming that the employer does not voluntarily recognize a union, the union generally petitions the NLRB for an election. It must submit to the NLRB regional office authorization cards signed by at least 30 percent of the workers. The regional office verifies whether there are enough valid cards to warrant an election and looks closely at the proposed bargaining unit to make sure that it is appropriate. If the regional office determines that the union has identified an appropriate bargaining unit and has enough valid cards, it orders an election. Election: The NLRB closely supervises the election to ensure fairness. All members of the proposed bargaining unit vote on whether they want the union to represent them. If more than 50 percent of the workers vote for the union, the NLRB designates that union as the exclusive representative of all members of the bargaining unit. When unions hold representation elections, they win about 60 percent of the time. 44. No. Connie has no legal claim to require the company to give her job back. The strike was based on economic issues. An economic strike is one intended to gain wages or benefits. During an economic strike, an employer may hire permanent replacement workers. When the strike is over, the company has no obligation to lay off the replacement workers to make room for the strikers. However, if and when the company does hire more workers, it may not discriminate against the strikers. The only time Connie would have a legal right to demand her job back would be if the strike had occurred due to an unfair labor practice on the part of the company. 45. No. Once Jenna's union was certified as the official representative of Mega Corp's employees (or, at least, a certain group of employees within the company), then the union has the exclusive right to negotiate the employment contract for that class of employees. It would be a violation of federal law (Section 9 of the National Labor Relations Act of 1935) if the company negotiated individually with Jenna. The principle of "exclusivity" is illustrated by this situation.

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Chap 30_9e_Standard Indicate whether the statement is true or false. 1. Quid pro quo sexual harassment cases involve coworkers making offensive jokes or rude comments or displaying pornographic materials, but not sexual offers or requests. a. True b. False 2. The EEOC is the federal agency responsible for enforcing Title VII. a. True b. False 3. As part of the hiring process, it is legal for employers to use any personal information potential employees post on social media. a. True b. False 4. Under the Equal Pay Act of 1963, an employee may not be paid at a lesser rate than employees of the opposite sex for tasks requiring equal skill, effort, and responsibility under similar working conditions. a. True b. False 5. In order to be considered sexual harassment, the questionable behavior must be directed at a coworker of the opposite gender. a. True b. False 6. Disparate impact applies if the employer has a rule that on its face is not discriminatory, but in practice excludes too many people in a protected group and the rule is not a job-related business necessity. a. True b. False 7. Heather applied for a promotion, but her manager promoted a coworker because the manager knew Heather was seven months pregnant. The manager did not want to promote someone who would probably be taking time off of work for childbirth and childcare. The manager has acted legally and reasonably to protect her company’s interests. a. True b. False 8. Title VII of the Civil Rights Act of 1964 applies to employers with any number of employees, making it illegal to discriminate on the basis of race, color, religion, sex, or national origin. a. True b. False 9. In order to be considered sexual harassment, behavior must be so severe that it interferes with an employee’s ability to work. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 30_9e_Standard 10. Brian is a police officer. He just turned 54 years old and is worried that he will be forced to retire next year when he turns 55. The Age Discrimination in Employment Act will protect him if his employer tries to force him to retire early. a. True b. False 11. The Civil Rights Act of 1866 offers plaintiffs the possibility of higher compensatory and punitive damage awards than plaintiffs who file under the Civil Rights Act of 1964. a. True b. False 12. Employers may consider arrest records because that is not evidence of wrongdoing. a. True b. False 13. Alice works for a large advertising agency where she is hoping to be promoted to a management position. Alice's mother and two sisters all died of breast cancer at a young age. Alice’s employer knows this and will not put Alice in a management position because he fears that she will also develop cancer. This decision is allowed because it is in the best interest of the company. a. True b. False 14. Generally speaking, an employer does not have to give workers a day off on their religious Sabbath if doing so would cause an undue hardship for the employer. a. True b. False 15. Retaliation means that an employer has done something that would deter a reasonable worker from complaining about discrimination. a. True b. False 16. Race may be a bona fide occupational qualification (BFOQ) when the employee will be working with children of a different race. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 17. Laura intends to file a Title VII lawsuit against her employer. Which of the following is true? a. Laura is required to first submit her claim to the Equal Employment Opportunity Commission. b. Laura must first submit her claim to a state civil rights commission before she may proceed with her lawsuit. c. If the EEOC determines Laura has no case against her employer, she may not file a lawsuit. d. Laura may initiate a lawsuit or file with the EEOC as she so elects.

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Chap 30_9e_Standard 18. Which of the following can never be a bona fide occupational qualification? a. race b. religion c. sex d. None of these are correct. 19. Which statute prohibits discrimination on the basis of disability by the federal government, federal contractors, and all entities that receive federal funds? a. the Civil Rights Act of 1866 b. the Equal Pay Act of 1963 c. the Rehabilitation Act of 1973 d. the Family and Medical Leave Act of 1993 20. Which of the following would be a reasonable accommodation under the ADA? a. modifying a job description and job duties to accommodate the disabled worker b. assigning a shadow employee to work with the disabled worker c. providing part-time schedules to accommodate the disabled worker d. creating a new job that the disabled worker can perform 21. Which of the following statements is TRUE regarding immigration under Title VII? a. An interviewer cannot ask an applicant if they are authorized to work in the United States. b. Once hired, a person must show three forms of evidence proving they are authorized to work in the United States. c. It is illegal for employers to discriminate against non-citizens because "national origin" is a protected category. d. Once hired, employers must turn I-9 records over to the immigration office. 22. Under which circumstances would the EEOC consider obesity to be a disability? a. only if it has an underlying physiological cause b. only if the individual is morbidly obese c. if it has an underlying physiological cause and/or if the individual is morbidly obese d. being overweight is not considered a disability under any circumstances 23. An employer would be expected to make reasonable accommodations for a disabled worker, such as a. creating a new job that the worker can do. b. adapting the work environment for all employees so the disabled worker doesn’t feel segregated or stigmatized. c. providing transportation to and from the worker’s home. d. allowing a part-time schedule.

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Chap 30_9e_Standard 24. Madeline—a White woman—applied for a job as an attendant in a men's bathroom at a fancy hotel. The hotel refused to hire her. A court would be likely to rule in favor of the hotel on the basis of which BFOQ? a. authenticity b. merit c. privacy d. reverse discrimination 25. There are four types of illegal activity under the Civil Rights Act of 1964. Which choice lists these four? a. disparate treatment, disparate impact, hostile environment, and retaliation b. disparate employment, unfair promotions, hostile environment, and unfair firing c. false reports, retaliation, prima facie discrimination, sexual harassment d. religious disparaging, racial profiling, sexual harassment, unfair promotions 26. Lamont is an African-American male. His employer tends to give him low-level tasks at work because he does not believe African-Americans are as skilled as other ethnic groups. Under Title VII, Lamont's employer is engaging in which illegal activity? a. disparate treatment b. retaliation c. family responsibility discrimination d. reverse discrimination 27. Which of the following is NOT an advantage to plaintiffs alleging racial discrimination and filing under the Civil Rights Act of 1866? a. a four-year statute of limitations b. unlimited compensatory and punitive damages c. assistance in filing from the Equal Employment Opportunity Commission d. applicability to all employees, not just those with 15 or more employees 28. Which Supreme Court case had the most influence on the passage of the Civil Rights Act of 1964? a. Plessy v. Ferguson b. Brown v. Board of Education c. Roe v. Wade d. Griggs v. Duke Power 29. Under the ADEA, an employer can win a disparate impact case if it can show that the discriminatory decision was based on a reasonable factor other than a. age. b. sex. c. race. d. national origin.

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Chap 30_9e_Standard 30. Alfred has been working for Canyon, Inc. for 12 years, with regular positive performance reviews and promotions. Roger has only been working for Canyon for 3 years. Alfred also has more management qualifications. Yet when a management position is open, Alfred’s supervisor advises that Alfred should NOT be promoted to that position. His reason is that he has recently learned that Alfred regularly attends a Narcotics Anonymous support group. Although Alfred has been clean for 16 years, there is fear that he could relapse. What is true? a. Canyon is allowed to make past drug abuse a barrier to management positions. b. Although Canyon’s behavior is unethical, it is not prohibited. c. Canyon’s behavior is prohibited by the Americans with Disabilities Act. d. Canyon’s behavior is not prohibited by the Americans with Disabilities Act, but it is prohibited by Title VII of the Civil Rights Act. 31. Which federal law protects Americans from being treated unfairly because of differences in their DNA that may affect their health? a. Title VII of the Civil Rights Act b. the Pregnancy Discrimination Act c. the Americans with Disabilities Act d. the Genetic Information Nondiscrimination Act 32. orning Consumer Products Co. asks its employees to apply four tests in determining whether their behavior violates Title VII with respect to sexual harassment. Which of the following is one of the four tests? a. Would your friends be impressed with your behavior? b. Do you think your behavior is humorous? c. Would your behavior help you to get a promotion? d. Would you like your behavior reported in your local newspaper? 33. Which of the following is TRUE in cases based on claims of disparate treatment? a. The plaintiff must prove that the defendant intentionally discriminated. b. The defendant must have made a disparaging remark about the plaintiff. c. The defendant must prove that the plaintiff is not qualified for the position. d. The plaintiff must prove that they were discriminated against because of their education level. 34. The Age Discrimination in Employment Act protects persons a. between 30 and 65 years of age. b. age 70 and older. c. between 45 and 70 years of age. d. age 40 and older. 35. Under the Americans with Disabilities Act, a person with a disabling illness a. is not considered disabled once the illness is being managed with medicines. b. is not considered disabled unless there is no known cure. c. is considered disabled, but only at times when hospitalization is required for treatment. d. is considered disabled, even if the illness is under control.

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Chap 30_9e_Standard 36. Which of the following are remedies available to a successful plaintiff under Title VII? a. hiring, reinstatement, and back pay b. hiring, reinstatement, and back pay c. compensatory and punitive damages d. All of these are correct. 37. An employer may be liable for an employee’s sexual harassment if a. the supervisor scheduled the plaintiff and defendant to work together. b. the defendant showed signs of being distraught over the harassment. c. the plaintiff suffered a “tangible employment action” such as firing or demotion. d. All of these are correct. 38. Which of the following is TRUE about affirmative action? a. Affirmative action is required by Title VII. b. Affirmative action is prohibited by Title VII. c. Affirmative action is allowed in government contracts if it can show the programs are needed to overcome specific past discrimination. d. Affirmative action programs are usually voluntary on the part of employers, since courts have no power to order remedies for past discrimination. 39. Mark was refused employment at a Christian bookstore because he was not a "born-again Christian." If Mark brings a Title VII action against the bookstore, the bookstore's best defense would be a. it did not discriminate against a protected category. b. Title VII doesn't apply to private businesses. c. being a "born-again Christian" is a bona fide occupational qualification. d. it could not reasonably accommodate Mark. 40. Which of the following questions could an interviewer safely ask a candidate in a job interview? a. “Are you a United States citizen?” b. “When did you graduate from college?” c. “Could you carry a 100-pound weight, as required by this job?” d. “Are you married?” 41. What are three general defenses an employer can raise if sued for violating Title VII of the Civil Rights Act?

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Chap 30_9e_Standard 42. What is the process for filing a suit under Title VII of the Civil Rights Act?

43. Discuss the two categories of sexual harassment.

44. What accommodations might an employer be expected to make for a disabled employee? What standard is used to determine whether an employer would be expected to make these accommodations?

45. Explain the Title VII requirements on affirmative action, and identify three sources of affirmative action programs.

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Chap 30_9e_Standard Answer Key 1. False 2. True 3. False 4. True 5. False 6. True 7. False 8. False 9. True 10. False 11. True 12. False 13. False 14. True 15. True 16. False 17. a 18. a 19. c 20. c 21. c 22. c 23. d 24. c 25. a 26. a

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Chap 30_9e_Standard 27. c 28. b 29. a 30. c 31. d 32. d 33. a 34. d 35. d 36. d 37. c 38. c 39. c 40. c 41. An employer can defend a Title VII case by establishing that an alleged discrimination was based on (a) merit, (b) seniority, or (c) a bona fide occupational qualification. An employer is not liable under Title VII if it shows that the person favored was the most qualified. Test results, education, or productivity can demonstrate merit if they relate to the job in question. A legitimate seniority system is legal, even if it perpetuates past discrimination. An employer may establish discriminatory job requirements if they are essential to the position in question. 42. Before a plaintiff can bring suit under Title VII, he must first file a complaint with the Equal Employment Opportunity Commission. Generally, this must happen within 180 days of the wrongdoing. The EEOC then conducts an investigation and attempts to mediate the dispute if appropriate. If the EEOC investigation reveals that discrimination has occurred, it will typically file the suit on behalf of the plaintiff. This arrangement is favorable to the plaintiff because the government pays the legal bills. If the EEOC decides not to bring a suit in the case or does not make a decision within six months, it issues a right to sue letter, and the plaintiff may proceed on his own in court within 90 days. 43. There are two categories of sexual harassment: Quid Pro Quo. From a Latin phrase that means “one thing in return for another,” quid pro quo harassment occurs if any aspect of a job is made contingent upon sexual activity. Hostile Work Environment. An employee has a valid claim of sexual harassment if sexual talk and activity are so pervasive that they interfere with the employee’s ability to work. Courts have found that offensive jokes, intrusive comments about clothes or body parts, and public displays of pornographic pictures can create a hostile environment.

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Chap 30_9e_Standard 44. Once it is established that a worker is disabled, employers may not discriminate on the basis of disability so long as the worker can, with reasonable accommodation, perform the essential functions of the job. An accommodation is not reasonable if it would create undue hardship for the employer. To meet this standard, employers are expected to make facilities accessible, permit part-time schedules, acquire or modify equipment, and assign a disabled person to an open position that he can perform. 45. Affirmative action is not required by Title VII, nor is it prohibited. Affirmative action programs have three different sources: litigation, voluntary action, and government contracts. Courts have the power under Title VII to order affirmative action to remedy the effects of past discrimination. Employers can voluntarily introduce an affirmative action plan to remedy the effects of past practices or to achieve equitable representation of minorities and women. The government may use affirmative action programs when awarding contracts only if (1) it can show that the programs are needed to overcome specific past discrimination, (2) they have time limits, and (3) nondiscriminatory alternatives are not available.

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Chap 31_9e_Standard Indicate whether the statement is true or false. 1. Alan, a dentist, and his wife Martha, an attorney, can protect their personal assets with limited liability from their business dealings by creating and operating a professional corporation together. a. True b. False 2. Corporations have a distinct advantage over other forms of business organization in the area of taxation. a. True b. False 3. The most common form of business ownership is the corporation. a. True b. False 4. Social enterprises are organizations that pledge to behave in a socially responsible manner, even as they pursue profits. a. True b. False 5. Corporations have perpetual existence. a. True b. False 6. Franchise fees can be costly, but they are usually payable over a number of years, after profits are generated from the business. a. True b. False 7. No formal steps are necessary to create a sole proprietorship. a. True b. False 8. Generally, a joint venture is a partnership created for one limited purpose. a. True b. False 9. To form an LLC, both a charter and an operating agreement must be filed with the secretary of state in the jurisdiction where the business will operate. a. True b. False 10. A partnership is a taxable entity, separate from the partners. a. True b. False

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Chap 31_9e_Standard 11. If partners wish to maintain having protection against personal liability, it is essential to comply with all the technicalities of a limited liability partnership statute. a. True b. False 12. For those wishing to purchase a franchise, the Federal Trade Commission acts as a guardian, ensuring that the business idea is sound and that the information in the Franchise Disclosure Document is accurate. a. True b. False 13. A limited liability company, unlike an S corporation, can have members that are corporations, partnerships, or nonresident aliens. a. True b. False 14. To be a close corporation, the business must be small, with no more than 20 owners and no more than $500,000 in gross annual income. a. True b. False 15. Limited liability is a major advantage of a partnership as compared to a corporation. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 16. Which is an advantage of a sole proprietorship? a. It can offer multiple classes of stock. b. It is very easy to form. c. It can attract a wide variety of shareholders. d. It offers its owner limited liability. 17. A court may pierce an LLC's veil if a. members fail to provide adequate capital. b. members treat the LLC like a separate organization. c. members keep their assets and the assets of the LLC separate. d. the LLC has too many members. 18. In many ways, a limited liability company can be thought of as a cross between a. a corporation and a franchise. b. a joint venture and a partnership. c. a corporation and a sole proprietorship. d. a sole proprietorship and a social enterprise.

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Chap 31_9e_Standard 19. Which of the following forms of organization is a compromise between starting one's own business as an entrepreneur and working for someone else as an employee? a. limited liability company b. sole proprietorship c. close corporation d. franchise 20. Daniel, his parents, and three brothers own all the stock of their family farm corporation, and each person takes an active role in managing the enterprise. This corporation, which is taxed as a corporation, is most likely a(n) a. S corporation. b. professional corporation. c. close corporation. d. proprietorship. 21. The term "S Corporation" comes from a. the Internal Revenue Code. b. the FTC rules. c. the Securities and Exchange Commission. d. state corporation law. 22. Which is true of an S corporation? a. There can be no more than 50 shareholders. b. There can be only one class of stock. c. A majority of shareholders must agree the company should be an S corporation. d. All of these are correct. 23. The phrase "piercing the company veil" applies to which type of organization? a. a close corporation b. a general partnership c. a limited liability company d. an S corporation 24. An organization that does not pay income tax on its profits but passes it through to its owners who pay the tax at their individual rates is called a a. business corporation. b. flow-through tax entity. c. tax-free business venture. d. professional corporation.

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Chap 31_9e_Standard 25. The form of business ownership that is the MOST easily transferable is the a. general partnership. b. corporation. c. close corporation. d. sole proprietorship. 26. All the business forms listed below have limited liability EXCEPT the a. limited liability company. b. general partnership. c. S corporation. d. corporation. 27. Most franchisors and franchisees are a. partnerships. b. sole proprietorships. c. corporations or LLCs. d. social enterprises. 28. Jill owns a retail business by herself and was sued by a customer who fell in the store. The customer claimed the business was negligent in caring for its floors. Which statement best describes Jill's potential liability? a. Jill has no potential liability to the customer. b. Jill can be held personally liable to the customer since she is the owner. c. Jill can only be liable up to the amount she initially invested in the business. d. Jill cannot be held personally responsible; the woman's insurance must pay for the claim. 29. The corporate form of business a. was first known and used by the Greeks and then spread through the Romans to England. b. was not known until the advent of the Industrial Revolution c. was first allowed in the State of New York around 1811 and is considered to be an American creation. d. is a relatively new concept developed shortly after the Great Depression. 30. Which of the following would NOT be personally liable for the debts of the business? a. a sole proprietor b. a partner in a general partnership c. an S corporation shareholder d. a partner in a joint venture

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Chap 31_9e_Standard 31. Debra wanted to form a partnership with Lawrence. He agreed and they became co-owners in an equal partnership. This year, after expenses, the partnership had a profit of $200,000. How will the taxation of this profit be handled? a. Since the partnership was Debra's idea, she will pay income tax on the profit on her personal tax return. b. The business will pay half of the tax liability, and Debra and Lawrence will pay the other half. c. Debra and Lawrence must both pay tax on the business's profit. d. The business itself will pay the taxes on the business’s profit. 32. What constitutes a social enterprise's "triple bottom line"? a. employees, customers, and profits b. assets, liabilities, and revenue c. social concerns, shareholders, and sales d. people, planet, and profits 33. Which of the following statements regarding social enterprises is TRUE? a. Social enterprises are essentially nonprofit organizations. b. To become a socially conscious organization, one-half of the shareholders must approve. c. The focus of social enterprises is the motto "reduce, reuse, recycle." d. Unlike charities, social enterprises can sell stock to investors. 34. Harold and Zack have pooled their money together to buy real estate but have filed no formal papers to form a business. Harold, a lawyer, handles all the legal matters and Zack, a real estate broker, finds buyers for the property they have subdivided. Harold and Zack are engaged in a a. partnership. b. close corporation. c. limited liability company. d. professional corporation. 35. When a partner leaves the partnership, whether it be voluntary or by expulsion, death, or bankruptcy, it is called a. dissociation. b. termination. c. detachment. d. separation. 36. Charles and Ellen, an unmarried couple, run an ice cream store. The business is not incorporated, and they have filed no formation papers with the state. Their business is a a. sole proprietorship. b. partnership. c. franchise. d. limited liability company.

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Chap 31_9e_Standard 37. A social enterprise must do all of the following EXCEPT a. register with the state as a nonprofit organization. b. state in its charter that it is a benefit corporation. c. obtain approval of its charter from two-thirds of its shareholders. d. measure its social benefit using a standard set by an objective third party. 38. The Federal Trade Commission requires franchisors to a. give prospective franchisees a Franchise Disclosure Document at least 14 business days prior to the signing of a contract or payment of any money. b. give prospective franchisees earnings information on the company. c. disclose any litigation the company has ever been involved in. d. let prospective franchisees know how many franchisees have gone out of business in the prior five years. 39. What federal agency requires that the seller of a franchise give the potential buyer a Franchise Disclosure Document (FDD) and audited financial statements? a. the Securities and Exchange Commission (SEC) b. the Interstate Commerce Commission (ICC) c. the Federal Trade Commission (FTC) d. the Franchise Sales Commission (FSC) 40. All of the following are characteristics of a closely held corporation EXCEPT a. the shares are publicly traded. b. the corporation can typically operate without a board of directors. c. the shareholders usually restrict share transfer. d. minority shareholders are provided more protection than in regular corporations. 41. Trudy wishes to buy a national franchise. What information is the seller legally required to provide before she buys the franchise?

42. What is a joint venture? Briefly explain the tax and liability implications of a joint venture.

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Chap 31_9e_Standard 43. Compare and contrast the following forms of business organization as to ease of formation, liability of owners, management, and tax implications: sole proprietorship, general partnership, limited liability company, and corporation.

44. Andy wants to start his own business. He has decided to rent space in a "strip mall" and open a pet shop. Additionally, he will provide dog grooming services. He figures he can do almost everything himself, though he will need to hire a part-time employee on an "as needed" basis. His friend, Lacy, has agreed to work when needed. Andy is considering operating his business as a sole proprietorship. What are the primary legal advantages and disadvantages to this form of business ownership for Andy's pet shop?

45. In order to obtain limited liability, Tom and Doris formed an LLC to operate their catering business. They sometimes deposit the proceeds from catering jobs into their personal checking accounts, and if they need to pay personal bills and are short of funds, they use the business account. If creditors of the business cannot get payment for their invoices, is there anything a court can do to help the creditors?

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Chap 31_9e_Standard Answer Key 1. False 2. False 3. False 4. True 5. True 6. False 7. True 8. True 9. False 10. False 11. True 12. False 13. True 14. False 15. False 16. b 17. a 18. c 19. d 20. c 21. a 22. b 23. c 24. b 25. b 26. b

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Chap 31_9e_Standard 27. c 28. b 29. a 30. c 31. c 32. d 33. d 34. a 35. a 36. b 37. a 38. a 39. c 40. a 41. The Federal Trade Commission requires the seller of the franchise to provide Trudy with a Franchise Disclosure Document (FDD) at least 14 calendar days before any contract is signed or money is paid. This disclosure statement must provide the following information: The history of the franchisor and its key executives Litigation with franchisees Bankruptcy filings by the company and its officers and directors Costs to buy and operate a franchise Restrictions, if any, on suppliers, products, and customers Territory—any limitations (in either the real or virtual worlds) on where the franchisee can sell or any restrictions on other franchisees selling in the same territory Business continuity—under what circumstances the franchisor can terminate the franchisee and the franchisee’s rights to renew or sell the franchise Franchisor’s training program Required advertising expenses A list of current franchisees and those that have left in the prior three years A report on prior owners of stores that the franchisor has reacquired Earnings information is not required; but if disclosed, the franchisor must reveal the basis for this information Audited financials for the franchisor A sample set of the contracts that a franchisee is expected to sign

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Chap 31_9e_Standard 42. A joint venture is a partnership for a limited purpose. It is not a legal entity, so all tax liability is shared among the participants in the venture. Similarly, these participants also share any liability that arises out of the joint venture's activities. 43. A sole proprietorship is an unincorporated business owned by one person. It is easy and inexpensive to create and operate. However, the owner has unlimited personal liability for the debts of the business. The owner has the right to manage the business. Business income is taxed on the owner’s personal income tax return; the company does not have to file a separate tax return. A general partnership is an unincorporated association of two or more co-owners to operate a business for profit. Partnerships are easy to form and do not require filings with the government, although a written partnership agreement for use between the parties is recommended. A disadvantage of general partnerships is that each partner is personally liable for the debts of the enterprise whether or not she caused them. Thus, a partner is liable for any injury that another partner or an employee causes while on partnership business as well as for any contract signed on behalf of the partnership. Unless otherwise agreed, partners have equal rights to manage the business. A partnership does not pay taxes itself; all income and losses are passed through to the partners and reported on their personal income tax returns. Limited liability companies generally require two documents: a charter and an operating agreement. The charter must be filed with the secretary of state in the jurisdiction in which the LLC is being formed. The operating agreement sets out the rights and obligations of the members. All members have limited liability, and the business has the tax status of a flow-through entity. Corporations are relatively expensive and difficult to form, but owners have limited liability. Generally, the owners/shareholders are not involved in the management of the company. Corporations are taxable entities, so they must pay taxes and file returns. The owners/shareholders must also pay tax on dividends they receive from corporations. 44. There are many advantages to operating the pet shop as a sole proprietorship. Besides the advantage of "being your own boss," there are no formal procedures required to create this type of business ownership. A sole proprietorship is a flow-through tax entity, which means that, although Andy must pay personal income tax on any profit he earns, the business itself does not pay income taxes. The business is not even required to file a separate tax return. Certainly, Andy faces some serious disadvantages as a sole proprietor. He is personally liable for any debts or claims made against the company or his employees. As the owner of a sole proprietorship, Andy will have limited options for financing his business. Debt is generally his only source of working capital because he has no stock or memberships to sell. For this reason, sole proprietorships work best for small businesses without large capital needs. 45. It is common under corporate law for shareholders who do not comply with the technicalities of the law to be held personally liable for the corporate debts. This is called “piercing the corporate veil.” Similarly, the members of an LLC may be held liable if they do not observe the formalities required for the business. Here, Tom and Doris are mingling business and personal funds. Courts would be likely to disregard the LLC form and hold Tom and Doris personally liable for the business debts.

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Chap 32_9e_Standard Indicate whether the statement is true or false. 1. Without the approval of the other partners, a partner cannot sell their share. a. True b. False 2. Jeremiah was a partner in a partnership, but he quit unexpectedly when he got his feelings hurt over an internal decision. Dissociation has occurred. a. True b. False 3. Alicia and Ted have a written agreement wherein they will share the losses of their joint business. This agreement is strong evidence they are partners. a. True b. False 4. A partner always has the right, though not the power, to leave a partnership. a. True b. False 5. A partnership is an association of two or more persons who carry on as co-owners of a business for profit, whether or not they intend to form a partnership. a. True b. False 6. The dissolution of a partnership means the same as its termination. a. True b. False 7. A partnership can only be held liable for the partners’ authorized acts. a. True b. False 8. Common law plays an important role in regulating partnerships. a. True b. False 9. Lily is involved in the winding up of her partnership. Lily is NOT entitled to compensation for her work since she is a partner. a. True b. False 10. Kyle, Pedro, and Madeline form a partnership. There is no agreement as to the duration of the partnership. The partnership is a partnership at will. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 32_9e_Standard 11. The rules set out in the UPA defining the liability of partners to outsiders can be modified by the partnership agreement. a. True b. False 12. Nicholas and Holly are partners in a toymaking shop. If Rudolph obtains a judgment against Nicholas for injuring Rudolph while Nicholas was on partnership business, Rudolph must try to collect from the partnership before going after Nicholas’s personal assets. a. True b. False 13. A partnership is liable for both the negligent and intentional acts of a partner if the acts were committed within the ordinary course of the partnership's business. a. True b. False 14. A wrongful dissociation occurs if a partner violates the partnership agreement. a. True b. False 15. Doyle contributed $10,000 when he became a general partner in the existing partnership of R & Z Heating. If Albert wins a judgment for $25,000 against R & Z on a claim that was incurred before Doyle became a partner, Doyle shares joint and several liability with his new partners for the whole obligation. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 16. In determining if a partnership exists, the courts will consider all of the following factors EXCEPT a. management of the business. b. actions of the persons involved. c. the nature of the business. d. profit. 17. Max, Jenny, and Craig are partners. They have purchased an elegant Victorian home and converted it into an office for their partnership. Craig decides to use the partnership's office to host some evening parties. Craig has a sideline business of arranging expensive gatherings and charging each person a handsome price to attend these "elite" parties. When Max and Jenny find out what Craig is doing, they demand that he pay them for the use of the property. How much money, if any, is Craig required to pay the partnership? a. Nothing. He is free to use partnership property for his own uses. b. Nothing, but he will be removed from the partnership for violating his fiduciary duty. c. He must turn over any profits he earned from this activity. d. He must pay the fair market value for the use of the house.

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Chap 32_9e_Standard 18. Lori and Dan own a small restaurant as partners. Dan works several hours a day cooking, waiting on tables, doing the books, and so forth. Dan believes he is entitled to be paid at least a standard wage for all his work since, at the present time, the part-time kitchen helpers earn more than he does! Lori claims Dan is not entitled to anything other than one-half the net profits. Is Lori right? a. Yes. The UPA states a partner may not collect a "wage" from the partnership business under any circumstances. b. Yes, as long as there is no agreement between Lori and Dan allowing for either of them to be paid wages for work done at the restaurant. c. No. Dan may collect only minimum wage, as required by federal law. d. No. Dan may collect a fair wage for the work he has performed. 19. Nancy was a partner of a small business. She could see that the business was beginning to fail and that it was very unlikely it would recover. Not wanting to lose her investment, she asked that the court require the partnership to dissolve since she did not have a legal right to withdraw at that time. Does a court have the authority to order a partnership to dissolve? a. Yes. A court can dissolve a partnership when it is convinced that the partnership is unlikely to succeed. b. Yes. Under the UPA, if a partner can show the court the business suffered a loss the year before the case was filed, the court can dissolve the partnership. c. No. A court can only dissolve a partnership at the request of all the partners. d. No. A court does not have authority to dissolve the partnership. 20. In Banker v. Estate of Banker,the court held that a. it could not intervene in the affairs of a partnership. b. when proof of an agreement is lacking, a partner cannot receive compensation for work done. c. regardless of a written agreement to the contrary, a partner can receive compensation for work done. d. all parties doing work for a partnership are entitled to compensation for work done to further the partnership business. 21. Dusty dissociated from a partnership. To protect himself from debts of the partnership after he leaves, Dusty should a. secure an indemnity bond. b. file a statement of dissociation with the secretary of state. c. execute a formal written agreement with the remaining partners. d. demand that the partnership terminate. 22. Ending a partnership involves which of the following three steps? a. dissolution, winding up, and termination b. dissociation, winding down, and consummation c. failure, dividing up, and paying off d. dissociation, agreement, and dissolution

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Chap 32_9e_Standard 23. Larry and Reed are partners in Custom Pet Grooming. As they are both nearing retirement age, when they form their partnership, they agree they will end their business relationship and sell Custom Pet Grooming in three years. Larry and Reed have a a. franchise. b. term partnership. c. partnership at will. d. partnership by estoppel. 24. In which case did the plaintiff wish to be a partner so he could share in the profits of the enterprise? a. Banker v. Estate of Banker b. Moren v. Jax Restaurant c. Herman v. Pickell & Kaleidoscope Books d. Marsh v. Gentry 25. Sandy, Ramon, and Bonnie were partners. Sandy dissociated from the partnership. Bonnie and Ramon decided to continue the business. When Sandy dissociated, there was a $50,000 debt owed to Great State Bank. Which statement is correct? a. Sandy remains liable on the $50,000 debt owed to Great State Bank. b. Only Ramon and Bonnie are liable for the $50,000 debt owed to Great State Bank. c. The debt is extinguished as a result of the dissociation. d. Whether Sandy remains liable depends on whether she filed a statement of dissociation. 26. Daria is a partner in a small coffeeshop. If she acts with actual or implied authority, then she has a. the power to bind the partnership, but not the right. b. the right to bind the partnership, but not the power. c. both the power and the right to bind the partnership. d. neither the power nor the right to bind the partnership. 27. Gary and Herman are partners in a lawn mower repair business in Ohio. While Gary is on vacation, visiting his sister in Georgia, his sister’s neighbor has trouble with her mower and Gary fixes it for her. She insists on paying him. Gary a. may keep the payment since he did the work while he was on vacation. b. must turn the money over to the partnership because he earned it doing the kind of work that the partnership does. c. may not accept the money because it would create a conflict of interest. d. may not accept the money because it would mean he was taking a business opportunity away from the partnership.

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Chap 32_9e_Standard 28. Kayla and Marshall formed a partnership. Marshall incurred a debt in the ordinary course of the partnership business. If the debt is not paid, the creditor may sue a. only Marshall. b. only the partnership. c. the partnership and the partners together, or in separate lawsuits, or in any combination. d. only Marshall and the partnership in a lawsuit together or the creditor loses any right to sue the partnership. 29. All of the following conditions must exist for partnership by estoppel to exist EXCEPT a. one partner agrees not to share in the profits of the enterprise. b. participants tell other people they are partners even though they are not. c. a third party believes and relies upon the assertion that participants are partners. d. a third party suffers harm because they believed a partnership existed. 30. Randy, Joan, and Arnie are partners. Their agreement did not address dissociation nor how long the partnership would last. Randy decided to leave the partnership. What happens when Randy serves notice he intends to withdraw? a. The partnership can either buy him out and continue in business or wind up the business and terminate the partnership. b. The partnership automatically terminates. c. The partnership winds down. d. The partnership estoppes. 31. Which statement about the financial rights of partners is accurate? a. All partnership property belongs to the individual partners. b. Partners share profits equally unless they agree otherwise. c. Partners share losses equally. d. All of these are correct. 32. Art and Alma made capital contributions of 60 percent and 40 percent, respectively, to their newly formed partnership, AA & Associates. They did not have a written partnership agreement. At the end of the first year, the partnership made a profit of which Alma now claims half. However, Art maintains he should receive 60 percent. Who is correct? a. Art, since the UPA presumes that profits and losses are divided in proportion to capital contribution. b. Art, since it would only be fair. c. Alma, because she works in the business. d. Alma, as the UPA provides that profits are split equally unless the partners agree otherwise.

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Chap 32_9e_Standard 33. Judy believed that Ray and Don were partners in an automotive repair business. Ray and Don were not partners. Ray owned the business as a sole proprietor. Ray, however, allowed Don, his unemployed brother-in-law, to be around the business. When Judy was having her car repaired, Ray said, "My partner here, Don, will give you a ride to work this morning so you can leave your car here. He will give you a ride back here after work, and your car will be done." Judy allowed Don to drive her to work. While riding with Don, he accidentally ran a stop light and caused an accident. Judy was hurt and claims that both Don and Ray are liable to her. Is she right? a. Yes. This illustrates a partnership by estoppel. b. No. Don was not a partner in the business. c. No. Don was a dissociated partner. d. No. There was no intent to have a partnership. 34. Which of the following is a rightful dissociation? a. A partner in a partnership at will serves notice that he intends to withdraw. b. A partner in a term partnership withdraws before the end of the term. c. A partner in a term partnership becomes bankrupt. d. A partner violates the partnership agreement. 35. Which of the following events occurs first with respect to the ending of a partnership? a. termination b. winding up c. dissolution d. distribution of proceeds 36. At what stage are the partnership debts paid and the proceeds distributed to the partners? a. during dissolution b. during winding up c. during termination d. during dissociation 37. Astrid and Razi formed a partnership in which they agreed to share profits 60 percent to Astrid and 40 percent to Razi. Losses will be shared a. equally, unless otherwise agreed. b. 60 percent to Astrid and 40 percent to Razi, unless otherwise agreed. c. according to their capital contributions to the partnership. d. in whatever proportion provides the greatest tax advantage for the partners that year.

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Chap 32_9e_Standard 38. Theresa and Bobbi bought a racecar together. They agreed to share all expenses and split net profits equally. There was no agreement as to the duration of the partnership. After about a year, Bobbi decided she was tired of the racing business and left the partnership. Bobbi did not violate the partnership agreement. Theresa claims Bobbi's leaving was wrongful. Is Theresa correct? a. Yes, Bobbi was legally required to secure Theresa's permission before leaving the partnership. b. Yes, Bobbi had a legal duty to stay in the partnership until Theresa was willing to agree to end the relationship. c. Yes, Bobbi had a legal duty to stay in the partnership until a new partner could be found. d. No, in a partnership at will, a partner has the right to leave the partnership at any time. 39. Anne and Mike were winding up their partnership. Mike was approached by a person who wanted the partnership to do some work for him. Mike agreed that the partnership would do the work. Generally speaking, in such a situation a. Anne is not liable since the partnership was in the winding-up phase. b. Anne is not liable since she did not consent to the work. c. Anne is not liable since Mike's conduct was wrongful. d. Anne is liable unless she filed a statement of dissolution with the secretary of state within 90 days of when Mike entered the contract. 40. Identify and briefly discuss the management rights and duties of a partner.

41. Dennis and Claudia were partners who operated a retail store. They agreed to end the partnership. Dennis agreed to stay at the store and oversee the going-out-of-business sale. Claudia agreed to deal with the accountants and other matters not directly related to the hands-on operation of running the store. Claudia received notice that the store's liability policy would expire on July 1. She decided not to renew the policy and let it lapse. The going-out-of-business sale would not be completed until August 1. In July, a customer slipped and fell in the store. When Dennis learned that Claudia had allowed the liability policy to lapse, he was very upset and claimed he should not be liable for the customer's injury. Is Dennis liable to the customer? Explain.

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Chap 32_9e_Standard 42. Jack and Jill were living together. Jack wanted to start a small retail store but did not have good credit. Jill, whose credit was excellent, signed loan agreements with Jack so he could borrow the money to start the business. Jack used business cards that stated he was the "owner" of the business. He and Jill filed separate tax returns. Jack stated he was self-employed and claimed the business was a sole proprietorship. The money that was earned from the store was placed into a joint checking account owned and used by Jack and Jill. When there were significant decisions to be made about the business, such as deciding to franchise the business, the decision was made jointly by Jack and Jill. Five years after the business was started, Jill left Jack. She claimed she was entitled to one-half the business's profits since she and Jack were partners. Jack disagreed and claimed they never had a partnership. Discuss Jill's claim.

43. Ramiro is dissociated from the partnership he helped form ten years ago. If his partners want to continue the business, what must they do? Does it make any difference if the dissociation was wrongful?

44. Andy, Becky, and Charlie formed a partnership. Their business was to create Web pages for students. They would take a person's academic and career information and make an attractive Web page. Andy supplied the computer and technical advice. Becky was the business manager. Charlie did the bulk of the marketing. Charlie and Becky became irritated with Andy, as it seemed they did more work than he did. Charlie and Becky decided to end their partnership with Andy. During the winding-up process, how are the assets of the partnership paid out?

45. Village Bank believed that Spencer and Nadia were partners in an e-business. Spencer and Nadia were not partners. Spencer owned the business as a sole proprietor. Nadia, however, was a close friend of Spencer. When Spencer visited Village Bank in an effort to obtain a $10,000 loan, Nadia went with him. During the conversation with the banker, Spencer referred to Nadia as "my partner." Village Bank made the business loan believing that Spencer and Nadia were partners. Spencer defaulted on the loan. Village Bank claims that both Spencer and Nadia are liable on the loan. Will Nadia be liable on the loan?

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Chap 32_9e_Standard Answer Key 1. True 2. True 3. True 4. False 5. True 6. False 7. False 8. True 9. False 10. True 11. False 12. True 13. True 14. True 15. False 16. c 17. c 18. b 19. a 20. b 21. b 22. a 23. b 24. c 25. a 26. c

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Chap 32_9e_Standard 27. b 28. c 29. a 30. a 31. b 32. d 33. a 34. a 35. c 36. b 37. b 38. d 39. d 40. Each partner has equal rights in the management and conduct of the business, unless the partners agree otherwise. If the partnership is large, usually one or a few partners are designated as managing partners or members of an executive committee. Partners are agents of the partnership and have the power to bind the partnership through actual, implied, or apparent authority. Unless otherwise agreed, all partners have an equal vote, regardless of their contributions to the partnership. The UPA gives each partner the right to inspect and copy the partnership’s books and records. In addition to rights, partners have certain duties, which are mandatory: the duties of care, loyalty, and good faith and fair dealing. Partners are liable to the partnership for gross negligence, reckless conduct, intentional misconduct, or a knowing violation of the law. Partners are not liable for ordinary negligence. Under the duty of loyalty, partners have the duty not to compete with the partnership, not to take a business opportunity away from the partnership unless the other partners consent, to turn over to the partnership any profit earned from the use of partnership property without the consent of the partners, and to avoid conflicts of interest. Partners have an obligation of good faith and fair dealing to each other and to the partnership. 41. Yes. A partner always has the authority to act as an agent of the partnership and is always the agent of her other partner(s). In this case, whether or not Claudia acted properly in allowing the policy to lapse is not relevant to Dennis's potential liability to the customer. He may or may not have a claim against Claudia; however, he is liable to the customer for the injury and Claudia is also responsible.

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Chap 32_9e_Standard 42. Participants in an enterprise cannot be partners unless they share profits, but not all profit sharers are partners. The courts also consider the following factors in deciding whether there is a partnership: a. Are the participants involved in the management of the business? Partners share in the management of the business, although not all managers are partners. b. An agreement to share in losses is strong evidence of a partnership. c. In a partnership, actions speak louder than words. If thepeople act like partners, then the law will treat them as such. If they do not act likepartners, then nothing they say, orally or in writing, is enough, on its own, to create apartnership. Note, however, that in a close case, referring to themselves as partnersmay help sway a court, but it is not enough by itself to create a partnership. Though it would be necessary to examine all the facts, it does appear that Jack and Jill had a partnership and that she is entitled to one-half the net profits of the business as of the date the partnership was dissolved. Of critical importance is that the money earned from the business was deposited into the couple's joint bank account and that Jill was actively involved in the management of the business. 43. If Ramiro is dissociated from the partnership, his partners can, by unanimous vote, continue the business. They must, however, buy out Ramiro by paying him the value of his share of the business. The value is the greater of Ramiro’s share of the proceeds if the partnership were sold as an ongoing business or if the partnership’s assets were liquidated. It does make a difference in figuring the value of Ramiro’s share whether the dissociation was wrongful. If it was wrongful, the partnership can deduct from the amount it owes Ramiro any damages he caused the partnership. He could actually end up owing the partnership money. 44. During the winding-up process, the assets of the partnership are paid out in the following order: First, to creditors of the partnership, including creditors who are partners. Second, any leftover funds (or obligations) are distributed to the partners. Unless the partnership agreement provides otherwise, partners share equally in profits—and losses. 45. The bank can make a case to hold Nadia liable under partnership by estoppel. Partnership by estoppel exists when: 1. Participants tell other people that they are partners or they allow other people to say, without contradiction, that they are partners; 2. A third party relies on this assertion; and 3. The third party suffers harm. In this situation, Spencer told Village Bank that they were partners, and Nadia didn't contradict him. The bank relied on the fact that they were partners in extending the loan. Village Bank can probably hold Nadia liable on the loan. The bank should have protected its interest by having Nadia, as well as Spencer, sign the loan papers.

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Chap 33_9e_Standard Indicate whether the statement is true or false. 1. A business corporation can be incorporated under either state law or federal law. a. True b. False 2. To adopt a contract means to form a new contract with different parties. a. True b. False 3. When a company dissolves, preferred stockholders typically have the right to receive their share of corporate assets before common shareholders. a. True b. False 4. A corporation must have a registered agent within the state of incorporation only if the corporation maintains an office in that state. a. True b. False 5. When a corporation accepts legal responsibility for a contract, it is called novation. a. True b. False 6. The lawyer who forms the corporation cannot legally serve as its incorporator. a. True b. False 7. Common stock is the last stock in line for any corporate payouts, including dividends and liquidation payments. a. True b. False 8. Stock is divided into categories called series, and these series can be further divided into subcategories called classes. a. True b. False 9. A corporation is required to have at least one director, no matter how many shareholders it has. a. True b. False

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Chap 33_9e_Standard 10. Incorporators are required to sign the charter, deliver it to the proper state officials, and purchase a certain percentage of the initial stock offering. a. True b. False 11. Sara decided to incorporate her business under the name Gomo, Inc. Before Gomo was incorporated, Sara signed a contract in the name of Gomo, Inc. to lease a store front. Sara did not tell the other party that Gomo was not yet formed. Sara is personally liable on the lease. a. True b. False 12. Terminating a corporation is a three-step process: dissolution, winding up, and termination. a. True b. False 13. A corporation officially states its purpose is "to engage in any lawful activity for which corporations may be organized under the General Corporation Law of Idaho." Under corporate law, this purpose is too broad. A corporation's purpose must be more narrowly defined. a. True b. False 14. Zach decides to incorporate his business under the name of "Zamm." In addition to "Zamm," the Model Act requires that Zach include one of the following words: "corporation," "incorporated," "limited," or "company." a. True b. False 15. Promoters are personally liable on any contract they sign before the corporation is formed. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 16. What is an exculpatory clause? a. a requirement that the company pay the legal fees of directors who are sued for actions taken on behalf of the company b. a provision that if a party enters into a contract believing in good faith that the corporation exists, he cannot later take advantage of the fact that it does not c. a requirement that a corporation cannot undertake any transaction unless the charter permits it d. a provision that protects directors from personal liability to the corporation and its shareholders Copyright Cengage Learning. Powered by Cognero.

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Chap 33_9e_Standard 17. Hank owns 100 shares of cumulative preferred stock in Wayside Transport, Inc. Kelsey owns 50 non-cumulative preferred shares, and Oleg owns 120 shares of common stock. Wayside does not pay dividends in 2015. In 2019, a. Hank and Kelsey must receive their 2019 dividends before Oleg is paid any 2019 dividends. b. Oleg cannot receive any 2019 dividends until Hank is paid for the 2015 dividends. c. Kelsey cannot receive the dividends Wayside could not afford to pay in 2015. She will just lose them. d. All of these are correct. 18. Mike is planning on incorporating his business in the state of Delaware. Which of the following regarding the name of Mike's business is TRUE? a. He will be able to use the words "Association" or "Institute" in his company name. b. He will not be able to use abbreviations (such as Inc. or Corp.) in his company name. c. His company name will have to include one of the following words: Corporation, Incorporated, Company, or Limited. d. His company name can be the same as another corporation that already exists in Delaware. 19. The person who creates a corporation is called the a. promoter. b. partner. c. agent. d. incorporator. 20. What term identifies stock that has been authorized and sold? a. authorized and paid stock b. outstanding stock c. treasury stock d. authorized and unissued stock 21. Fashions, Inc. has 12 shareholders. There is no shareholder agreement concerning the board of directors. The company is subject to the Model Act. How many directors is Fashions, Inc. required to have? a. none b. one c. two d. five 22. Which of the following states that a corporation cannot undertake any transaction unless its charter permits it? a. the ultra vires doctrine b. the estoppel doctrine c. the exculpatory clause d. the indemnification clause

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Chap 33_9e_Standard 23. Conversion rights a. specify the order in which classes of stockholders are paid upon dissolution. b. are designed to prevent dilution of a shareholder's ownership in the company. c. allow investors to convert to a different class. d. establish whether shareholders are entitled to dividends. 24. MegaCorp is incorporated in the state of Delaware and is registered only in Delaware. Jolene purchased a MegaCorp product from a company's sales representative following a presentation in Michigan. Jolene was seriously injured by the product in Michigan. Under the Model Act, if Jolene sues in Michigan, can MegaCorp defend the suit there? a. MegaCorp may only defend against a lawsuit in Michigan if it first registers by paying back fees, taxes, and penalties. b. Yes, MegaCorp can bring or defend against a lawsuit in any state regardless of whether the corporation is registered to do business in that state. c. Yes, MegaCorp can defend against a lawsuit in Michigan regardless of whether MegaCorp is registered to do business in that state. d. No. Jolene must sue, and MegaCorp may defend a lawsuit only in Delaware. 25. What is the first step that must be taken to terminate a corporation? a. filing b. vote c. revocation d. winding up 26. Carey decided to incorporate her business under the name yStar Inc. Before yStar was incorporated, Carey signed a contract in the name of yStar, Inc. to have some office space remodeled. Which statement is correct? a. yStar is liable on the contract because the contract was signed in its name. b. yStar becomes liable on the contract as soon as it is incorporated. c. yStar is liable on the contract if the contractor knows that the corporation does not yet exist. d. yStar will be liable on the contract only if the corporation adopts the contract. 27. In incorporating E-prise, the promoter gave an incorrect ZIP Code for the registered agent. All of the other requirements for incorporation were met. E-prise is a(n) a. de jure corporation. b. de facto corporation. c. corporation by estoppel. d. indemnified corporation.

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Chap 33_9e_Standard 28. Which state does your textbook cite as being particularly attractive to companies looking to incorporate? a. Ohio b. Alaska c. Utah d. Delaware 29. Who elects the officers of a corporation? a. the agents b. the shareholders c. the incorporators d. the directors 30. Laurie is incorporating her business. Laurie’s home state is Wisconsin. Business will be conducted in California, Michigan, Pennsylvania, and Virginia. Laurie a. must incorporate the business in Wisconsin, the home state. b. must incorporate the business in Wisconsin, California, Michigan, Pennsylvania, and Virginia. c. must incorporate in Delaware. d. can incorporate the business in any state. 31. Corporate stock can be divided into categories called ________, which can be further divided into ________. a. authorized shares; classes b. classes; series c. equity; assets d. Debentures; classes 32. Who signs the charter and files it with the secretary of state? a. the incorporator b. the chairman of the board c. the promotor d. the company president 33. Fashions, Inc. has 12 shareholders. The company is subject to the Model Act. What officers is Fashions, Inc. required to have? a. a president, secretary, and treasurer b. a president and a secretary, and they can be the same person c. a president, at least one vice-president, a secretary, and a chief financial officer d. whatever officers are described in the corporate bylaws

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Chap 33_9e_Standard 34. Under the Model Act, a corporation must have at least one director unless all shareholders agree to eliminate the board or the corporation has fewer than _____ shareholders. a. 10 b. 25 c. 50 d. 100 35. The Levitt Corporation charter authorizes 500,000 shares of stock. This stock is referred to as a. treasury stock. b. preferred stock. c. authorized stock. d. common stock. 36. Under most state statutes, a corporation may a. include in its charter a provision indemnifying directors unless they have engaged in intentional misconduct or bad faith. b. include in its charter a provision indemnifying directors under any circumstances in the conduct of their duties for the corporation. c. not include in its charter a provision indemnifying directors who engage in negligent conduct of their duties. d. not include in its charter any provisions regarding indemnification of directors. 37. The executives of Jornaginn Corporation have decided they need to sell 50,000 additional shares of stock to finance their expansion plans. The executives a. cannot sell that many shares unless they were authorized initially in the corporate charter. b. can sell as many shares as the market will bear. c. are limited by the number of shares authorized in the corporate charter, but this number can be increased by amending the charter and paying a fee. d. can sell the shares only if the shares have a par value that is close to the current market price. 38. MegaCorp is incorporated under Delaware law. It is registered to do business in New York. Legally, in New York MegaCorp is known as what kind of corporation? a. domestic b. foreign c. secondary d. cumulative

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Chap 33_9e_Standard 39. Wizardry Corporation's purpose clause in its charter states the following: "To operate a home-cleaning service business." After a few years of successful operation, Wizardry is offered the challenge of landscaping a neighboring business. If Wizardry accepts the offer, it would be violating its charter under a. the de jure doctrine. b. the de facto doctrine. c. the ultra vires doctrine. d. an estoppel theory 40. Discuss how a corporation is terminated.

41. MegaCorp has five directors. The company has 1,050 shares of voting stock. Jessica would like to purchase enough stock to elect herself to the board of directors. The company allows for cumulative voting. Explain the concept of cumulative voting and also state how many shares of MegaCorp stock Jessica will need to own to assure herself a place on the board of directors.

42. Identify four circumstances that might persuade a court to pierce the corporate veil.

43. Denise is a promoter for a proposed corporation, EVR-Young Corp. As promoter, she signed a three-year lease to rent office space in an office park. She signed her name and indicated below her signature that she was signing as "promoter for EVR-Young Corp., a company yet to be incorporated." EVR-Young is never incorporated. The lessor believes that Denise is personally liable for any damages it will sustain as a result of the three-year lease having to be breached. Is Denise personally liable? Explain.

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Chap 33_9e_Standard 44. What are some of the advantages for a business to incorporate in Delaware?

45. Isabel, Wesley, Gina, and Lucas worked together intensively to form and become the only shareholders of a corporation that is environmentally conscious. Is there anything they can do to avoid having shares of stock in their company sold to someone who does not share their vision for the environment?

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Chap 33_9e_Standard Answer Key 1. False 2. False 3. True 4. False 5. False 6. False 7. True 8. False 9. False 10. False 11. True 12. False 13. False 14. True 15. True 16. d 17. d 18. a 19. a 20. b 21. a 22. a 23. c 24. c 25. b 26. d

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Chap 33_9e_Standard 27. a 28. d 29. d 30. d 31. b 32. a 33. d 34. c 35. c 36. a 37. c 38. b 39. c 40. Ordinarily, terminating a corporation is a three-step process. First, the directors recommend to the shareholders that the corporation be dissolved, and a majority of the shareholders agree. Second, the corporation files “Articles of Dissolution” with the secretary of state. Third, the officers of the corporation pay its debts and distribute the remaining property to shareholders. When this winding up is completed, the corporation ceases to exist. Alternatively, the secretary of state may dissolve a corporation that fails to comply with state requirements or a court may dissolve a corporation if it is insolvent or if its directors and shareholders cannot resolve conflict over how the corporation should be managed. 41. Cumulative voting allows a shareholder to pool her votes for one nominee to the board. The formula for cumulative voting is: Number of shares needed to elect one director = (Number of shares outstanding ÷ Number of directors to be elected plus one) plus one. In this situation, if all five directors are elected at the same time, then Jessica needs to purchase at least 176 shares of voting stock [1,050 ÷ (5 + 1)] + 1 = 176]. If she has 176 votes, she can cast all her votes for herself. Since 176 votes is enough to guarantee her election to the board, she will be elected. 42. Courts generally pierce the corporate veil in four circumstances: (1) Failure to observe formalities, such as not holding shareholders' meetings or not keeping minute books; (2) commingling of assets of the corporation and the shareholders; (3) inadequate capitalization; and/or (4) fraud.

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Chap 33_9e_Standard 43. Since Denise signed the contract as a promoter for a company yet to be incorporated, she is personally liable for any damages sustained by the lessor. She cannot claim she was an agent for the corporation since a person can only be an agent for an existing principal. Since EVRYoung Corp. was not legally recognized as an entity at the time the lease was signed, Denise could not be the company's agent. She is personally liable on this contract unless she and the lessor had an express agreement that she would not be liable in the event the corporation was never formed. 44. Delaware offers corporations several advantages: Delaware allows a great deal of flexibility for corporations with respect to the management of the business. For example, if shareholders want to vote on a matter in writing rather than holding a meeting, Delaware law requires only a majority vote to agree. A Delaware court recently upheld the enforceability of bylaws that require shareholders who want to sue a company to file their lawsuits in Delaware, which is more convenient than being sued anyplace the company does business. Delaware has a special court called a Chancery Court that hears only corporate matters. The judges are experts in corporate law. Corporate cases in Delaware can get to trial quickly. Given this special court structure, a large volume of corporate law precedent has developed in Delaware. The precedent helps attorneys better advise their corporate clients since the law is well defined. Because very few businesses are actually based in Delaware, it is viewed as being a neutral place in which to try cases. None of the parties have a home court advantage.

45. Yes, they can sign a shareholder agreement that grants a right of first refusal for their company’s stock. Typically, with such an agreement, if a shareholder wants to sell his stock, he must first offer it to the company at the same price that the outsider has offered. If, after 30 days, the company has not agreed to buy the stock, he must then offer it to the other shareholders. Only if they also refuse to buy it within 30 days can he sell it to an outsider at the same price that he offered to the company and shareholders.

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Chap 34_9e_Standard Indicate whether the statement is true or false. 1. A fundamental problem of the modern corporation is the conflict of interests between managers, shareholders, and stakeholders. a. True b. False 2. A finding by a court that a manager’s decision had a rational business purpose does not necessarily protect the manager from a finding that he breached a duty of care. a. True b. False 3. Generally, managers that make informed decisions will not be liable even if their decision turned out badly. a. True b. False 4. Tender offers are regulated on the federal level by the National Labor Relations Act. a. True b. False 5. The Williams Act regulates the conduct of the target company in a takeover situation. a. True b. False 6. A manager who first offers an opportunity to disinterested directors or shareholders who turn it down has the right to take advantage of the opportunity herself. a. True b. False 7. A manager who has engaged in self-dealing has violated the duty of loyalty to the corporation, unless the selfdealing was entirely fair to the corporation. a. True b. False 8. Poison pill (aka shareholder rights plan) are plans that interfere with an outsider’s ability to buy company stock. a. True b. False 9. The "business judgment rule" has been replaced by “good-faith statutes” in most states. a. True b. False

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Chap 34_9e_Standard 10. States are not involved in the regulation of corporate takeovers. a. True b. False 11. A director violates the corporate opportunity doctrine if he or she competes with the corporation, unless the disinterested directors and shareholders approve of the director's actions. a. True b. False 12. Directors have the authority to manage the corporate business. a. True b. False 13. A public offer to buy a block of stock directly from shareholders is called a tender offer. a. True b. False 14. A speculator plans to acquire control of Kelp Corporation and then resell it at a profit. A speculator is sometimes known as a corporate raider. a. True b. False 15. Courts are sympathetic to managers acting in the best interests of the corporation, even when the acts are illegal. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 16. A manager used her position in the company to develop a new business the company might have pursued on its own. This is a breach of the a. duty of care. b. duty of non-competition. c. duty of loyalty. d. duty of recognition. 17. Which of the following statements is correct with respect to state efforts to offer protection to companies targeted for hostile takeovers? a. Courts offer the only legal protection to companies targeted for hostile takeovers. b. Statutory law offers the only legal protection to companies. c. Both statutory law and the state courts have provided some degree of protection for companies. d. State courts and state statutes have offered no protection for companies targeted for hostile takeovers.

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Chap 34_9e_Standard 18. Amy is on the board of directors of Computers Plus. Computers Plus is looking for a warehouse to purchase. Amy owns a warehouse. In order for Amy to sell her warehouse to Computers Plus, a. the transaction must be fair to both Amy and Computers Plus. b. the disinterested members of the board of directors must approve the transaction. c. she must resign her position on the board of directors of Computers Plus before any negotiations for the warehouse begin. d. a court must review the opportunity to determine its favorability. 19. Which of the following takeover defenses is also known as a shareholder rights plan? a. poison pill b. blank check c. supermajority voting d. greenmail 20. A staggered board of directors is an example of a. a hostile takeover maneuver. b. a special committee. c. a shark repellent. d. None of these are correct. 21. Under the Williams Act, a. the target company must state its position on a tender offer within ten days of its commencement. b. a bidder must keep a tender offer open for at least 30 business days initially. c. no shareholder may withdraw acceptance of the tender offer while the offer is still open. d. All of these are correct. 22. The business judgement rule is designed to protect a. only the manager. b. only the manager's decision. c. both the manager and the manager's decision. d. a business from a conflict of interest. 23. What type of transaction employs special committees made up of disinterested board members who review the transaction to determine if it is entirely fair to the corporation? a. hostile takeover b. self-dealing c. rational business purpose d. corporate opportunity

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Chap 34_9e_Standard 24. Which of the following describes the duty of loyalty? a. It requires managers to make decisions they reasonably believe to be in the best interest of the corporation. b. It prohibits managers from making a decision that benefits them at the expense of the corporation. c. It requires consideration of the interests of the surrounding community. d. It requires using care that an ordinarily prudent person would take in a similar situation. 25. In which case did the court find managers liable, even though the special committee and shareholders approved a self-dealing transaction? a. Anderson v. Bellino b. In re Dole Food Co. c. Unocal Corp. v. Mesa Petroleum Co. d. RSL Communications v. Bildirici 26. On the day a tender offer begins, a. greenmail must be sent to the SEC. b. a bidder must file a disclosure statement with the SEC. c. assets of the target corporation must be locked up until an inventory is completed. d. the SEC issues a binding order to the target company to file audited financial statements to the bidder. 27. Which of the following is correct concerning antitakeover efforts? a. Most states have passed laws to deter hostile takeovers, but these statutes have not totally eliminated hostile takeovers. b. Federal statutes have been more effective than state statutes in eliminating hostile corporate takeovers. c. The most effective federal statute has been the Poison Pill Act. d. The Williams Act has been the most effective legislation in regulating the actions of the target company. 28. Courts have long ruled that corporate directors and officers owe a fiduciary duty to a. the corporation only. b. the corporation and shareholders. c. shareholders only. d. society at large. 29. Which of the following is a fundamental goal of shareholders? a. to have the business survive b. to keep their jobs c. to have an immediate increase in stock price d. to have the business provide jobs

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Chap 34_9e_Standard 30. What is greenmail? a. a takeover defense in which the target buys back the shark's stock at a premium price b. a takeover defense where the target sells off the assets that the takeover company most wants c. a takeover strategy in which one company buys stock from the shareholders of the target firm d. a takeover defense where the target effectively limits how large a block of stock an investor can buy 31. Alex is a director of ABC, Inc. Alex wants to personally make a major purchase from Bravo Co. If it knew of the opportunity, ABC also might be interested in making that same purchase. Alex must a. advise the boards of both corporations of his conflict of interest. b. first offer the opportunity to make the purchase to the disinterested directors of ABC or its shareholders. c. resign from the board of directors. d. abandon the idea of making the purchase himself. 32. Courts agree in principle that any decision that has no rational business purpose a. automatically violates the business judgement rule. b. can be challenged and will be automatically voided. c. is automatically in violation of the Wrigley Act. d. means the manager will automatically be fired. 33. Which of the following is the most appropriate term to use when describing management's duty to its shareholders? a. official duty b. legal duty c. fiduciary duty d. statutory duty 34. Antitakeover tactics include all EXCEPT a. blank check preferred stock. b. negative tender offers. c. greenmail. d. poison pills. 35. For the business judgment rule to apply, the manager must a. be trying to resolve a conflict of interest. b. have exercised extraordinary care in resolving the situation. c. have acted in the best interests of the corporation. d. prove he or she was aware of the decision being made.

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Chap 34_9e_Standard 36. The Model Business Corporation Act states: “All corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation managed by or under the direction of, its a. shareholders.” b. officers.” c. board of directors.” d. executive committee.” 37. The business judgment rule accomplishes all of the following EXCEPT a. permits directors to do their jobs. b. keeps judges out of corporate management. c. encourages directors to serve. d. totally protects managers from all liability. 38. In the late 1960s, a shareholder of the company that owned the Chicago Cubs baseball team sued the company because the directors refused to install lights in Wrigley Field. The court decided that the directors a. had a rational purpose for not installing lights and were not liable for doing anything improper. b. were not protected by the business judgment rule. c. had not acted with any rational purpose and were liable to its shareholders for damages caused by their actions. d. had the right to make decisions for the team without any concern for the desires of the shareholders. 39. Management's duty to have a rational business purpose, avoid illegal behavior, and make informed decisions refers to its a. duty of care. b. duty of loyalty. c. duty of openness. d. duty of fairness. 40. RayCorp offers to buy out MegaCorp by paying $69 per share. LandCo, who also wants to buy MegaCorp, offers to pay $75 per share. When the bidding process is finally over, RayCorp has offered $85 per share and LandCo has offered to pay $90 per share. MegaCorp agrees to sell to RayCorp on grounds that, all things considered, the takeover by RayCorp would be better for the business. LandCo claims that MegaCorp should have sold the company to it since it was the highest bidder. Is LandCo correct? a. Yes. This is a breach of duty. MegaCorp must sell the company to the highest bidder; it cannot give preferential treatment to a lower bidder. b. No. This is covered by the Williams Act. c. No. The directors have broad discretion in deciding to whom to sell the company. d. No. MegaCorp is acting in good faith by considering all things, not just the offering price of the shares.

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Chap 34_9e_Standard 41. One of the directors of Independent Pallet Mill purchases 100 acres of timberland. In order for him to sell the timber from this land to Independent, what must he do? If he does not act properly in this situation, what duty would he violate and what would be the result?

42. Discuss the purposes of the business judgment rule.

43. Major Corporation wants to acquire control of Forte Company. What are some legal steps Forte can take to resist a hostile takeover?

44. List and discuss the three ways to acquire control of a corporation.

45. What is the definition of the business judgment rule?

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Chap 34_9e_Standard Answer Key 1. True 2. False 3. True 4. False 5. False 6. True 7. True 8. True 9. False 10. False 11. True 12. True 13. True 14. True 15. False 16. c 17. c 18. b 19. a 20. c 21. a 22. c 23. b 24. b 25. b 26. b

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Chap 34_9e_Standard 27. a 28. b 29. c 30. a 31. b 32. a 33. c 34. b 35. c 36. c 37. d 38. a 39. a 40. a 41. The transaction will be valid if the disinterested members of the board of directors approve the transaction, the disinterested shareholders approve it, or the transaction is entirely fair to Independent. If the director does not act properly, he would be violating the duty of loyalty to his company. Self-dealing means that a manager makes a decision benefiting either himself or another company with which he has a relationship. If a manager engages in selfdealing, the business judgment rule no longer applies. This does not mean the manager is automatically liable to the corporation or that the decision is automatically void. It just means a court will scrutinize the deal more carefully. 42. The business judgment rule is designed to accomplish three primary goals: 1. It permits directors to do their job. If directors were afraid they would be liable forevery decision that led to a loss, they would never make a decision, or at leastnot a risky one. 2. It keeps judges out of corporate management. Shareholders would generally preferthat their investments be overseen by experienced corporate managers, not judges.Without the business judgment rule, judges would be tempted, if not required, tosecond-guess managers’ decisions. 3. It encourages directors to serve. No one in his right mind would serve as a directorif he knew that every decision was open to attack in the courtroom. Even if thecompany pays the legal bills, who wants to spend years in litigation?

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Chap 34_9e_Standard 43. Target companies have a variety of options available to them to assist them in resisting a hostile takeover. The target company can lock up the assets of the company by selling off the assets that the shark most wants. If the bidder is simply after a quick profit, the management of the target company can engage in "greenmail" and offer to buy back its own stock from the bidder for, say, 30 percent more than what the bidder paid. Use a poison pill as a provision attached to the acquiring and/or transfer of stock that makes the stock much more expensive or at least less desirable to obtain. Often a company will have its charter changed so that the bidder would have to offer one of its own company shares for every share purchased from the target company's shareholders. The use of staggered board of directors is allowed, and the result of this is that it could take several years for the acquiring company to gain total control of the board. The company could require supermajority voting before a transfer could take place, and/or the company could elect to sell the company to someone else before the bidding company can complete its buyout. Some companies have amended their bylaws to provide that anyone who receives payment from an activist is disqualified from serving as a director. Some companies have blank check preferred stock in their charters. When this stock is authorized, its rights and other characteristics are left blank, to be filled in by the board of directors upon issuance. It is like an unloaded gun that can be armed by the board whenever a shark threatens.

44. Generally, the three methods of acquiring a corporation are: a. Buy the company's assets. Such sales must be approved by the acquired corporation's board and shareholders. b. Merge companies into one new corporation. In a merger, the acquired company ceases to exist and it is absorbed into the acquiring company. This type of acquisition also must be approved by the shareholders and board of directors of the target company. c. Buy the shares of the acquired corporation from the shareholders. This method is called a tender offer. Approval of the board of directors of the target company is not strictly necessary. A tender offer is called a hostile takeover if the board of the target company resists. 45. The business judgment rule states that managers are not liable for decisions they make in good faith if (1) it is done without a conflict of interest; (2) it is done with the care that an ordinary prudent person would take in a similar situation; and (3) it is done in a manner they reasonably believe to be in the best interests of the corporation.

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Chap 35_9e_Standard Indicate whether the statement is true or false. 1. A proxy is a vote that is mailed in, like an absentee ballot. a. True b. False 2. Larry has owned $25,000 of stock in E-prise, Inc. for the past 18 months. Under SEC rules, Larry can require that one proposal be placed in the company's proxy statement to be voted on at the shareholder meeting. a. True b. False 3. Alberta is not employed by E-prise, Inc. but she is a member of E-prise's board of directors. Alberta is an outside director. a. True b. False 4. A derivative lawsuit is filed by a shareholder of the corporation if their own rights have been harmed. a. True b. False 5. In reality, the officers of the large corporations have a great deal of influence on who will be nominated and elected as directors. a. True b. False 6. Overall, directors get paid very little for the amount of work they perform. a. True b. False 7. Minority shareholders have no right to overturn an ordinary business transaction between the corporation and a controlling shareholder. a. True b. False 8. Under both state and federal law, a shareholder can generally revoke a proxy at any time. a. True b. False 9. The NYSE and NASDAQ both require that the members of the nominating committee be independent directors who are less likely to simply go along with whatever the CEO wants. a. True b. False

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Chap 35_9e_Standard 10. Shareholders are permitted to sue the corporation directly only if their own rights have been harmed. a. True b. False 11. In a derivative lawsuit, any proceeds awarded by the court must be paid to the corporation, not the shareholders themselves. a. True b. False 12. A corporation is required to have at least one class of stock with voting rights. a. True b. False 13. If a public company decides not to solicit proxies for a shareholder meeting, it need not give shareholders the information that would have been required in a proxy statement. a. True b. False 14. Matt, a shareholder, can run for director by simply placing his name on the company’s proxy statement. a. True b. False 15. Controlling shareholders have no fiduciary responsibility to minority shareholders. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 16. At least once every three years, companies must take a nonbinding shareholder vote on the compensation of the five highest-paid executives. This is referred to as a. clawback pay action. b. voting out the directors. c. activist investing. d. say-on-pay. 17. A corporation must obtain shareholder approval before the company a. sells off a major portion of its business to another company. b. opens additional offices. c. hires or fires a significant number of employees. d. expands into foreign markets.

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Chap 35_9e_Standard 18. Veritas, Inc. is planning its annual shareholder meeting on June 15. The company a. need not send notices of the meeting to shareholders since it is the regularly scheduled, annual meeting, which Veritas always holds on the third Thursday of June. b. must send notices to everyone who owns stock as of January 1. c. must send notices to everyone who owns stock on the “record date,” which can be no more than 70 days before the meeting. d. is not required to have an annual shareholders meeting if the company is listed only on the NYSE. 19. Under the Model Act, who has the right to call a special meeting of the shareholders to vote on an emergency issue that cannot wait until the next annual meeting? a. the board of directors and shareholders who own at least 10 percent of a company's stock b. any group of shareholders that is at least 25 in number and holds 25 percent of a company's stock c. the board of directors and the CEO d. only the board of directors 20. Luella just purchased five shares of common stock in TriColor, Inc. for $250. Luella has the right to a. manage the day-to-day business of the corporation. b. set executive compensation. c. require that a proposal be placed in the company’s proxy statement to be voted on at the shareholder meeting. d. vote to elect directors. 21. All of the following are shareholder rights EXCEPT a. the right to manage the firm. b. the right to vote. c. the right to information. d. the right to dissent. 22. Benjamin sits on the board of directors of Litman Corporation. He has the support of only 30 percent of Litman's shareholders. Benjamin is best characterized as a(n) a. independent director. b. zombie director. c. inside director. d. outside director. 23. What is an inside director? a. a shareholder charged with the illegal act of insider trading b. a member of the board of directors who is also a board member of a competing firm c. a shareholder who is a board member of a competing firm d. a member of the board of directors who is also an employee of the corporation

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Chap 35_9e_Standard 24. Quick Supply House breached a contract with MegaCorp. The breach resulted in the loss of a great deal of money to MegaCorp. The board of directors for MegaCorp vote not to sue the supply house since it believes the legal costs would be more than it would probably recover. If a group of shareholders wish to sue the supply house, this would a. be a type of direct lawsuit. b. have to be a derivative lawsuit. c. be a settlement lawsuit. d. be an SEC lawsuit. 25. A public company instituted a clawback policy. What does this mean? a. The company can require the CEO and CFO to reimburse the company for any bonus or profits they received from selling company stock within a year of the release of flawed financials. b. At least once every three years, companies must take a nonbinding shareholder vote on the compensation of the five highest-paid executives. c. The company is prohibited from expelling shareholders unless the firm pays a fair price for the minority stock and the expulsion has a legitimate business purpose. d. The company has decided that the compensation level of its executives is not in the company's best interests, so it reduces all executive pay levels by a certain percentage. 26. Charles owns 1,000 shares of stock in Temperan, Inc. Charles wants to obtain corporate records including the corporation's minute book and accounting records. Under the Model Act, Charles is entitled to this information if he requests it in good faith and a. he has a proper purpose. b. he owns at least 1 percent of the company or $2,000 of stock. c. he is an employee of Temperan. d. he is a controlling shareholder. 27. Shareholders must begin the litigation process by asking the board of directors to bring suit, an action called a. proxy access. b. proper purpose. c. making demand. d. benchmarking.

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Chap 35_9e_Standard 28. Meredith, a shareholder in Quarto, Inc., notified Quarto's board of directors that the corporation had been wronged and asked the board to bring a lawsuit in the corporation's name. In response to Meredith's demand, the board a. can file suit on behalf of the corporation. b. can reject Meredith's demand or simply fail to respond. c. can appoint a Special Litigation Committee. d. can do any of these options. 29. Mariposa is a shareholder of Tuscan Corporation. If she is acting in good faith, under the Model Act she has the right to a. inspect the company's accounting records. b. vote on a merger proposal. c. examine the company's minute book. d. All of these are correct. 30. In a derivative lawsuit, the named plaintiff a. is the corporation on whose behalf the lawsuit is filed. b. is the particular class of shareholders primarily injured by the wrong. c. consists of all the corporation's shareholders. d. is the board of directors for the corporation. 31. Ev-R-Green Co., a private corporation, decides to sell substantially all of the company’s assets. Under the Model Act and many state statutes, a. the sole remedy for dissenting shareholders is to sell their stock on the stock exchange. b. the board must first get unanimous shareholder approval for this fundamental change. c. Ev-R-Green must buy back, at fair value, the stock of any shareholders who object to the decision. d. the company may buy back, at fair value, the stock of any shareholders who object to the decision or the shareholders who object may receive the right of first refusal to purchase corporate assets. 32. A "fundamental change" in a corporation would be illustrated by a. E-prise, Inc. merging with Vitta Corporation. b. E-prise electing new members to the board. c. Vitta Corporation adding a new product to its product line. d. Vitta Corporation setting the date for its annual meeting. 33. The percentage increase in stock price appreciation and dividends is referred to as a. net returns on invested capital. b. price/earnings ratio. c. total shareholder return. d. financial leverage ratio.

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Chap 35_9e_Standard 34. A corporation's obligation to voluntarily provide shareholders with financial information a. depends on whether the company is publicly or privately held. b. depends on the requirements of the Model Business Corporation Act. c. is extensive and is carefully regulated by the SEC if the company is privately held. d. depends on the ruling of the board of directors. 35. The proceeds, if any, of a derivative lawsuit go to a. the shareholders of the corporation. b. the shareholders who actually filed the lawsuit. c. the board of directors. d. the corporation. 36. Lucy owns 10 shares of stock in Quamba, Inc. Lucy wishes to place a proposal in a company's proxy statement to be voted on at the shareholders' meeting. Pursuant to the SEC rules, before Lucy is allowed to place her proposal on the proxy statement, she must a. have owned continuously for one year at least 1 percent of the company and $25,000 or more of the stock. b. have owned continuously for one year at least 1 percent of the company or $25,000 or more of the stock. c. have the permission of the board of directors. d. have been a stockholder for at least two years. 37. Maureen, a shareholder of Metra, Inc., is unhappy with how the corporation is being managed. Maureen wants the company to sell off its unproductive divisions. Which statement is correct? a. If Maureen owns at least 1 percent or $2,000 of Metra's stock, she can require the company to include her proposal in its proxy statement. b. If Maureen has a proper purpose, she can require the company to include her proposal in its proxy statement. c. If Maureen can show cause, she can require the company to automatically sell off its unproductive divisions. d. Maureen cannot require that the company put her proposal to sell off unproductive divisions on its proxy statement. 38. Kian is the chief financial officer of Yonkka, Inc. He is also a member of Yonkka's board of directors. Kian is a. an inside director. b. an outside director. c. holding an illegal position. d. a public director.

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Chap 35_9e_Standard 39. When can shareholders sue a corporation directly? a. only if their own rights have been violated b. only if the corporation has been wronged c. only if they hold at least 10 percent of company stock d. at any time they wish 40. The percentage of voters who must be present for a meeting to count is referred to as a. a plurality. b. simple majority. c. a quorum. d. a proxy. 41. Vernon and David are the controlling shareholders in E-treme, Inc. Discuss the obligations that Vernon and David owe to the minority shareholders.

42. Loraine is a shareholder of Taley Corp. She would like to inspect and copy the company's minute book, accounting records, and shareholder lists. Under what circumstances is Loraine allowed to inspect or copy corporate records?

43. Kris, a shareholder of E-Max, Inc., claimed that the business was being mismanaged. Kris notified the board of directors that the corporation has been wronged and asked the board to bring suit in the name of the corporation directly. In response to Kris's demand, what actions may the board take? What could Kris's response be to each alternative?

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Chap 35_9e_Standard 44. Explain the ways in which the federal government has tried to change the landscape of corporate governance and executive compensation.

45. List and describe the various rules that apply to fundamental corporate changes requiring shareholder approval.

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Chap 35_9e_Standard Answer Key 1. False 2. True 3. True 4. False 5. True 6. False 7. False 8. True 9. True 10. True 11. True 12. True 13. False 14. False 15. False 16. d 17. a 18. c 19. a 20. d 21. a 22. b 23. d 24. b 25. a 26. a

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Chap 35_9e_Standard 27. c 28. d 29. d 30. a 31. c 32. a 33. c 34. a 35. d 36. b 37. d 38. a 39. a 40. c 41. As controlling shareholders, they may not enter into unfair business transactions with the corporation; they have a fiduciary duty to minority shareholders; they may not exclude minority shareholders from beneficial arrangements involving stock; and they are prohibited from expelling minority shareholders, unless the expulsion is done for a legitimate business purpose and a fair price is paid for their stock. 42. A company's obligation to provide shareholders with financial information depends upon whether it is publicly or privately held. Even if a company is not required to volunteer information, shareholders have the right to obtain certain information upon request. Under the Model Business Corporation Act, Loraine has a legal right to inspect and copy corporate records if she acts in good faith and has a proper purpose. A "proper purpose" is one that aids the shareholder in managing and protecting her investment. If she believes the company is being mismanaged and wants a shareholder list to see if others will join her in a lawsuit against the company, the company must make records available to her. If, on the other hand, she only wants a list of shareholders to obtain names/addresses of potential customers for her new business, this would not be a proper purpose. 43. The board has three choices: 1. It can agree with the shareholders and file suit on behalf of the corporation. In this case, the shareholders cannot bring their own derivative action. 2. The board can reject the demand or fail to respond. To proceed with a derivative suit, the plaintiffs must convince the court that the board has violated the business judgment rule. 3. The board can appoint a Special Litigation Committee. If the SLC determines that the lawsuit is without merit, the court must generally dismiss the case unless the shareholders can show the rejection was uninformed or not in good faith. Copyright Cengage Learning. Powered by Cognero.

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Chap 35_9e_Standard 44. The federal government has tried to change the landscape of corporate governance and executive compensation, in the following ways: Lead Director. The independent members of the board are required to meet regularly on their own, without management. About half of the companies in the S&P 500 have appointed a so-called lead director to run these meetings and serve as a counterweight to the CEO chair. Disclosure. The SEC now requires more complete disclosure of executive compensation. This disclosure includes the relationship between financial performance and executive compensation as well as the ratio between the CEO’s total pay and the median total compensation for all other company employees. Clawbacks. A public company must establish a clawback policy, whereby it can require the CEO and CFO to reimburse the company for any bonus or profits they received from selling company stock within a year of the release of flawed financials. Say-on-pay. At least once every three years, companies must take a nonbinding shareholder vote on the compensation of the five highest-paid executives. 45. A corporation must seek shareholder approval before undergoing any fundamental changes. These are the specific rules: Mergers. As a general rule, one corporation cannot merge with another unless a majority of both sets of shareholders approve. This rule is always true for shareholders of the acquired company because they are always affected by the merger. But shareholders of the acquiring company vote only if the merger will have a major impact on their company. Sale of assets. Shareholders do not have to approve routine sales of assets, but a company cannot sell “all or substantially all” of its assets without shareholder approval. Dissolution. A corporation cannot voluntarily dissolve without shareholder approval. However, the state or a court can involuntarily dissolve a corporation regardless of shareholder views. Amendments to the charter. Directors propose amendments to the charter, but these amendments are not valid unless approved by shareholders. Amendments to the bylaws. Both directors and shareholders have the right to amend the bylaws.

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Chap 36_9e_Standard Indicate whether the statement is true or false. 1. Shoe Sunshine, Inc. filed for bankruptcy protection under Chapter 11 and submitted a plan of reorganization within 120 days after filing for relief. Two of the classes of creditors voted against the plan. However, the bankruptcy judge considered the plan to be feasible, fair, and in the best interests of the creditors; the judge approved it in spite of these creditors' objections. This action by the judge is called a "cramdown." a. True b. False 2. Bankruptcy is regulated by federal law. a. True b. False 3. Generally, filing bankruptcy stops the collection activity of creditors. a. True b. False 4. Peggy’s credit card debts are mounting as her costs of insurance and fuel have dramatically increased and her income, from sporadic freelance jobs, has dropped. Chapter 13 of the Bankruptcy Code will allow her to reorganize her debt while she keeps most of her assets. a. True b. False 5. Brad was having financial difficulties and thought bankruptcy might be in his future. He transferred his sports car to his brother with the agreement that if he didn’t file for bankruptcy within the next 18 months, his brother would return the car to him. Brad did file for bankruptcy in 10 months. The bankruptcy trustee can void the transfer and bring the car back into Brad’s estate for the purpose of providing assets for Brad’s creditors. a. True b. False 6. Individual debtors are allowed to keep some assets in a Chapter 7 bankruptcy. a. True b. False 7. Under all chapters of the Bankruptcy Code, most of the debtor’s assets are distributed to creditors and the debtor has no obligation to share future earnings with creditors. a. True b. False 8. The Bankruptcy Code uses the term “debtor” to refer to a person who cannot pay his debts. a. True b. False 9. Chapter 7 bankruptcy petitions may only be filed voluntarily. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 36_9e_Standard 10. Alimony and child support obligations are considered priority claims. a. True b. False 11. In a Chapter 13 bankruptcy, creditors cannot force a debtor into bankruptcy; nor can they vote to confirm or reject a plan of reorganization. a. True b. False 12. Creditor claims are divided into classes, and the highest class must be satisfied in full before going to the next category. a. True b. False 13. In Chapter 11 bankruptcy, only the debtor may propose plans of reorganization. a. True b. False 14. Francesca cannot serve as a trustee in a bankruptcy case because she is not a lawyer. a. True b. False 15. Chapters 11 and 13 are liquidation chapters. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 16. What is the "gap period"? a. the period between the time a debtor files for bankruptcy and the time that he is granted discharge b. the period of time that creditors must wait to be paid once a plan of payment is approved c. the period between the time that a creditor files for an involuntary petition and the court issues the order for relief d. the period between the time a debtor files for bankruptcy and the time that the plan of payment is approved 17. Debts that cannot be discharged in bankruptcy include all EXCEPT a. money owed for alimony. b. income taxes for three years prior to filing. c. money owed to utility companies. d. money obtained fraudulently.

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Chap 36_9e_Standard 18. Chapter 7 bankruptcy is also known as a. reorganization. b. reaffirmation. c. voluntary bankruptcy. d. straight bankruptcy. 19. Which of the following statements concerning a Chapter 11 reorganization plan is TRUE? a. A reorganization plan will be confirmed by the court only if a majority of each class of creditors votes in favor of the plan. b. A reorganization plan can be confirmed by the court over objections of some creditors if the court determines that the plan is feasible and fair. c. Only the bankruptcy court has the authority to confirm or reject the reorganization plan. Creditors do not have a right to vote on the plan. d. A reorganization plan binds only the debtor and not the creditors. 20. Ramona has received a discharge in bankruptcy but wants to reaffirm a debt to her sister. To be valid, the reaffirmation a. will be scrutinized by the court to make sure her sister has not unfairly pressured Ramona. b. will be automatically disallowed because allowing Ramona to promise to pay a discharged debt would be contrary to the goals of the bankruptcy proceedings. c. will be automatically allowed if Ramona voluntarily chooses to make it. d. must clearly disclose that Ramona has the right to rescind at any time since the debt was already discharged. 21. Under what circumstances might the court reject a debtor's Chapter 13 plan? a. The plan requires future earnings to pay off debts. b. The plan promises to pay all secured and priority claims. c. The plan anticipates paying the unsecured creditors less than what they would get under Chapter 7. d. The plan treats all unsecured classes equally. 22. A form stating the name of an unsecured creditor and the amount of the claim against the debtor is called a(n) a. order for relief. b. automatic stay. c. proof of claim. d. reaffirmation form. 23. Jun-seo owes $20,000 in unsecured claims to 15 different creditors, and he has generally not been paying debts that are due. Two of Jun-seo's creditors want to force him into bankruptcy by filing an involuntary petition; the other creditors do not agree. Which of the following statements is correct about this situation? a. An involuntary petition cannot be filed because Jun-seo is not that deeply in debt. b. An involuntary petition cannot be filed because not enough creditors want to force Jun-seo into bankruptcy. c. An involuntary petition can be filed because Jun-seo is not making his payments in a timely way. d. An involuntary petition can be filed because any one of Jun-seo's creditors can force him into bankruptcy. Copyright Cengage Learning. Powered by Cognero.

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Chap 36_9e_Standard 24. Grand Lighting Co. has filed a petition for voluntary bankruptcy under Chapter 7 of the Code. Which of the following will prohibit creditors from collecting debts that Grand Lighting incurred before the petition was filed? a. an automatic stay b. a proof of claim c. a voluntary petition d. a discharge statement 25. Agnes plans to file for bankruptcy under Chapter 7. One month prior to filing, Agnes gives Joe's Filling Station $700 to apply to her gas bill. Joe has been so kind to let her charge the gas she needed for her car over the past year. The bankruptcy trustee appointed to the case a. can cancel the payment to Joe as a fraudulent transfer. b. cannot cancel the payment to Joe because it is payment for an existing debt. c. cannot cancel the payment to Joe because he is not an insider. d. can cancel the payment to Joe as a voidable preference. 26. Who operates the business and develops a plan of reorganization in Chapter 11 bankruptcies? a. the trustee b. the debtor in possession c. the state courts d. the creditors' committee 27. Who is responsible for gathering the bankrupt's assets and dividing them among creditors? a. the executor b. the state court c. the creditors' committee d. the trustee 28. Iris received a discharge under a Chapter 7 bankruptcy. She cannot receive another discharge under Chapter 7 for at least a. six years after the prior filing. b. eight years after the prior filing. c. ten years after the prior discharge. d. She cannot file another Chapter 7, but could file a Chapter 11 or 13 bankruptcy. 29. Forever Yours, Inc. has a secured and perfected security interest in Sally's big-screen TV. On the filing date of Sally's Chapter 7 petition, the balance of the debt owed to Forever Yours is $2,000. The value of the TV is estimated at $1,500. This means that Forever Yours a. is secured for the entire debt, $2,000. b. is unsecured for $500, the excess of the debt over the value of the TV. c. has a high priority claim of $500. This means that Forever Yours, Inc. will be allowed $500 worth of other unsecured property before other unsecured creditors get anything. d. is unsecured for the entire debt.

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Chap 36_9e_Standard 30. Andy's business is not able to pay its debts, and the prospects for its finances to improve are slim. Andy decides not to continue the business. In this case, Andy should file a voluntary petition for which type of bankruptcy? a. Chapter 7. b. Chapter 11. c. Chapter 13. d. Chapter 12. 31. Link negligently ran his car into John, causing $50,000 in injuries. Link was intoxicated at the time of the accident. Can Link discharge this debt in bankruptcy? a. Yes, claims based on negligence are dischargeable. b. Yes, as long as he didn't intend to hit John's car. c. No, such claims are not dischargeable in bankruptcy. d. No, because Link breached a fiduciary duty. 32. When a debtor no longer has an obligation to pay a debt, that debt has been a. terminated. b. revoked. c. completed. d. discharged. 33. Kathleen filed for voluntary bankruptcy, and the automatic stay went into effect. The automatic stay a. acts to automatically discharge Kathleen's debts. b. prohibits creditors from collecting debts against Kathleen that arose before she filed bankruptcy. c. stops only secured creditors from taking any act to collect, assess, or recover a claim against Kathleen that arose before she filed bankruptcy. d. stops creditors from trying to collect from Kathleen, but it does not stop them from filing lawsuits against her. 34. Creditors of Northern Hydraulics file an involuntary bankruptcy petition against the company, and the petition is approved. What is true of Northern Hydraulics? a. Northern Hydraulics has at least $10,425 in debts. b. There are at least 12 creditors. c. A custodian has automatically been appointed. d. It must make all the filings necessary under a voluntary petition. 35. Under the federal Bankruptcy Code, the exemption amount for the debtor's personal residence is a. $23,675. b. $55,200. c. unlimited. d. $125,000.

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Chap 36_9e_Standard 36. In a voluntary petition, a claim of exemptions lists a. the names and addresses of all creditors. b. all assets that the debtor is entitled to keep. c. the debtor's job, income, and expenses. d. the debtor's assets and debts. 37. The correct order of payment of claims from the debtor's estate would be a. secured claims, priority claims, unsecured claims. b. secured claims, unsecured claims, priority claims. c. priority claims, secured claims, unsecured claims. d. priority claims, unsecured claims, secured claims. 38. Which is an example of a priority claim? a. alimony b. income tax c. child support d. All of these are correct. 39. A trustee can void any transfer that meets all of the following requirements EXCEPT a. if the transfer was to a creditor of the debtor. b. if the pre-petition payment was made in the ordinary course. c. if the transfer was used to pay an existing debt. d. if the debtor's liabilities exceeded assets at the time of the transfer. 40. Which of the following is a primary goal of the Bankruptcy Code? a. to preserve as much of the debtor's property as possible b. to pay off the debtor's creditors as quickly as possible c. to secure debt counseling for the debtor d. to keep the debtor from falling behind in payments 41. Artistic Framing, a business with $120,000 of unsecured debt, needs to file for bankruptcy but wants to continue in business. Discuss what chapter of the Bankruptcy Code should be used, and explain the plan of reorganization that should be used.

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Chap 36_9e_Standard 42. When Dudley files his Chapter 7 petition, he lists the following debts: a. $25,000 in back child support and alimony b. $15,000 for liabilities incurred after drinking and driving c. $10,000 for past-due student loans d. $5,000 for past-due rent to his landlord e. $550 for a past-due phone bill How will each of these debts be treated by the bankruptcy court.

43. What are the three main purposes of the federal Bankruptcy Code? How are these purposes supported and fostered in the Code?

44. Karen has filed for bankruptcy. Who has the authority to confirm or reject a plan of payment, and what factors will be considered when deciding whether to approve a repayment plan under Chapter 13?

45. Mark and Cynthia work for Bryson Supply Co. If the company files for Chapter 7 bankruptcy before paying their last month of wages and benefits, will they be able to recover anything from the company?

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Chap 36_9e_Standard Answer Key 1. True 2. True 3. True 4. False 5. True 6. True 7. False 8. True 9. False 10. True 11. True 12. True 13. False 14. False 15. False 16. c 17. c 18. d 19. b 20. a 21. c 22. c 23. b 24. a 25. d 26. b

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Chap 36_9e_Standard 27. d 28. b 29. b 30. a 31. c 32. d 33. b 34. d 35. a 36. b 37. a 38. d 39. b 40. a 41. If Artistic wants to continue in business, it should file under a reorganization chapter (Chapters 11 or 13) rather than a liquidation chapter (Chapter 7). Although its purpose is to rehabilitate the debtor through reorganization, Chapter 13 is available only to individual debtors with a regular source of income. It is not available to businesses. Chapter 11 is the appropriate chapter for Artistic. Artistic becomes the debtor in possession and, in effect, serves as trustee. Once the bankruptcy petition is filed, an automatic stay goes into effect to provide the debtor with temporary relief from creditors. The next stage is to develop a plan of reorganization that provides for the payment of debts and the continuation of the business. For the first 120 days (which the court can extend up to 18 months), the debtor has the exclusive right to propose a plan. If the debtor fails to file a plan, or if the court rejects it, then creditors and shareholders can develop their own plan. 42. Certain debts are never discharged, and the debtor is fully liable for the debts even after receiving a discharge from the bankruptcy court. These types of debts are generally denied a discharge based on public policy reasons. In this example, the child support and alimony, the liabilities for operating a motor vehicle while under the influence, and school loans guaranteed by the government (unless undue hardship can be established) are nondischargeable debts. Bankruptcy has no effect on these debts. The unpaid rent and phone bill generally will be discharged. 43. The primary goals of the Bankruptcy Code are: (1) To preserve as much of the debtor's property as possible. The Code requires debtors to disclose all of their assets and prohibits them from transferring assets immediately before a bankruptcy filing. (2) To divide the debtor's assets fairly between the debtor and creditors. The Code attempts to balance the creditor's desire to be paid with the debtor's right to get on in life with a fresh start. (3) To divide the debtor's assets fairly among creditors. Creditors will all be treated fairly, according to established rules.

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Chap 36_9e_Standard 44. The court has the sole authority to confirm or reject the plan of payment. Creditors have no voting rights. However, the court will ensure the following: The creditors have the opportunity to voice their objections at a hearing, All of the unsecured creditors receive at least as much as they would have under a Chapter 7 filing, The plan is feasible and the bankrupt will be able to make the promised payments, The court must have a good reason to allow a plan to extend beyond three years and in no event can it last longer than five years, and The debtor is acting in good faith, making a reasonable effort to pay obligations.

45. One goal of the Bankruptcy Code is to ensure creditors are paid in the proper order. The Code places all claims into one of three classes: secured claims, priority claims, and unsecured claims. Secured claims are paid in full before priority claims are paid. Payments to employees for back wages and benefits for work performed during the 180 days prior to the filing of bankruptcy are in the class of priority claims. If Bryson has enough assets to pay all its secured claims and its priority claims, Mark and Cynthia will each be able to recover up to $12,850 for the work performed and pension, health, or life insurance plans for work performed during the 180 days prior to the date of Bryson’s petition. There are subcategories of priority claims, and each subcategory must receive full payment before the next subcategory receives anything. If there are not enough funds to pay a whole subcategory, the claimants in that subcategory receive pro rata shares. The priority subcategories, in order, include alimony and child support, administrative expenses, gap expenses, payments to employees, employee benefit plans, consumer deposits for goods to be purchased, taxes, and claims for injuries caused by a bankrupt driving under the influence.

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Chap 37_9e_Standard Indicate whether the statement is true or false. 1. The "tipper" of inside information can be convicted of a crime, but the "tippee" cannot. a. True b. False 2. Premier Enterprises sold Watson unregistered stock which was not exempt. The 1933 Act imposes liability on Premier, and Watson can demand rescission if he still owns the stock. a. True b. False 3. A control security is stock which gives the owner a controlling interest in the company. a. True b. False 4. Section 10(b) and the SEC’s Rule 10b-5 prohibit fraud in connection with the purchase and sale of specific security. a. True b. False 5. Under SEC Rule 147A, an issuer is not required to register securities that are sold only to residents of the state that is the issuer’s principal place of business. a. True b. False 6. After the SEC completes its review of a preliminary registration statement, it sends the issuer a comment letter setting forth changes that must be made. a. True b. False 7. The 1934 Act requires companies with a class of stock that is publicly traded to make ongoing, regular disclosure with the SEC. a. True b. False 8. To recover for an alleged violation of SEC Rule 10b-5, a plaintiff is required to prove reliance on a misstatement or omission relative to the purchase of the security. a. True b. False 9. Securities issued by banks are exempt from SEC registration. a. True b. False

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Chap 37_9e_Standard 10. Any securities offerings covered by the NSMIA must comply with state securities laws. a. True b. False 11. Regulation Crowdfunding permits privately held companies to sell up to $1 million in securities in any 12-month period provided they meet a number of criteria. a. True b. False 12. The Securities Act of 1933 established the Securities and Exchange Commission. a. True b. False 13. An offering under Regulation A (Reg A) is a small public offering, with a maximum value of $50 million in any 12-month period. a. True b. False 14. Securities offered and sold entirely within one state by a corporation of that state are exempt from registration. a. True b. False 15. Typically, exemptions under the 1933 Act are based on either the type of security or the type of transaction. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 16. Under Section 10(b) of the 1934 Act, all of the following would be considered a "corporate insider" EXCEPT a. the janitorial company who cleans the corporate offices. b. a major shareholder of the corporation. c. a member of the board of directors. d. All of these are correct. 17. Under the 1934 Act, an issuer must register with the SEC if a. it has not completed a public offering under the 1933 Act. b. its securities are not going to be traded on a national exchange. c. it will not be providing investors with a prospectus. d. it has at least 2,000 shareholders and total assets that exceed $10 million.

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Chap 37_9e_Standard 18. Felicity brought a lawsuit under Section 11 of the 1933 Act against Mojo Corp. What will Felicity have to prove in order to prevail? a. only that she relied on the registration statement. b. that Mojo was negligent in preparing the registration statement. c. that there was a material misstatement or omission in the registration statement, and she lost money. d. that Mojo intentionally tried to deceive investors. 19. Section 16 of the 1934 Act addresses what type of insider trading? a. classic insider trading b. tipping c. short-swing trading d. takeovers 20. If the final registration statement contains a material misstatement or omission, the purchaser of the security can recover damages from a. everyone who signed the registration statement. b. the company's directors, but not the chief officers. c. the experts who signed the registration statement, but not any other parties. d. the issuer of the security, but not the company’s directors or chief officers. 21. Which of the following represents a valid Regulation A Tier 1 offering? a. selling $3 million of securities in any 12-month period with a $250,000 individual investor limit. b. selling $10 million in securities in any 12-month period; investors can't buy more than 10% of their annual income or net worth. c. selling $20 million of securities in any 12-month period with no individual investor limit. d. selling $20 million in securities in any 12-month period; investors can't buy more than 5% of their annual income or net worth. 22. A criminal case under the Securities Act of 1933 is prosecuted by a. the SEC. b. the Justice Department. c. the Department of the Treasury. d. the FTC. 23. MegaCorp wishes to sell $25 million of securities. The only investors will be 20 unaccredited investors. Which of the following applies to this offering? a. Rule 504, option 1 of Regulation D of the 1933 Act b. Rule 505 of Regulation D of the 1933 Act c. Rule 506 of Regulation D of the 1933 Act d. Rule 504, option 2 of Regulation D of the 1933 Act

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Chap 37_9e_Standard 24. Under what type of securities offering must the issuer determine if the investor is an accredited, sophisticated investor, and if the stock is restricted? a. Regulation A offering b. Regulation D offering c. public offering d. interstate offering 25. Under Regulation D, institutions such as banks and insurance companies are considered to be what type of investors? a. accredited b. unaccredited c. restricted d. unrestricted 26. Which of the following is reported on Form 8-K? a. audited financial statements b. the resignation of a director over a policy dispute c. unaudited financial statements d. All of these are correct. 27. What is the legal term meaning that someone has acted with the intent to deceive or with deliberate recklessness as to the possibility of misleading investors? a. scienter b. omission c. negligence d. fraud 28. Under which of the following exemptions is there no dollar limitation? a. Rule 504 b. Rule 505 c. Rule 506 d. Regulation A 29. Section 16 of the 1934 Act prohibits short-swing trading on the part of officers, directors, and controlling shareholders who a. own more than 25% of the company. b. are also on the board of directors of the company. c. own more than 10% of the company. d. trade their shares in order to invest in another company.

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Chap 37_9e_Standard 30. When a stock underwriter acts as the company's agent in selling stock, it is called a a. company underwriting. b. express underwriting. c. firm commitment underwriting. d. best efforts underwriting. 31. When the underwriter buys stock from the issuer and sells it to the public it is referred to as a a. best efforts underwriting. b. firm commitment underwriting. c. secondary underwriting. d. public underwriting. 32. Pursuant to a public offering, a CPA firm audited the financial statements. After the offering, omissions and misstatements were found. The CPA firm is now being sued by the purchasers of the stock. The purchasers are alleging that the erroneous financial statements in the registration statement caused them to suffer a monetary loss. The CPA firm can avoid liability if it can prove a. that it used due diligence in auditing the financial statements. b. the corporation was the party who made misstatements and omissions. c. the firm believed that the statements were accurate. d. None of these will avoid liability. 33. State securities statutes are known as a. going dark laws. b. blue sky laws. c. big country laws. d. sunshine laws. 34. The 1934 Act is primarily intended to a. maintain the integrity of the secondary market for securities. b. make sure companies who wish to raise money by the sale of securities comply with disclosure requirements for the initial offering. c. coordinate federal and state laws with a primary emphasis on allowing the individual states to maintain primary control over securities law. d. broaden the SEC's enforcement power. 35. Which of the following has the most elaborate disclosure requirements? a. initial public offering b. Regulation A c. Regulation D d. crowdfunding

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Chap 37_9e_Standard 36. In determining liability for errors in a registration statement, the plaintiff must prove that there was a misstatement or omission that was important enough to affect the plaintiff's investing decision. In other words, the misstatement or omission needs to be a. material. b. unrefutable. c. accredited. d. firm. 37. Officials from Vital Corporation are traveling around the country making presentations to prospective investors. The officials are conducting a a. prospectus. b. secondary offering. c. road show. d. private offering. 38. Which of the following is a characteristic of a restricted security? a. It is purchased in a private offering. b. It cannot be sold at any time. c. It is subject to reporting requirements. d. After six months, it is classified as a control security. 39. Ed, a vice-president of Palmette Products, Inc., buys 1,000 shares of his company’s stock on June 15. His son has medical problems in September, and Ed sells the stock at a profit. Under Section 16, Ed a. must turn over to Palmette any profits he made on the sale. b. may keep any profits on the sale since he had a good reason to sell and was not selling in order to manipulate the market. c. may keep the profits from the sale as long as he reported his sale to the SEC within two business days. d. may keep any profits from the sale if he did not act on secret information when he sold the shares. 40. The 1933 Act exempts all but which of the following from its registration requirements? a. short-term notes b. treasury stock c. government securities d. annuity contracts 41. The Fallwater Partnership wants to incorporate and is considering using a DPO. Explain what a DPO is and discuss the advantages and disadvantages of this course of action.

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Chap 37_9e_Standard 42. What are the purposes of a registration statement and what information must it contain?

43. Discuss the process an issuer follows for either an IPO or a secondary offering.

44. Countywide Metals is a small company that incorporates in the state in which it is doing business and plans to offer and sell $100,000 worth of stock only to residents of the county in which it is doing business. Discuss the requirements Countywide must meet for registering its securities.

45. Jackie learned of insider trading information while talking to Mark, a director of a large corporation. She took advantage of the information to buy stock and make a huge financial gain. If she is accused of violating securities law, what must the government prove in order to gain a conviction against Jackie?

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Chap 37_9e_Standard Answer Key 1. False 2. True 3. False 4. False 5. True 6. True 7. True 8. True 9. True 10. False 11. True 12. False 13. True 14. True 15. True 16. a 17. d 18. c 19. c 20. a 21. c 22. b 23. c 24. b 25. a 26. b

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Chap 37_9e_Standard 27. a 28. c 29. c 30. d 31. b 32. a 33. b 34. a 35. a 36. a 37. c 38. a 39. a 40. b 41. A DPO is a direct public offering of stock. It is a way a company raises capital for the first time by selling stock itself rather than going through Wall Street. In a DPO, Fallwater would typically sell shares to its customers, employees, suppliers, and members of the community. Advantages for Fallwater would be that a DPO is cheaper and faster than a regular public offering through an underwriter. Also, a DPO can be an effective marketing tool because shareholders become more loyal customers. Disadvantages are that significant management time can be consumed and cost efficiencies may not be realized. Each investor must receive written information about the company. The cost of preparing and sending these disclosure statements to many small investors may not be an efficient way to raise money. Also, setting up a system to permit sales of shares in the short term can be difficult. Finally, there is a limit to how much a company can raise using a DPO. 42. A registration statement has two purposes: to notify the SEC that a sale of securities is pending and to disclose information to prospective purchasers. The registration statement typically must include (1) detailed information about the issuer and its business, (2) a description of the stock, (3) the proposed use of the proceeds from the offering, and (4) three years of audited financial statements.

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Chap 37_9e_Standard 43. Underwriting. For a public offering, companies hire an investment bank to serve as underwriter. In a firm commitment underwriting, the underwriter buys the stock from the issuer and resells it to the public. The underwriter bears the risk that the stock may sell at a lower price than expected. In a best efforts underwriting, the underwriter does not buy the stock but instead acts as the company’s agent in selling it. If the stock sells at a low price, the company, not the underwriter, is the loser. Registration Statement. The registration statement has two purposes: to notify the SEC that a sale of securities is pending and to disclose information to prospective purchasers. The registration statement typically must include detailed information about the issuer and its business, a description of the stock, the proposed use of the proceeds from the offering, and three years of audited financial statements. Prospectus. Typically, buyers never see the entire registration statement; they are given the prospectus instead. The prospectus includes important disclosures about the company and the security that is to be sold. All investors must receive a copy of the prospectus before purchasing the stock. Sales Effort. Company executives and the investment bankers travel around the country making presentations to potential investors. The investment bank cannot actually make sales during this period, but it can solicit offers. The SEC closely regulates an issuer’s sales effort to make sure that no one is unduly hyping the stock. Going Effective. Once its review of the preliminary registration statement is complete, the SEC sends the issuer a comment letter, listing changes that must be made to the registration statement. An issuer almost always amends the registration statement at least once, and sometimes more. Immediately after the SEC has approved a final registration statement, the issuer and underwriter agree on a price for the stock and the date to go effective; that is, to begin the sale.

44. The Securities Act of 1933 requires that, before offering or selling securities, the issuer must register the securities with the SEC unless the securities qualify for an exemption. Countywide falls within the intrastate offering exemption. Under SEC Rule 147, an issuer is not required to register securities that are offered and sold only to residents of the state in which the issuer is incorporated and does business. To qualify under Rule 147, 80 percent of Countywide's revenues and assets must be in-state, and it must also intend to spend 80 percent of the offering’s proceeds in-state. Neither Countywide nor any purchaser can sell the securities outside the state for nine months after the offering. Countywide may be subject to state laws, or blue sky laws, regulating the sale of securities. 45. The government must prove that (1) Jackie knew the information was confidential, (2) she knew it came from an insider who was violating his fiduciary duty, and (3) the insider, Mark, expected some personal gain as a result of giving Jackie the insider information.

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Chap 38_9e_Standard Indicate whether the statement is true or false. 1. Predatory pricing occurs when a company lowers its prices below cost to drive competitors out of business. a. True b. False 2. The Sherman Act was designed to prevent extreme concentrations of economic power. a. True b. False 3. Companies with substantial assets must notify the FTC before consummating a merger. a. True b. False 4. Possessing a monopoly is not necessarily illegal; using improper conduct to acquire or maintain one is. a. True b. False 5. The FTC blocked the merger of the owners of Schick and Harry’s because they feared the merger would lead to higher prices. a. True b. False 6. Reciprocal dealing is a type of vertical cooperative strategy. a. True b. False 7. The Clayton Act prohibits anticompetitive mergers. a. True b. False 8. For the first 70 years after the Sherman Act was enacted, most scholars and judges took the view that large concentrations of economic power were suspect even if they had no obvious impact on competition itself. a. True b. False 9. Both the Justice Department and the Federal Trade Commission have the authority to enforce antitrust laws. a. True b. False 10. Gary, Louise, and Brian, who own competing gas stations in town, happen to see each other at a restaurant one morning and have breakfast together. While talking, they decide to set their gas prices at the same amount. They have committed an illegal act only if the agreed price is unfair to consumers. a. True b. False

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Chap 38_9e_Standard 11. Both per se and rule of reason violations of the Sherman Act are automatically illegal. a. True b. False 12. Predatory pricing occurs when a company raises its prices above cost to drive competitors out of business. a. True b. False 13. Under the Hart-Scott-Rodino amendment to the Clayton Act, companies with substantial assets must notify the FTC before consummating a merger. a. True b. False 14. Per se violations are subject to both civil and criminal penalties. a. True b. False 15. Under modern antitrust law analysis, a company with a market share between 70 and 90 percent has a monopoly. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 16. What law prohibits mergers that are anticompetitive? a. Sherman Act b. Clayton Act c. Robinson-Patman Act d. Radmon Act 17. A vertical allocation of customers or territory a. is a per se violation of Section 1 of the Sherman Act. b. is a rule of reason violation of the Sherman Act. c. is not a violation of the Sherman Act. d. is illegal if it adversely affects one party over the other. 18. Ed was an independent owner of a chain of TV stores. He successfully got customers into his store by cutting his prices on widely advertised name-brand products in order to sell other products for which he received a bigger profit. When the manufacturers of three of the name-brand products discovered Ed's actions, they agreed secretly to stop selling him their TVs. The three manufacturers a. are doing nothing illegal, as they did not get Ed to agree to anything. b. are free to agree not to deal with Ed since the public can go elsewhere and will not be hurt economically. c. can choose either as a group to deal or not to deal with any retailer they want. d. are engaged in a rule of reason violation of the antitrust laws if their action harms competition.

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Chap 38_9e_Standard 19. Gorhan Construction, Brighton Bros., and Tirenn Construction agreed that on three upcoming projects, Gorhan would bid lowest on one, Brighton would submit the lowest bid on the second project, and Tirenn would submit the lowest bid on the third project. In this way, they would each be assured of work for the upcoming season. This behavior a. is legal and acceptable practice in the construction industry to spread work more evenly. b. is a per se violation of the Sherman Act. c. is a rule of reason violation of the Sherman Act. d. violates ethical, but not legal, standards. 20. Exclusive dealing contracts, if they have an anticompetitive effect, are illegal under the a. Sherman Act only. b. Clayton Act only, c. Sherman Act and Clayton Act. d. Sherman Act, Clayton Act, and Robinson-Patman Act. 21. Pat's Pen Co. manufacturers and sells an inexpensive ball-point pen. Salley's Stationery purchases the pens for $.25 each in quantities of 1,000. Salley's discovers that a national chain, a competitor of Salley's, buys the pen at $.20 each for quantities of 1,000. If Salley's Stationery sues Pat's Pen Co. for price discrimination a. Pat's Pen Co. will win if it can prove that it has been selling to the national chain continuously at the cheaper rate. b. Pat's Pen Co. will win if it can prove that it did not intend to economically harm Salley's Stationery. c. Salley's Stationery will win if it can prove price discrimination occurred and that it lessened competition. d. Salley's Stationery will win since price discrimination is a per se violation with no real defenses. 22. Any conduct overseas that has an anticompetitive impact in the United States is a violation of U.S. law provided that: a. the seller requires the buyer to purchase all their products together. b. the actor owns at least 50 percent market share. c. the domestic actor intended to affect the U.S. market. d. the foreign conduct has a direct and substantial effect on the U.S. market. 23. A monopoly is illegal a. under any circumstances, under Section 2 of the Sherman Act. b. only if it is gained or maintained by using wrongful tactics. c. if you have greater than 50 percent of market share. d. any time there are no interchangeable products. 24. An automatic breach of antitrust laws is called a a. refusal to deal. b. per se violation. c. conscious parallel. d. rule of reason violation.

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Chap 38_9e_Standard 25. Typically, courts will find that a company does not control a market unless it has: a. the short term ability to exclude competitors or raise prices. b. at least a 50 percent market share. c. predatory pricing. d. a vertical allocation of customers or territory. 26. Which of the following is a vertical cooperative strategy? a. market division b. price-fixing c. reciprocal dealing d. joint venture 27. In vertical price-fixing, the manufacturer sets the a. minimum prices that retailers may charge. b. maximum prices that retailers may charge. c. number of items a retailer may sell at a specific price. d. date by which a retailer must sell products. 28. Two universities located within 30 miles of each other agree to allocate their customers so as to help them both. The two schools draw a line down a map, and each university agrees to accept students only on their side of the line. What type of horizontal cooperative strategy does this represent? a. market division b. refusal to deal c. reciprocal dealing d. joint venture 29. What is the Justice Department's current position relative to reciprocal dealing agreements? a. The Justice Department actively enforces this illegal activity. b. The Justice Department is only concerned about these agreements if a large, national company is involved. c. The Justice Department only gets involved if such an agreement will foreclose a significant share of the market and if the participants agreed not to buy from other competitors. d. The Justice Department only gets involved if such an agreement is "decidedly uneven," meaning that one company benefits significantly more than the other. 30. If a company has violated antitrust laws, a. the Justice Department can initiate only noncriminal charges against the violator. b. the Federal Trade Commission may file criminal proceedings against the violator. c. any private person or company that has been harmed by the violator can file a lawsuit to recover damages. d. both the Justice Department and the Federal Trade Commission can bring criminal proceedings.

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Chap 38_9e_Standard 31. A major motion picture distributor offers to provide a television station with three very popular, desirable films. However, as part of the agreement, the distributor requires that the television station also purchase four films that are not very desirable. This type of arrangement is called a a. reciprocal dealing agreement. b. reverter arrangement. c. joint custody arrangement. d. tying arrangement. 32. Assume that three automobile manufacturers all merged into one car company. Such a merger would be a a. vertical merger. b. vertical cooperative arrangement merger. c. horizontal merger. d. intracompetitive merger. 33. Which of the following cases involved price-fixing? a. Coalition for a Level Playing Field, L.L.C., v. Autozone, Inc. b. United States v. Apple, Inc. c. United States v. Waste Management, Inc. d. New York v. Actavis PLC 34. Which of the following is the most accurate statement about the Robinson-Patman Act? a. It has rarely been enforced in recent years. b. The U.S. government has stepped up its enforcement during the last decade. c. It has been declared unconstitutional. d. It was repealed by Congress in 1998. 35. If competitors act in concert but without an explicit agreement, they are engaged in a. a tying arrangement. b. monopolization. c. reciprocal dealing. d. conscious parallelism. 36. A refusal to deal a. is a right to decide with whom to do or not to do business and cannot be legally limited. b. is a rule of reason violation of the Sherman Act and is illegal if it harms competition. c. is an agreement in which a buyer refuses to purchase goods from a supplier unless the supplier also purchases items from the buyer. d. occurs when a manager refuses to recognize that price-fixing is a problem.

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Chap 38_9e_Standard 37. What type of collusion does the Supreme Court refer to as "the supreme evil of antitrust"? a. price-fixing b. reciprocal dealing c. price discrimination d. vertical mergers 38. John D. Rockefeller’s oil business was the main reason which legislation was enacted? a. Sherman Act b. Robinson-Patman Act c. Clayton Act d. Chicago School Act 39. Under which circumstance is it legal to charge a lower price to a particular buyer? a. if the items are the same b. if the price discrimination lessens competition c. if the costs of serving that particular buyer are lower d. All of these are correct. 40. Explain horizontal price-fixing and vertical minimum and maximum price-fixing. Discuss their status under antitrust laws.

41. Smalltown has two family-owned hardware stores that have been in business for years. Major Hardware decides that Smalltown would be a good place to build one of its superstores. Major opens, advertising unbelievably low prices; in fact, at below cost. Because Major owns stores nationally, it is able to keep prices extremely low until both of the family-owned stores have to go out of business because they cannot compete. After Major is the only hardware store in town, it raises its prices enough to make up for its former losses and to make some additional profit. Discuss this behavior in relation to antitrust law.

42. Discuss when monopoly power is not a violation of Section 2 of the Sherman Act.

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Chap 38_9e_Standard 43. Explain the overall purposes of the Sherman Antitrust Act, the Clayton Act, and the Robinson-Patman Act. How do each of these Acts relate to each other?

44. Violations of antitrust law are either per se violations or rule of reason violations. What are the differences between these two types of violations? Give examples of each.

45. The chain of Mega Hardware stores agreed with Lock Tight Manufacturing not to carry any brand of locks and door handles other than those manufactured by Lock Tight. Mighty Lock threatened to sue for antitrust violations. On what basis and under what statute(s) would Mighty Lock sue?

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Chap 38_9e_Standard Answer Key 1. True 2. True 3. True 4. True 5. True 6. True 7. True 8. True 9. True 10. False 11. False 12. False 13. True 14. True 15. False 16. b 17. b 18. d 19. b 20. c 21. c 22. d 23. b 24. b 25. b 26. c

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Chap 38_9e_Standard 27. a 28. a 29. c 30. c 31. d 32. c 33. b 34. a 35. d 36. b 37. a 38. a 39. c 40. Horizontal price-fixing is the agreement between competitors on the prices at which they will buy or sell products or services. Horizontal price-fixing is a per se violation of Section 1 of the Sherman Act. Vertical price-fixing occurs when a manufacturer sets the minimum or maximum prices its distributors can charge. Resale price maintenance (RPM) is vertical minimum price-fixing, and in 1911 the Supreme Court held RPM to be a per se violation of the Sherman Act. However, in 2007, the Court reversed itself and held that RPM is a rule of reason violation. Vertical maximum price-fixing is also a rule of reason violation of the Sherman Act. The defendant is liable only if the pricefixing harms competition. 41. Major has engaged in predatory pricing. It occurs when a company lowers its prices below cost to drive competitors out of business. Under Section 2 of the Sherman Act, it is illegal to attempt to monopolize. Typically, the goal of a predatory pricing scheme is either to win control of a market or to maintain it. To win a predatory pricing case, the plaintiff must prove three elements: the defendant is selling its products below cost; the defendant intends that the plaintiff go out of business; and if the plaintiff does go out of business, the defendant will be able to earn sufficient profits to recoup its prior losses. 42. Under Section 2 of the Sherman Act, it is illegal to monopolize or to attempt to monopolize a market. Monopoly power in and of itself is not a violation of Section 2 of the Sherman Act. For a Section 2 violation, the acquisition of monopoly power must have been done in a wrongful manner. For example, monopoly power is not illegal if it is the result of a patent, efficient operation, superior business decisions, or a superior product. It is only illegal if it is obtained in an improper manner. To determine if a defendant has illegally monopolized, three questions must be answered: (1) What is the market? (2) Does the company control the market? and (3) How did the company acquire or maintain its control?

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Chap 38_9e_Standard 43. The Sherman Antitrust Act was created in 1890, primarily in response to Standard Oil's monopoly of the oil industry and the increasing influence of major railroad companies. The Sherman Act was very broadly worded and prohibits all agreements in restraint of trade. Section 2 of the Sherman Act makes it illegal to monopolize or attempt to monopolize a market. In 1914, Congress passed the Clayton Act to clarify and strengthen the intent of the Sherman Act. The Clayton Act prohibits anticompetitive mergers, tying agreements, and exclusive dealing agreements. Congress created the Robinson-Patman Act in 1936 as an amendment to the Clayton Act. The Robinson-Patman Act makes it illegal to charge different prices to different customers if the items are the same and the price discrimination lessens competition. Suppliers are allowed to charge different prices for the same goods if the costs of servicing the buyer are lower (i.e., selling a large quantity to one buyer) or if the supplier is simply meeting competition. 44. A per se violation is a violation that is automatically illegal. It is irrelevant what the effect of the given conduct is on competition; the conduct, in and of itself, is illegal. Defendants are subject to both criminal and civil penalties. The Justice Department has sought criminal sanctions against per se violators. Examples would include price-fixing, bidrigging, or an agreement by competitors to divide their market among themselves. A rule of reason violation will be illegal only if it results in harm to competition. Such violations are viewed on a caseby-case basis. Examples of rule of reason situations would include refusal to deal arrangements and reciprocal dealing agreements. 45. Mighty Lock would sue Mega Hardware for violation of antitrust laws because of Mega Hardware and Lock Tight’s use of an exclusive dealing contract. Under Section 1 of the Sherman Act and Section 3 of the Clayton Act, exclusive dealing contracts are subject to a rule of reason and are illegal only if they have an anticompetitive effect.

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Chap 39_9e_Standard Indicate whether the statement is true or false. 1. Consumers may keep as a gift any unordered merchandise that they receive in the mail. a. True b. False 2. The FTC may consider an act unfair if it simply violates public policy. a. True b. False 3. Electronic payments via a telephone, computer, or wire transfers are not regulated by the government. a. True b. False 4. The Truth in Lending Act regulates interest rates or the terms of a loan. a. True b. False 5. The Equal Credit Opportunity Act makes it illegal for a lender to discriminate against a potential borrower because of race, national origin, religion, or sex, but it is permissible to treat a borrower differently if he or she is on welfare. a. True b. False 6. The Federal Trade Commission Act considers the terms “deceptive” and “unfair” to be synonymous when determining what practices should be prohibited. a. True b. False 7. In 30-year mortgages, the finance charge typically exceeds the amount of the principal. a. True b. False 8. "Bait-and-switch" tactics are not a violation of FTC rules if the merchant does not have enough stock on hand to meet reasonable demand for the advertised product. a. True b. False 9. Section 5 of the Federal Trade Commission Act (FTC Act) prohibits unfair and deceptive acts or practices. a. True b. False 10. An employer cannot request a consumer report on a potential employee without that person's permission. a. True b. False

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Chap 39_9e_Standard 11. The Magnuson-Moss Warranty Act requires manufacturers to provide a warranty on their products regardless of cost. a. True b. False 12. If UTB—a mortgage company—violates any provision of TILA, their consumers have the right to rescind the mortgage for up to six business days after the signing. a. True b. False 13. Under §5 of the FTC Act, anyone who receives unordered merchandise in the mail may treat it as a gift. a. True b. False 14. The Telephone Consumer Protection Act (TCPA) prohibits telemarketers from making autodialed and/or prerecorded calls or texts to cell phones, and prerecorded calls to residential land lines unless the consumer unambiguously consents in writing. a. True b. False 15. The Consumer Financial Protection Bureau (CFPB) was created to represent consumers by filing suit in a federal court, for the purpose of asking for damages on behalf of the injured consumer. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 16. The maximum rate of interest for credit transactions is established by a. state law. b. federal law. c. the Federal Reserve Board. d. the FTC. 17. Under the TILA, a qualified mortgage (QM) a. limits upfront points and fees to 5 percent. b. limits all of a borrower's debt to 43 percent of his or her income. c. allows balloon payments only if the borrower agrees up front. d. must allow for negative amortization. 18. Which of the following statements expresses the purpose of the Truth-in-Lending Act? a. to require lenders to charge a "reasonable" rate of interest. b. to regulate interest rates and terms of loans. c. to provide consumers with information necessary to make the best credit decision. d. to help lenders limit state laws.

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Chap 39_9e_Standard 19. Mabel is a single 40-year-old who has borrowed money on numerous occasions. Her payment record has been good, except she has been delinquent in paying a few bills. Which of the following is true regarding credit information gathered on Mabel? a. Since Mabel has been delinquent, she waives her right to see the credit files. b. If Mabel is rejected for a loan because of the consumer report, the lender must tell her the source of the report. c. Mabel has a right to have the information regarding her delinquency in paying a few loans stricken from her credit record because her record has generally been good. d. Mabel's only legal remedy, if there is erroneous information in her credit file, is to report the problem to the FTC for enforcement. 20. Suppose Bill's credit card is stolen and he notifies his credit card company of this fact. Which of the following is true regarding the amount of unauthorized charges made before Bill notified his credit card company? a. Bill is not responsible for any of the unauthorized charges. b. Bill is responsible for the first $50 of unauthorized charges. c. Bill is responsible for the first $100 of unauthorized charges. d. Bill is responsible for half of the unauthorized charges. 21. For the FTC to consider a practice to be unfair, it must meet a three-part test. Which of the following is NOT one of those tests? a. The practice causes a substantial consumer injury. b. The harm of the injury outweighs any countervailing benefit. c. The consumer had no reasonable way to recoup lost funds from the injury. d. The consumer could not reasonably avoid the injury. 22. In 1969, the federal government estimated that consumer products caused 30,000 deaths, 110,000 disabling injuries, and 20 million trips to the doctor. The product category causing the majority of harm was a. automobiles. b. children's toys. c. power tools. d. food products. 23. Under FTC rules, when a customer legally cancels a door-to-door sales contract, the seller must return the buyer's money within a. 3 days. b. 5 days. c. 10 days. d. a “reasonable time” after the sale was made. 24. "Bait-and-switch" is a. advertising a product for sale and then giving the customer a rain check. b. placing the store brand and the national brand side-by-side in a store to confuse customers. c. selling the store brand at a lower price than the national brand. d. advertising certain goods and then pressuring the customer to buy different, more expensive goods. Copyright Cengage Learning. Powered by Cognero.

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Chap 39_9e_Standard 25. Under the Fair Debt Collection Practices Act, a collection company is legally permitted to a. call the debtor at any time of the day. b. call acquaintances of the debtor to tell them that the consumer is in debt. c. call the debtor even if the debtor has requested in writing that he or she wishes no further contact. d. visit the debtor at work if the consumer's employer permits such contact. 26. Under the Fair and Accurate Credit Transactions Act (FACTA), a. a creditor may not discriminate against a borrower on the basis of race, sex, religion, or age. b. a debt collector may not harass or abuse debtors. c. a credit card company must promptly investigate and respond to any consumer complaints about a credit card bill. d. a consumer has the right to obtain one free credit report every year from each of the three major reporting agencies. 27. The issue in the POM Wonderful, LLC v. FTC case involved a. the type of evidence necessary to support health claims in advertisements. b. violation of the Fair Debt Collection Act. c. the legality of the Consumer Product Safety Act of 1972. d. a violation of the Magnuson-Moss Warranty Act. 28. Under the Truth in Lending Act, a lender must disclose all of the following EXCEPT a. the average percentage rate charged by competitors. b. the amount financed. c. the annual percentage rate (APR). d. the finance charge. 29. MoneyMaker Toy Company violated the safety standards set forth by the Consumer Product Safety Commission when it produced a toy gun that caused injury to hundreds of children. Because of MoneyMaker’s actions a. the CPSC can impose civil penalties on the company. b. the CPSC can impose criminal penalties on the company. c. users can sue for damages, including attorney’s fees, if MoneyMaker knew it was violating a consumer product safety rule when it produced the guns. d. All of these are correct. 30. Which of the following is a provision of the CARD Act? a. Lenders cannot bribe an appraiser to misstate a home's value. b. Manufacturers must report all potentially hazardous product defects within 24 hours of discovery. c. Credit card bills must be mailed at least 21 days ahead of their due dates. d. All of these are correct.

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Chap 39_9e_Standard 31. Chase received a magazine in the mail that he did not order. He was surprised, but read and enjoyed the magazine. A month later, another copy arrived, along with a bill for $25 to cover the subscription. Which of the following applies to this situation? a. Chase does not have to pay for the magazine, even if the company continues to send it to him. b. Chase needs to return the two copies of the magazine he received to show that he is not interested. c. Chase must notify the magazine whether or not he wants to continue receiving the magazine within 30 days. d. Chase must pay the bill because the magazine company is entitled to be paid for sending out subscriptions. 32. John loans George money, and they sign a written agreement whereby George will repay John in monthly installments. Is this loan subject to the Truth in Lending Act? a. Yes, if the loan is for more than $1,000. b. Yes, if John and George live in different states. c. No, if John is not in the business of offering credit. d. No, if John and George are related. 33. The Fair Debt Collection Practices Act prohibits which of the following practices by a debt collector? a. falsely representing himself as a lawyer. b. telephoning the debtor at 8:00 a.m. c. visiting a debtor at work if the employer permits personal visits. d. using neighbors to locate the debtor. 34. Sandy noticed an unauthorized electronic funds withdrawal on her bank statement. In order for her to not be liable for the withdrawal, she must notify her bank within _______ of the date of the bank statement. a. 10 days b. 30 days c. 60 days d. 90 days 35. With regard to mortgages, the Consumer Finance Protection Bureau (CFPB) requires mortgage servicers a. to contact borrowers who are 36 days late in making a payment. b. to wait 180 days after nonpayment before beginning foreclosure. c. to credit payments within 3 days after they are received. d. to extend delinquent borrowers additional time to repay the loan. 36. A door-to-door salesperson knocks on Mary's door and convinces her to purchase the Wonder Vacuum for $500. Soon after the salesperson leaves, Mary begins to have second thoughts about the transaction. Which statement about the situation is correct? a. Mary agreed to purchase the vacuum, so she must honor the agreement. b. Mary can cancel the transaction at any time before midnight of the third business day thereafter. c. Mary must pay for the vacuum, but she can get a refund if she returns it to the manufacturer within 30 days. d. Mary can keep the vacuum without paying when it is delivered, as it was purchased in her home.

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Chap 39_9e_Standard 37. Consumers have a right to a. exclude as obsolete information about a previous 7-year old (or older) bankruptcy discharge. b. know the name of anyone to whom credit information has been supplied by a consumer reporting agency within the last 3 years. c. have their own version of a disputed credit situation included in their credit file. d. have investigative reports become obsolete after 1 year. 38. The Fun Tyme Toy Company discovers that one of its products can easily break, exposing children to potential injury from the sharp parts. Under the Consumer Product Safety Act of 1972, in how long does Fun Tyme have to report this defect to the Consumer Product Safety Commission? a. 24 hours b. 3 days c. 7 days d. 30 days 39. Ron's Furnace Repair advertised it would inspect any homeowner's furnace for free. Janet had Ron's come to inspect her furnace. The servicewoman dismantled the entire furnace then refused to put it back together unless Janet paid her $250. The FTC considers such a practice to be a. an unfair practice. b. a deceptive practice. c. an act that violates public policy. d. All of these are correct. 40. The Trimbles apply to Community Bank for an installment loan of $20,000 to remodel their bathroom. Discuss the disclosures Community Bank is required to make.

41. What must a seller disclose under the Magnuson-Moss Warranty Act?

42. Richard received his credit card bill and noticed an error. He wrote to the company the next week, pointing out the error in his bill. Under the law, what is the credit card's obligation once it receives Richard's letter?

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Chap 39_9e_Standard 43. Commonground Collections has been hired to collect past-due medical bills for Lakeview Physicians. List some activities that Commonground may not do pursuant to the FDCPA.

44. What are the three tests or elements used by the FTC to determine whether a particular act is an unfair trade practice?

45. Brooke uses her credit card to purchase a lawn mower at the local “big box” hardware store, but when she tries to use the mower for the first time, she finds it is not self-propelled as advertised. Does she have any recourse?

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Chap 39_9e_Standard Answer Key 1. True 2. True 3. False 4. False 5. False 6. False 7. True 8. False 9. True 10. True 11. False 12. False 13. True 14. True 15. False 16. a 17. b 18. c 19. b 20. b 21. c 22. b 23. c 24. d 25. d 26. d

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Chap 39_9e_Standard 27. a 28. a 29. d 30. c 31. a 32. c 33. a 34. c 35. a 36. b 37. c 38. a 39. d 40. The Truth in Lending Act will apply to this loan because it is a consumer loan, it will be repaid in more than four installments or has a finance charge, the loan is for less than $54,600, and it is made by someone in the business of offering credit. All loans regulated by the TILA must have clear disclosures in a meaningful sequence. Also, the lender must disclose the amount financed, the total amount the consumer will have paid by the end of the loan, the finance charge (the amount in dollars the consumer will pay in interest and fees over the life of the loan), and the annual percentage rate (the actual rate of interest the consumer pays on an annual basis). 41. The seller must disclose: The terms of any written warranty in simple, understandable language. Whether the warranty is full or limited. The name and address of the person the consumer should contact to obtain warranty service. The parts that are covered and those that are not. What services the warrantor will provide, at whose expense, and for what period of time. A statement of what the consumer must do and what expenses he must pay. 42. Under the Fair Credit Billing Act, the company must acknowledge receipt of the letter within 30 days. Within two billing cycles (but not longer than 90 days) it must investigate the complaint and respond.

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Chap 39_9e_Standard 43. Under the FDCPA, Commonground's agents may not:

Contact a debtor who has notified the agency in writing to make no further contact. Directly contact a debtor who is represented by an attorney. Call before 8 a.m. or after 9 p.m. Use threats, or obscene or abusive language. Imply they are attorneys or government representatives if they are not. Use a false name. Make false, deceptive, or misleading statements. Contact debtors at work if employers prohibit this. Contact acquaintances other than to locate a debtor. Tell acquaintances the consumer is in debt.

44. The FTC considers an act to be unfair if each of the following three tests is met: (1) the act causes the consumer substantial physical or financial injury; (2) the harm of the injury outweighs any countervailing benefit; and (3) the consumer could not reasonably avoid the injury. Additionally, the FTC may decide a practice is unfair on grounds it violates public policy even if the three tests mentioned above are not actually satisfied. 45. Since Brooke used a credit card for the purchase, she is protected under the TILA. If there is a dispute between a merchant and a customer, the credit card company cannot bill the customer if she makes a good faith effort to resolve the dispute, the dispute is for over $50, and the merchant is in the same state as or within 100 miles of the customer’s house.

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Chap 40_9e_Standard Indicate whether the statement is true or false. 1. Weste, Inc. decided to expand by building a $50 million manufacturing facility. Weste, Inc. is not a federal agency and the expansion is not regulated or approved by the government. Nevertheless, Weste must prepare an environmental impact statement. a. True b. False 2. An Environmental Impact Statement must be prepared for every major federal action that significantly affects the quality of the environment. a. True b. False 3. A person who violates the Clean Water Act can face possible imprisonment in addition to other penalties. a. True b. False 4. TriColor, Inc. purchased a piece of land from HBC, Inc. Hazardous waste was subsequently discovered on the land. Even though TriColor did nothing illegal, it may be liable under CERCLA for the cleanup costs. a. True b. False 5. In 1980, the Congress created the Environmental Protection Agency (EPA) to consolidate environmental regulation under one roof. a. True b. False 6. A Japanese company operates a ship called the Kinia. If the Kinia sails in U.S. waters, it must comply with design standards set by the Oil Pollution Act of 1990. a. True b. False 7. Cincy, Inc. is building a $20 million addition onto its distribution facility. To build the facility, Cincy must fill in two acres of wetlands. Under the Clean Water Act, Cincy must obtain a permit before filling in the wetlands. a. True b. False 8. Armand Industries is producing a foul-smelling odor as a by-product of its factory’s operations. However, the emission is not harmful to the health of those exposed to it. Armand would be subject to a primary national ambient air quality standard established by the EPA. a. True b. False 9. The CAA’s major provisions include prevention of significant deterioration (PSD). a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 40_9e_Standard 10. Chemicals are so common in consumer products that babies are now born with hundreds of chemicals in their blood. a. True b. False 11. The cost-benefit trade-off is particularly complex in environmental issues because those who pay the cost often are not the ones who receive the benefit. a. True b. False 12. Congress directed the EPA to establish national ambient air quality standards (NAAQS). a. True b. False 13. The EPA will allow individual states' air pollution level to rise as long as it still meets the EPA's existing national standards. a. True b. False 14. We Care—a nonprofit environmental organization—believes that Quanaco is violating the Clean Air Act. The EPA has not taken any action against Quanaco. We Care can file a citizens’ suit against the EPA. a. True b. False 15. Truan, Inc. has decided to market a new pesticide. Truan must register the pesticide with the EPA. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 16. Sam, the chief executive officer of Boch Industries, was prosecuted for violating the Resource Conservation and Recovery Act. Which of the following is correct concerning the penalties? a. Sam cannot be criminally prosecuted for violating this statute. b. Sam faces criminal fines as well as imprisonment. c. Sam faces only criminal fines. d. The only penalty Sam faces is an injunction to prevent further violations. 17. Under Superfund legislation, to what extent must a hazardous waste site be cleaned? a. The reasonable conditions under the circumstances. b. A safe level for the area in which it is located. c. A pristine condition, regardless of cost. d. To the condition of the property before the hazardous waste was dumped on it.

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Chap 40_9e_Standard 18. Which law requires the EPA to set national standards for substances if they are potentially harmful to human health? a. Resource Conservation and Recovery Act b. Oil Pollution Act c. Safe Drinking Water Act d. Ocean Dumping Act 19. Coastal City Power Plant received its annual sulfur dioxide emission allowance. Because it is using a low-sulfur fuel which burns cleaner than some fuels, it does not need its entire allowance this year. In this instance, Coastal City Power a. loses whatever unused allowance it has for the year. b. may sell its leftover allowance to another company. c. will not be regulated by an allowance next year since it was within its allowance for this year. d. will only avoid future regulation if it signs an agreement to continue using either low-sulfur coal or natural gas in the future. 20. Under the Endangered Species Act, what federal agency in the Department of the Interior is responsible for preparing a list of species that are in danger of becoming extinct? a. National Park Service b. Fish and Wildlife Service c. Bureau of Land Management d. Bureau of Safety and Environmental Enforcement 21. Under the ______ administration, the United States withdrew from the Paris Accord, an international agreement to prevent climate change. a. Nixon b. Reagan c. Obama d. Trump 22. The cap and trade program is a method for: a. limiting air pollutants in an economically efficient manner. b. establishing national ambient air quality standards for primary pollution. c. to “protect and enhance” air quality. d. regulating both the total amount of existing air pollution and its ongoing production. 23. Which law establishes rules for treating both hazardous and nonhazardous forms of solid waste? a. National Environmental Policy Act b. Toxic Substances Control Act c. Safe Drinking Water Act d. Resource Conversation and Recovery Act

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Chap 40_9e_Standard 24. All of following must be included in a federal Environmental Impact Statement EXCEPT a. the available alternatives to the proposed action. b. the means to mitigate adverse environmental impacts. c. the direct and indirect effects of the proposed action. d. the cost of implementing the proposed action. 25. Which of the following statements regarding automobile pollution is true? a. If states do not adopt their own set of automobile pollution standards, they must abide by those of the federal government. b. California and New York are the only two states with separate automobile pollution standards. c. California sets even stricter pollution standards than the Clean Air Act. d. Because of federal standards, motor vehicles are no longer a major source of air pollution. 26. What was at issue in the Michigan v. EPA case? a. A determination as to whether climate change is "real" b. A provision directing the EPA to regulate power plant emissions if appropriate and necessary. c. The legality of implementing the Paris Accord. d. Whether the CWA should cover all navigable waters in the United States. 27. The Environmental Protection Agency (EPA) was created by Congress to a. consolidate environmental regulations under one agency. b. protect corporate investors. c. prevent conflicts between the Departments of Commerce and Interior. d. eliminate discrimination. 28. Under the Endangered Species Act, all federal agencies must a. avoid the use of all chemicals until the EPA has determined they are safe. b. prepare an environmental impact statement for actions significantly affecting the environment. c. avoid damage to habitat critical to the survival of endangered species. d. All of these are correct. 29. Which program was designed as a method for limiting air pollutants in an economically efficient manner by allowing enterprises to sell its leftover emissions allowance to other companies, or stockpile it for future use? a. the Paris Accord b. cap and trade c. Total Maximum Daily Load (TMDL) d. Resource Conservation and Recovery Act (RCRA)

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Chap 40_9e_Standard 30. In considering what is navigable waters, the Supreme Court ruled that a. the definition of navigable water must include all ponds and lakes even if they are not connected to open bodies of water. b. waterways confined to one state can be navigable water if pollutants can leak into drinking water. c. the definition of navigable water excludes intermittent streams or wetlands. d. all waterways including wetlands, intermittent streams, and ponds are all navigable waters. 31. Under the Clean Air Act, a. states and the EPA were to act as partners wherein the individual states would formulate state implementation plans to meet primary and secondary standards created by the EPA. b. the EPA formulated primary and secondary standards for air pollution; however, the individual states were not required to comply with these standards if they already had reasonable state statutes or regulations in place. c. the states were required to follow the guidelines established by the EPA, and did not have the authority to create their own state plans for implementing the federal standards. d. state laws or regulations preempt or take precedence over the guidelines promulgated by the EPA. 32. Which of the following is a point source of water pollution? a. A discharge from a factory water pipe. b. An oil spill into a body of water. c. A storm water run-off that carries pollutants. d. A water that has been used as a coolant and returned to the waterways. 33. Which of the following would be considered a stationary source? a. a locomotive b. an automobile c. a factory d. All of these are correct. 34. Under the Clean Air Act a. California was granted special permission to set stricter pollution standards than the federal standards. b. all states must follow federal automobile emission standards. c. the states must each set automobile emission standards, which must then be approved by the EPA. d. states were given the option of following federal standards or adopting their own stricter standards. 35. The Toxic Substances Control Act regulates a. chemicals other than pesticides, foods, drugs, and cosmetics. b. insecticides. c. natural gas. d. pesticides.

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Chap 40_9e_Standard 36. James owned real estate. He leased the building to two tenants. An insurance agent leased the first floor and a law firm leased the second floor. James later sold the land to Mary, who used the entire building for her business. She discovered that there were hazardous material storage tanks buried in the land. She removed the tanks, and then sued James and the former tenants for the cost of removing the tanks, even though none of them knew the tanks had been there. Which of the following statements is correct? a. James and the two tenants are liable. b. James is liable to Mary, but the tenants are not. c. The tenants are liable to Mary, but James is not. d. Neither James nor the tenants are liable to Mary. 37. Fresh Air, a nonprofit environmental organization, believes that Cincy Co. is violating the Clean Air Act. The EPA has not taken any action against Cincy Co. In this instance, Fresh Air a. can file a citizen suit against the EPA. b. can file an executive order with Cincy Co. c. cannot file a lawsuit but can ask an administrative law judge to hear its complaint. d. cannot file a lawsuit but can lobby Congress to force the EPA to act. 38. What administrative agency regulates pesticides, insecticides, fungicides, and rodenticides? a. Food and Drug Administration b. Occupational Safety and Health Administration c. Environmental Protection Agency d. Nuclear Regulatory Commission 39. Which of the following is NOT a provision of the Clean Air Act (CAA)? a. The establishment of national ambient air quality standards. b. The prevention of significant deterioration (PSD) program. c. The regulation of stationary sources. d. The consolidation of environmental regulation under one agency. 40. James purchased an abandoned lot. When he started to develop the land, he discovered several underground storage tanks containing hazardous waste buried on the site. He claims the seller, Richard, is liable to him for the cost of removing the tanks. Richard claims he owned the lot for 20 years and never knew of the underground tanks. Richard argues he purchased the land from Thomas and that Thomas or his heirs are liable for the cost of removing the underground tanks. Explain whether Richard is liable to James. Does Thomas or do his heirs have any liability to James or Richard?

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Chap 40_9e_Standard 41. When must an environmental impact statement be prepared and what must it discuss?

42. Discuss the major provisions of the Clean Air Act.

43. Trent was the production manager at HGB, Inc. Under his supervision, HGB filled in an area of wetlands on the company's property without a permit. Has Trent violated the law? What penalties might he face?

44. Foiler Manufacturing, a new corporation, estimates it may generate approximately 200 kilograms of hazardous waste each month. Discuss the EPA requirements it faces in relation to this waste.

45. Discuss the purpose of the Paris Accord and its relationship to the United States.

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Chap 40_9e_Standard Answer Key 1. False 2. True 3. True 4. True 5. False 6. True 7. True 8. False 9. True 10. True 11. True 12. True 13. False 14. True 15. True 16. b 17. c 18. c 19. b 20. b 21. d 22. a 23. d 24. d 25. c 26. b

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Chap 40_9e_Standard 27. a 28. c 29. b 30. c 31. a 32. a 33. c 34. a 35. a 36. b 37. a 38. c 39. d 40. Richard, as the seller of the land, is liable to James for the cost of removing the storage tanks containing the hazardous waste. Under the Comprehensive Environmental Response, Compensation, and Liability Act, usually referred to as the Superfund Act, anyone who has ever owned a site where hazardous waste is found is liable for the cost of the cleanup. It is irrelevant whether the owner knew of the existence of the waste. Thomas, if still living, is also liable to either Richard or James. Only if Thomas's heirs have ever owned the land, or if there had been a contract that created potential liability for the heirs, would they be liable for the cost of cleanup. 41. The National Environmental Policy Act of 1969 (NEPA) requires all federal agencies to prepare an environmental impact statement (EIS) for every major federal action significantly affecting the quality of the human environment. An agency need not prepare an EIS for a particular proposal if it finds, on the basis of a shorter environmental assessment (EA), that the action will not have a significant impact on the environment. An EIS must discuss (1) the environmental consequences of the proposed action; (2) available alternatives; (3) direct and indirect effects; (4) energy requirements; (5) impact on urban quality, historic, and cultural resources; and (6) the means to mitigate adverse environmental impacts. Once a draft report is ready, the federal agency must hold a hearing to allow for outside comments.

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Chap 40_9e_Standard 42. The major provisions of the Clean Air Act are: Primary Standards: Congress directed the EPA to establish national ambient air quality standards (NAAQSs) for primary pollution, that is, pollution that harms the public health. These standards are to be set without regard to cost. Secondary Standards: Congress directed the EPA to establish NAAQSs for pollution that may not threaten health but has other unpleasant effects, such as obstructing visibility or harming plants. State Implementation Plans (SIPs): After the EPA sets primary and secondary standards, states produce SIPs to meet these standards. If a state fails to produce an acceptable SIP, the EPA develops its own plan for that state. Regulation of stationary sources: The EPA sets limits on the amount of pollution a stationary source produces and requires that permits be obtained for construction, operation, or renovation. Prevention of Significant Deterioration (PSD) Program: The EPA does not permit states to let air quality decline, even if the new higher levels of pollution would still meet the EPA's existing national standards. Toxics: The EPA has safety standards for each of the 189 toxics plus any other toxics the EPA wanted to include under the National Emission Standards for Hazardous Air Pollutants. Citizen Suits. The Clean Air Act permits anyone who is or might be adversely affected by any violation to file suit against a polluter or against the EPA for failing to enforce the statute. 43. Trent has violated the law. Those who violate environmental laws are liable for civil damages. In addition, some statutes, such as the Clean Water Act, the Resource Conservation and Recovery Act, and the Endangered Species Act, provide for criminal penalties, including imprisonment. Trent violated the Clean Water Act so he may face criminal penalties and/or imprisonment. 44. Foiler, as does anyone who creates, transports, stores, treats, or disposes of more than a certain quantity of hazardous wastes, must apply for an EPA permit. All hazardous wastes must be tracked from the time they are created to their final disposal at a certified facility. Any company that generates more than a certain amount of hazardous waste in any month must obtain an identification number for its wastes. When it ships the waste to a disposal facility, it must send along a manifest identifying the waste, who is transporting it, and where it is going. Foiler must notify the EPA if it does not receive a receipt from the disposal site indicating that the waste has been received. 45. In 2015, 195 countries entered into the Paris Accord, an agreement to prevent climate change by reducing GHGs. The Accord does not set specific standards. Instead, each country establishes its own goals and there are no penalties for countries that set low goals or who fail to achieve their set targets. However, all countries have pledged to meet every five years to report the results of their emissions programs and to issue more aggressive plans. Historically, the United States has produced more total GHGs than any other country. In 2015, in response to the Paris Accord, the United States committed to cutting its GHG emissions and issued CAA regulations to implement this goal. In 2017, the Trump Administration overturned the regulations and withdrew from the Paris Accord. However, more than 1,200 mayors, governors, and business leaders in the United States have promised to continue efforts to meet the Paris Accord standards.

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Chap 41_9e_Standard Indicate whether the statement is true or false. 1. Only civil penalties can be incurred under the Uniform Trade Secrets Act. a. True b. False 2. A design patent protects the appearance of an item and is valid for 14 years. a. True b. False 3. A patent is available for an idea as well as a tangible application. a. True b. False 4. If a trademarked name acquires a generic meaning, the owner of the trademark loses protection. a. True b. False 5. Unlike with patents, the ideas underlying copyrighted material need not be novel. a. True b. False 6. The Trademark Law Treaty made it more difficult to apply for trademarks around the world. a. True b. False 7. A copyright is valid for 28 years after it is obtained and can be renewed for another 28 years. a. True b. False 8. A trade secret is a formula, device, process, method, or compilation of information that, when used in business, gives the owner an advantage over competitors who do not know it. a. True b. False 9. Trademark dilution occurs in two important ways: blurring and garnishment. a. True b. False 10. The name “Johnson Garage Doors” cannot be a trademark because a surname is already being used and other people have the right to continue to use the name. a. True b. False

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Chap 41_9e_Standard 11. Martina developed a new type of apple tree which could be reproduced through grafting. She cannot protect her rights in this tree by obtaining a plant patent since the tree cannot be reproduced by planting its seeds. a. True b. False 12. Southern Bar-B-Q owns a special, secret recipe for sauce which it guards because it gives the restaurant a competitive advantage. If Mort willfully misappropriates the recipe, a court may hold him liable to Southern for double damages. a. True b. False 13. The Supreme Court has held that parody of copyrighted material is a violation of copyright law. a. True b. False 14. A color cannot be trademarked since it cannot be kept from use by other businesses. a. True b. False 15. Clarissa trademarked her new company Samjack after her two sons Sam and Jack. This would be considered a fanciful trademark. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 16. The vast majority of patents that are issued are a. design patents. b. plant patents. c. utility patents. d. intellectual patents. 17. Ernest invents a novel, useful, nonobvious product. He a. must apply for a patent within one year of selling the product commercially. b. is entitled to a patent over someone else who invents the same product if he is the first to invent it. c. may receive patent protection for two years by filing a simpler, shorter, cheaper provisional patent application while he is working on his complex, regular patent application. d. may sell his product for up to five years to see how well it sells before going through the complex process of filing a patent application with the PTO Office.

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Chap 41_9e_Standard 18. NikeShoes.com produces a running shoe that it sells in the United States. The shoe has a check mark on the side, uses inferior materials, and is made using child labor. Nike, Inc. sues NikeShoes for trademark infringement under the Federal Trademark Dilution Act of 1995. What is likely to be the grounds for this suit? a. NikeShoes is diluting the value of Nike, Inc.'s product and tarnishing its image. b. NikeShoes is not paying Nike, Inc. a percentage of its sales. c. Nike, Inc. does not want its products compared to competitors. d. NikeShoes should not have been awarded a trademark for the check mark on its shoes. 19. Which is NOT a provision of the Digital Millennium Copyright Act? a. It is illegal to delete copyright information or distribute false copyright information. b. It is illegal to use copyrighted material under any circumstances without permission of the creator. c. It is illegal to circumvent encryption or scrambling technologies that protect copyrighted works. d. It is illegal to distribute tools and technologies designed to circumvent encryption devices. 20. There are three categories of valid, distinctive marks. Which is NOT one of them? a. fanciful marks b. suggestive marks c. generic marks d. descriptive marks 21. Monic, a college professor, makes 30 photocopies of a magazine article and passes the article out to her students. The students are assigned to read the article and write an opinion paper about it. Has Monic violated copyright law? a. Yes. Though the author will probably not enforce his or her rights under this situation, Monic has technically violated federal copyright law. b. Yes. Though educators have a right under the "fair use doctrine" to make limited use of copyrighted materials, Monic violated the law when she made photocopies of an entire article and distributed them to her students. c. No. Monic has acted within the fair use doctrine. d. No, as up to 50 photocopies of articles are always permissible. 22. Of the following, which is an advantage of trademark registration? a. Potential damages are lower. b. After five years the mark becomes almost impossible to challenge. c. It allows the trademark owner to use the TM symbol to put others on notice of the protection. d. It can't be used as an internet domain name.

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Chap 41_9e_Standard 23. A college professor copies seven chapters from a book called "How to Get Better Grades—A Creative Approach to College Success!" There are ten chapters in the book. She incorporates this material into a packet that is printed in her college's copy center. The packet is then placed on the required materials list for students to purchase and is sold in the local book store. The author of the book believes the professor has violated his copyright. a. The author is right. The professor should not have copied the chapters and placed them for sale in the bookstore. b. The author is technically correct. However, even though an infringement occurred, he cannot sue the professor since educational personnel are exempt from liability under copyright law. c. The author is not correct. Under the "fair use doctrine," a college professor can copy material and distribute it to students for educational purposes. d. The author is not correct. It does not appear that the professor actually made any money from the alleged copyright infringement. 24. What is the best definition of a trade secret? a. A formula, device, process, method, or compilation of information that, when used in business, gives the owner an advantage over competitors. b. Any combination of words and symbols that a business uses to identify its products or services and distinguish them from others. c. The right of an inventor to prevent others from making, using, or selling his inventions for a limited time. d. The right of a creator to exclusively reproduce, distribute, and perform her work for a limited time. 25. Jason and Stacey posted a copy of their favorite movie, Frozen, on YouTube. When YouTube realized it was posted, it removed it to avoid breaking copyright laws and was not liable for the posting. This is known as a. a legal reaction. b. a safe harbor. c. the digital solution. d. copyright liability. 26. McDonald's famous golden arches and other marks used by the company illustrate a a. suggestive mark. b. service mark. c. certification mark. d. collective mark. 27. A new savings and loan bank called Federal Deposit Bank applied for a trademark of its name. Why will this bank probably not receive trademark approval? a. It is similar to an existing mark. b. It is a generic trademark. c. It is a deceptive mark. d. It is a scandalous or immoral mark.

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Chap 41_9e_Standard 28. The Basic Books, Inc. v. Kinko's Graphic Corp. case held that a. professors could print and sell lengthy course packets of copyrighted material under the "fair use" doctrine. b. professors could not print and sell lengthy course packets of copyrighted material under the "fair use" doctrine. c. professors could not use commercial printing companies under the "fair use" doctrine. d. students could print and sell lengthy course packets of copyrighted material under the "fair use" doctrine. 29. If Cub Cadet wins a trademark infringement suit by proving the defendant’s trademark Kub Kadet is likely to deceive customers about who made the goods, Cub Cadet is entitled to a. up to twice the actual damages. b. an injunction to prevent further infringement. c. any profits Kub Kadet makes on its infringing product going forward. d. a public apology. 30. Intellectual property is a. protected in the same way as land. b. exclusive. c. expensive to produce but cheap to reproduce and transmit. d. expensive to produce, copy, and transmit. 31. A company's trade secret lasts for a. 20 years after the application is filed. b. 70 years after the death of the creator. c. 10 years, but it can be renewed for an unlimited number of terms as long as it is used. d. as long as it is kept confidential. 32. A plant patent lasts for a. 14 years from the date of issuance. b. 70 years after the death of the person who filed the patent. c. 20 years from the date of application. d. the life of the person who filed the patent. 33. Richard wrote a song called "College Days." He copyrighted the composition and had it professionally printed. A couple years later, he was attending a business meeting about 1,500 miles from his home. While sitting in a nightclub, he heard a small local band perform a song called "College Memories." The music and words were extremely similar to his song. The composer of "College Memories" claims he never heard of Richard's song, and that she is offended he would accuse her of stealing his work. If Richard wishes to sue for copyright infringement, he must prove a. only that his song and the infringer's song are substantially the same. b. that his work was original and the infringer actually copied his work, or that the infringer had access to his song and that the two works are substantially the same. c. that he sustained money damages as a result of the infringement. d. that he registered the song for a copyright.

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Chap 41_9e_Standard 34. What is the name of the treaty that allows American patents to be recognized and enforced in member countries? a. the Paris Convention for the Protection of Industrial Property b. the International Treaty of Trademarks and Patents c. the World Agreement of London d. the Berne Convention 35. Which of the following cases concerned a trade secret? a. Association for Molecular Pathology v. Myriad Genetics, Inc. b. Bikram's Yoga College of India, L.P. v. Evolation Yoga, LLC c. AMF Inc. v. Sleekcraft Boats d. CDM Media USA, Inc. v. Simms 36. Victoria registered a trademark under the Lanham Act. Six years later Don noticed Victoria's trademark and filed a lawsuit to enjoin her from using it because he had used it in his home state, even though he hadn't registered it. Will Don prevail? a. Yes. Victoria should have conducted a better search of trademarks registered under state laws. b. Yes. Federal law specifically states a federal trademark is not valid for any lawful owner of the same mark under state law. c. No. Don will not prevail, and Victoria can continue to use the mark because of the time involved. d. No, but Don can register the mark after it has been 10 years since Victoria registered it because Victoria cannot renew it. 37. The USDA Organic Seal is an example of a a. trademark. b. service mark. c. collective mark. d. certification mark. 38. A trademark lasts for a. 20 years after the application is filed. b. 70 years after the death of the creator. c. 10 years, but it can be renewed for an unlimited number of terms as long as it is used. d. as long as it is kept confidential. 39. James and his band played a very familiar song. However, they made up different words for the song that were intended to be funny. James's version of the popular song with different words is known as a a. knock off. b. parody. c. mockarama. d. link.

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Chap 41_9e_Standard 40. In order for a copyright holder to collect money damages from a person who used copyrighted material, it must be proven that a. the infringement was intentional. b. the copyright holder sustained more than $500 in actual damages. c. the copyrighted material contained the copyright symbol, name of the copyright holder, and the year of copyright. d. the infringer actually copied the work. 41. Identify the main provisions of the Digital Millennium Copyright Act.

42. Briefly define patent, copyright, and trademark, and explain how long they last.

43. Explain what a trademark is, and list the four different types of "marks" that can be protected under trademark law. Explain how each mark is used.

44. Derrick buys a CD but, after listening to it, decides he doesn’t like the music. May he legally sell the CD to someone else? If he thinks his cousin would enjoy the music, may he legally copy the CD for her?

45. Rick wrote a song entitled "Wonderful." At the bottom of the first page of the music, he wrote "© 2018 by Rick Reed." Four months later a local band was playing his song at a bar. Rick felt that the bar was an inappropriate setting for his music. What is his remedy?

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Chap 41_9e_Standard Answer Key 1. True 2. True 3. False 4. True 5. True 6. False 7. False 8. True 9. False 10. False 11. False 12. True 13. False 14. False 15. True 16. c 17. a 18. a 19. b 20. c 21. c 22. b 23. a 24. a 25. b 26. b

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Chap 41_9e_Standard 27. c 28. b 29. b 30. c 31. d 32. c 33. b 34. a 35. d 36. c 37. d 38. c 39. b 40. d 41. The Digital Millennium Copyright Act (DMCA) was passed to protect legitimate businesses from copyright pirates. The Act provides that (a) it is illegal to delete copyright information, such as the name of the author or the title of the article, or to distribute false copyright information; (b) it is illegal to circumvent encryption or scrambling devices that protect copyrighted works; and (c) it is illegal to distribute tools and technologies used to circumvent encryption devices. Internet service providers (ISPs) are not liable for posting copyrighted material as long as they are unaware that the material is illegal, and they remove it promptly after receiving a “takedown” notice that it violates copyright law. 42. Patent – Patent is a federal right of exclusive use that may be granted to inventors. Patents may be of three types: utility, design, and plant. Utility patents may protect processes, machines, or compositions of matter. Patentable creations must be novel, nonobvious, and useful. A patent gives the owner the exclusive right to make, use, license, sell, or assign the patent for a period of 20 years from the date of filing the application for the patent (14 years from the date of issuance for a design patent). Copyright – Copyright is a federal right which protects artistic or literary works including literature, music, plays, photographs, motion pictures, recordings, and to some extent computer programs. Copyright protects the particular tangible expression of an idea, but not the underlying idea or method of operation. The federal act allows copyright without registration, but will limit recourse if the work was not registered. The duration of copyright is the life of the author plus 70 years. For a corporate owner, copyright lasts 95 years from publication or 120 years from creation. Trademark – A trademark is a "mark," or a combination of words and symbols, used in conjunction with a trade (or business) which distinguishes that trade (or business) and the goods (or services) thereof from those of others. The trademark is valid for 10 years, but can be renewed for an unlimited number of terms as long as the mark is still being used. If the mark or name becomes a generic term, trademark protection of the mark or name is lost.

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Chap 41_9e_Standard 43. A trademark is any combination of words and symbols that a business uses to identify its products and services and distinguish them from others. Trademarks are important to both businesses and consumers. Often, the terms "trademark" or "mark" are used to refer to both trademarks and service marks. Technically, though, a trademark is affixed to goods in interstate commerce A service mark identifies services, not products. For example, "Burger King" is a service mark. Certification marks are words or symbols used by a person or organization to verify that certain products or services produced by others meet certain standards. An example of a certification mark would be the Good Housekeeping Seal of Approval. A collective mark is used to identify a group, such as the Rotary or Boy Scouts. 44. Under the first sale doctrine, Derrick has the legal right to sell the CD or otherwise dispose of it. However, the first sale doctrine does not allow the owner to make a copy of a copyrighted work. Copying and giving away a copy of the CD would be unfair to the owner of the copyright, who would not receive compensation for the intellectual property rights. 45. Musical works are protected by the Copyright Act. Thus, as a creator of the song, Rick has the benefit of copyright protection. Moreover, Rick has provided public notice of his copyright by indicating the copyright symbol, the date, and his name on the music. If he has registered the copyright with the Library of Congress, Rick's recourse is to bring an action for copyright infringement against the band for using the music without permission. Rick will be entitled to an injunction ordering the band to refrain from playing his song, and possibly damages and profits earned by the band's use of the song. Penalties for intentional copyright infringement are heavier than for unintentional violations, and the presence of a copyright notice is evidence that the infringer's actions were intentional.

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Chap 42_9e_Standard Indicate whether the statement is true or false. 1. A user's presence must be visible and generally known in the area, so that the owner is on notice that his title is contested. a. True b. False 2. Tom rented an apartment from Margaret on a month-to-month basis, with rent due on the first of the month. This type of tenancy is known as a "tenancy at will." a. True b. False 3. If you grant a nonpossessory interest to Eagle Logging to enter your land and remove timber from ten acres, you have granted Eagle a profit. a. True b. False 4. In a condemnation, a court order specifies what compensation is just for the property owner and awards title to the government. a. True b. False 5. In many states today a landlord must use reasonable care to maintain safe premises, and is liable for foreseeable harm. a. True b. False 6. Darlene conveys her beachfront property to Dan as a life estate, and upon Dan's death, the property will revert to Darlene or her heirs. Darlene's future interest in the beachfront property is called a remainder. a. True b. False 7. The implied warranty of habitability requires that a landlord meet all standards set by the local building code, or that the premises be fit for human habitation. a. True b. False 8. Landlords have the right, and may have a duty, to evict tenants who seriously disturb others. a. True b. False 9. If the court awards a partition to co-tenants, the court will normally attempt a partition by kind. If partition by kind is impossible because there is no fair way to divide the property, the court will order the real estate sold and the proceeds equally divided. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 42_9e_Standard 10. Carlos conveys his property "to Noah for life, then to Maxie." Noah has a life estate, and Maxie has a remainder. a. True b. False 11. Landlord-tenant relationships are governed by a mixture of property law, contract law, and negligence law. a. True b. False 12. Patrick owns an office building and leases space on a year-to-year basis. Patrick maintains a reversionary interest on the property. a. True b. False 13. Joint tenancy is the complete opposite of the tenancy in common, and is used more frequently. a. True b. False 14. The Moores's lease contains a clause allowing their landlord to raise their rent during the course of their lease if the landlord’s property taxes increase on the leased premises. This clause is unenforceable, since tenants deserve to know that their rent amount is fixed during their agreed rental time. a. True b. False 15. Juan has the right to walk (or drive) across his neighbor's property to reach the highway. Juan's right is referred to as an easement, which allows use of the land. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 16. If a customer trips and falls over a rip in the carpet in a retail store, who is liable under common law rules? a. The customer is liable because he didn't watch where he was going. b. The landlord alone is liable for not maintaining the property. c. The tenant alone is liable for not informing the landlord of the defective carpet and getting it repaired. d. The landlord and the tenant are probably both liable. 17. Ted and Janet were married and owned a piece of jungle property in a tenancy by the entirety. When Janet died, her will left all of her real property to T.J., Ted and Janet's adult son. T.J. claims he is the sole owner of the jungle property. Ted objects and files a lawsuit for sole ownership of the jungle property. a. Ted will win because property owned in a tenancy by the entirety includes rights of survivorship for the surviving spouse. Ted will get the title to the entire property. b. Ted will win only a one-half interest in the jungle property. T.J. will own the other one-half interest because Janet had the right to will her half of the property to anyone she chose. c. Ted will lose and forfeit his entire interest in the whole property because a tenancy by the entirety means that one party owns the entire property. d. T.J. will be required to sell his share in the property to Ted. Copyright Cengage Learning. Powered by Cognero.

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Chap 42_9e_Standard 18. Christy's new office lease states that rent will increase by 2% per year to cover tax increases. This is known as a(n) a. tax mitigation. b. escalator clause. c. fee escalation. d. tax abatement. 19. An easement by necessity arises when a. one person has the right to enter land belonging to another and make a limited use of it. b. a an owner subdivides land in a way that clearly implies the creation of an easement in favor of the new parcels. c. the dominant tenement absolutely must make use of other property. d. an owner gives the holder temporary permission to enter another’s property. 20. The right of an owner or her heirs to property upon the death of a life tenant is called a a. reversion. b. remainder. c. easement. d. reservation. 21. Daisy's Donuts rents retail space in the Crestwood Mall beginning January 1, 2018, and ending December 31, 2025. This is an example of a a. tenancy at sufferance. b. tenancy at will. c. periodic tenancy. d. tenancy for years. 22. Ali and Latosha bought a house through a mortgage they secured from their local bank. When they failed to make their mortgage payments, the bank used ________ to foreclose on the property and sell it. a. a lien b. adverse possession c. easement by prescription d. reversion 23. Which of the following is a possessory interest in land? a. fee simple absolute b. easement c. profit d. license

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Chap 42_9e_Standard 24. The Solomans own a cabin on the south side of Mount Henry. The Solomans told Bennie and Claudia they could live in the cabin and use it as they wished until the Solomans wanted to use it again. Twelve years later, the Solomans informed Bennie and Claudia that they were going to spend the summer at the cabin and that Bennie and Claudia would have to make other arrangements for the summer. Bennie and Claudia claimed that they had acquired title by adverse possession, because they had occupied the property for the period of time required for adverse possession under state law (10 years in that state). Are Bennie and Claudia correct? a. Yes, Bennie and Claudia were living on the property with exclusive, open possession for a continuous period of time for the required 10 years. b. Yes, Bennie and Claudia had the Solomans' permission, therefore the possession was not illegal. c. No, Bennie and Claudia's possession was with the Solomans' permission, and therefore the claim was not adverse to the Solomans. d. No, there was no warranty deed transferred to Bennie and Claudia. 25. You go to a theater to see a play one Saturday evening. You have a. purchased an interest called a “profit.” b. an easement by reservation. c. a license to enter the theater. d. no property right in the theater just by purchasing the ticket for the play. 26. The landlord's first important duty to a tenant is to a. deliver possession. b. maintain premises. c. pay the security deposit. d. provide eminent domain. 27. Professor McDonald owns the following property. Which of these is NOT real property? a. Professor McDonald's restored Victorian-era house. b. the grove of peach trees on Professor McDonald's property. c. custom-made bookshelves fitted into the library of Professor McDonald's home. d. the books that line Professor McDonald's bookshelves. 28. Unlike a tenant, a licensee a. is not entitled to the exclusive possession of the property. b. is entitled to the exclusive possession of the property. c. has control of the property. d. has only a month-to-month right to use the property. 29. Future interests in land a. are presently existing nonpossessory rights that may or may not develop later. b. are possessory interests because they permit the holder to take possession at some point. c. must create a right to, not merely the possibility of, possession at some time in the future or they would be merely illusory. d. cannot be bought and sold.

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Chap 42_9e_Standard 30. Paul and Diana are married and own a home. Both of their names are on the mortgage. This is an example of a a. tenancy in kind. b. tenancy at will. c. concurrent estate. d. shared estate. 31. Liz and Jeff live in California, a state that recognizes community property. Jeff is a machinist who makes $30,000 a year. Liz is the owner of a franchise where her take-home profit is approximately $75,000 a year. Jeff and Liz purchased a house during their marriage wherein Liz paid three-fourths of the purchase price and Jeff paid onefourth. Which of the following statements is correct with regard to Jeff and Liz? a. Each owns one-half of the real property and other assets they acquire during the marriage. b. The community property rules do not allow Jeff and Liz to maintain separate ownership of assets they each bring to the marriage or inherit. c. Community property can be sold by Jeff or Liz without consent by the other. d. Jeff owns one-fourth of the property and Liz owns three-fourths. 32. Ollie leased a building in Old Town. Ollie installed a washer and dryer unit and a new furnace in the basement of the building with new duct work throughout the building. Upon expiration of the lease, Ollie intends to remove the washer and dryer, but not the furnace. The washer and dryer can easily be removed without harming anything. Removal of the furnace, however, will damage the building. Are the washer, dryer, and furnace fixtures? a. The washer, dryer, and furnace are all fixtures. b. The furnace is a fixture, but the washer and dryer are not. c. The washer and dryer are fixtures, but the furnace is not. d. The furnace and the washer are fixtures, but the dryer is not. 33. Grandpa owns a farm. In a signed writing, Grandpa gave Sue the irrevocable right to use a road on his farm so that Sue could more easily reach her own property. What kind of interest in land did Grandpa give to Sue? a. easement by grant b. easement by implication c. reserved easement d. easement by prescription 34. What is an abatement? a. the power of the government to take private property for public use. b. an order requiring a homeowner to eliminate a nuisance. c. a process under which the original tenant transfers all of his rights and duties to a new tenant. d. the duty to keep losses at a minimum.

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Chap 42_9e_Standard 35. Louie subdivides his oceanfront property with a boat ramp and sells several parcels that do not reach the ocean, promising all purchasers use of the boat ramp. Bernie buys one of the parcels. His right to enter Louie's property to reach the boat ramp is a. an easement by implication. b. a profit appurtenant. c. an easement by reservation. d. a profit in gross. 36. Whether or not the zoning board will grant a request for a variance depends upon a. the type of the proposed building. b. the reaction of the neighbors. c. the reason the owner claims she or he is harmed by the zoning ordinance. d. All of these are correct. 37. Jacques informed his tenants that the railing on their balcony was unstable and he was in the process of repairing it. In the meantime, one of the tenants stepped out onto the balcony and fell through the railing. The tenant sued Jacques. Under common law, is the landlord liable? a. The landlord is liable because there was an understanding that the premises would be kept in a safe condition. b. The landlord is not liable because he informed the tenant of the safety issue. c. The landlord is liable because he did not complete the repair in a timely manner. d. The landlord is not liable because there was no expectation of safety. 38. The bank who lends money in exchange for a mortgage on the borrower's house is considered to be the a. mortgagee. b. mortgagor. c. profitor. d. profitee. 39. A security interest in real property is called a a. lien. b. mortgage. c. grant easement. d. reversion. 40. Mrs. Larkin rents an apartment to a couple who argue continually, disturbing other tenants. Without going through the lawful eviction procedure in court, one day she waits until the couple is out of town and changes all the locks. What has occurred? a. a constructive eviction b. an actual eviction c. an easement d. a variance

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Chap 42_9e_Standard 41. The Rameys are selling their home. They did not set forth in the sales agreement whether the washer and dryer, the draperies, and a cherry corner cabinet that was in the dining room were to be included in the sale or whether they were planning to take these items with them. The buyers are claiming these items are fixtures, and should stay with the house. The Rameys are claiming they are movable goods, and they should not be part of the real estate that was sold. Define “fixtures.” Identify the tests used to determine whether an item is a fixture, and explain whether you think each of the contested items is a fixture.Why, or why not?

42. What is the doctrine of adverse possession? Briefly explain how it works.

43. The city of Richmond needs land owned by the Neelans to expand a middle school. The Neelans do not want to sell. Discuss what course of action the city can take, and the basis for this action.

44. Sandra and Joe own a hobby farm as tenants in common. They also own a vacation home as joint tenants. What is the difference between the tenancy in common and joint tenancy?

45. Discuss the tenant's and the landlord's basic duties under a landlord-tenant relationship.

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Chap 42_9e_Standard Answer Key 1. True 2. False 3. True 4. True 5. True 6. False 7. True 8. True 9. True 10. True 11. True 12. True 13. False 14. False 15. True 16. d 17. a 18. b 19. c 20. a 21. d 22. a 23. a 24. c 25. c 26. a

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Chap 42_9e_Standard 27. d 28. a 29. a 30. c 31. a 32. b 33. a 34. b 35. a 36. d 37. b 38. a 39. b 40. b 41. Fixtures are goods that have become so attached to real property that they have become a part of it. When an owner sells real property, the buyer normally obtains the fixtures, unless the parties specify otherwise. The general rule is that an object is a fixture if a reasonable person would consider the item to be a permanent part of the property. Tests used to determine whether an item is a fixture are: attachment, adaptation, and other objective manifestations of permanence that indicate intent of the owner for the item to remain with the realty. The washer and dryer are probably not fixtures because they are not ordinarily attached to the realty in such a way that removing them would damage the property. The draperies could be fixtures if they were custom-made to fit the particular windows in that house, and would be unlikely to fit other windows. Unless the cabinet was so attached to the house that removing it would damage the house or cabinet, or it was made or adapted especially for attachment to that particular house, or there was some other manifestation indicating that the property owners clearly intended the cabinet to remain permanently, it is probably not a fixture and the sellers could take it with them. 42. Under the doctrine of adverse possession, someone can take title to the land if certain tests are met. In most states, to gain ownership of the land by adverse possession, the user must prove: entry and exclusive possession; open and notorious possession. a claim adverse, or hostile, to the owner. continuous possession for a statutory period.

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Chap 42_9e_Standard 43. The city has the power of eminent domain, which is the power of a government to take private property for public use. The Fifth Amendment to the U.S. Constitution states, “. . . nor shall private property be taken for public use, without just compensation.” The Supreme Court has held that this applies to state and local, as well as the federal, government. Richmond must pay the Neelans a fair price for their real property. This generally means the reasonable market value. If the Neelans refuse Richmond’s offer, Richmond will file suit seeking condemnation of the land. The court will specify what compensation is just and award title to Richmond. 44. The primary difference between these two types of concurrent estates is that joint tenancy has rights of survivorship, which means that upon the death of one of the co-owners, the deceased's interest passes to the surviving joint tenant. Under an ownership by tenancy in common, the deceased co-tenant's interest passes to her beneficiaries named in her will. Also, a tenant in common can convey his interest at any time during ownership. Under a joint tenancy, a conveyance by one of the joint tenants will destroy the rights of survivorship and create a tenancy in common. 45. The tenant's basic duties under a landlord-tenant relationship are the following: pay the rent and any other covenants under the terms of the lease agreement (i.e. security deposit, utilities, insurance, repairs, taxes); use the premises for a proper purpose; don't damage the premises; do not disturb the other tenants; and basic tort duties of care for the rented premises. The landlord's basic duties under a landlord-tenant relationship include: the duty to deliver possession of the premises at the beginning of the tenancy; duty to provide quiet enjoyment of the premises; duty to maintain the premises according to the lease terms and building codes; duty to maintain the premises in a habitable condition; duty to timely return the security deposit or provide the tenant with an accounting of the security deposit; and basic tort duties of care.

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Chap 43_9e_Standard Indicate whether the statement is true or false. 1. While shopping at the mall, Everett's wallet fell out of his pocket. Jon found the wallet. The wallet is abandoned property and Jon may keep it. a. True b. False 2. After a meeting with his advisor to register for a class at State University, Ron forgot his calculator in the dean's outer office. Theresa, another student, found the calculator. The calculator is treasure trove and Theresa may keep it. a. True b. False 3. Jimmy stole Dave’s motorcycle and completely revamped the engine and changed the body. These accessions were very expensive, but Jimmy was completely satisfied with the results, intending to sell the motorcycle for a huge profit. If the motorcycle is recovered from Jimmy, Dave must pay Jimmy for the improvements. a. True b. False 4. Dersett Trucking hauls granite for the major granite companies in Minnesota. Dersett Trucking does not make its trucking services available to the general public. Dersett Trucking is a contract carrier and does not incur strict liability. a. True b. False 5. If property is mislaid, the finder of the property will have a superior claim to possession of the property against everyone except the true owner. a. True b. False 6. The difference between an inter vivos gift and a gift causa mortis is that the inter vivos gift is made during the donor's lifetime and a gift causa mortis is a gift made after the donor's lifetime by the donor's estate. a. True b. False 7. All bailments have to be by agreement between the bailor and bailee. a. True b. False 8. Jerry enters a restaurant and hangs his coat in an unattended cloakroom near the entrance of the restaurant. Even though no employee of the restaurant is present, the provision of the cloakroom makes Jerry think it will be safe. In this situation, the restaurant is the bailor of Jerry’s coat. a. True b. False

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Chap 43_9e_Standard 9. Charles agrees to store Tuan's car in Charles's garage for the winter months while Tuan visits his grandmother in California. As a bailee, Charles is automatically entitled to use Tuan's car while Tuan is away. a. True b. False 10. A bailment was created for the parties' mutual benefit. This means that the bailee must use ordinary care with the property. a. True b. False 11. Stephen wants to give his niece, Dawn, a piece of jewelry as a gift. Stephen gives Tracy, his agent, the bracelet to take to Dawn. The delivery element of making a gift has been completed. a. True b. False 12. In January, Erwin told David, his nephew, that he would give him a car when he graduates from college. David graduated in May. If Erwin refuses to give David a car, David can sue him for breach of an inter vivos gift. a. True b. False 13. If one party makes accessions without agreement and the improvements can be “undone” without damaging the property, the improver must undo them. a. True b. False 14. Mega Corporation, the bailor, negotiates a bailment agreement with Huge Corporation, the bailee. Huge Corporation insists that an exculpatory clause be included in the terms and conditions of the bailment agreement. Later, Huge Corporation negligently (ordinary negligence, not gross negligence) damages the property that is the subject of the bailment. Most courts will allow Huge Corp. to stand behind its exculpatory clause and deny liability. a. True b. False 15. Ed wants to give Howard his old car, but Howard says he doesn’t want it. Howard later reconsiders and tells Ed he does want the car. His previous repudiation means there is no gift, and Howard has no rights in the car. a. True b. False 16. Jody loaned her neighbor, Phil, her snow blower. Phil set it near his driveway and later accidentally ran over and destroyed it. In a suit to recover damages, Jody as plaintiff has the burden of proving that Phil was negligent and caused the destruction of her snow blower. a. True b. False

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Chap 43_9e_Standard Indicate the answer choice that best completes the statement or answers the question. 17. Jared owns 100 acres of woodland. One day, he and Margie are hiking through Jared's woods and Margie finds a gold ring. The true owner is never discovered. Which of the following statements about this situation is correct? a. Because the ring was found on Jared's property, he is probably entitled to keep it. b. Margie found the ring, and since the true owner is unknown the ring now belongs to her. c. By law, Margie needs to return the ring to the spot where she found it, just in case the true owner returns for it. d. The ring must be sold and the profit split evenly between Jared and Margie. 18. Beth owned an original U.S. flag. She had previously loaned the flag to Ross, a lawyer, so that he could display the flag on the wall behind his office desk. One day while visiting Ross in his office and admiring the flag, Beth said to Ross, "You are so fond of that flag, I would like you to have it!" Ross responded with a gracious "thank you." In this situation a. Beth has not made a valid binding gift of the flag, because gifts are never binding and can always be revoked by the donor. b. Beth has not made a valid binding gift of the flag, because the donor must deliver the property to the donee, which was not done here. c. Beth has made a valid binding gift if Beth agreed to give the flag in exchange for Ross's legal services. d. Beth has made a validbinding gift, because she intended to transfer present ownership to Ross and Ross accepted the flag. 19. While digging in his backyard to plant a pear tree, Jonah discovers a bag of gold coins—all of which were minted in the 1800s. The bag of coins would most likely be considered a. lost property. b. mislaid property. c. treasure trove. d. abandoned property. 20. The element that distinguishes a contract from a gift is a. performance of the offeror's or donor's promise. b. the element of consideration which is present in a contract, but not in a gift. c. whether or not the offeree or donee accepts the offer. d. whether or not the subject of the gift or contract is illegal. 21. Hanna intends to give her granddaughter, Melodee, her antique hat pin. This heirloom has been kept under lock and key in the wall vault in the library of Hanna’s house in Virginia. The hat pin is currently the only item in the vault. When Hanna is visiting Melodee in Connecticut, Hanna gives Melodee the only key to the vault. Melodee is grateful for the present and excitedly accepts. In this situation has there been a completed gift? a. No. There has been no physical delivery of the hat pin. b. Yes. There has been physical delivery of the hat pin. c. No. There has only been constructive delivery of the hat pin. d. Yes. There has been constructive delivery of the hat pin.

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Chap 43_9e_Standard 22. Bertha, from Chicago, traveled to San Francisco to attend a conference. Her sister Martha lives in San Francisco, and consequently Bertha made arrangements to spend a couple of days with her sister. The next morning sitting at the breakfast table, Bertha realizes that she packed a mismatched pair of shoes (one is black and the other is blue). Luckily, Martha wears the same size of shoes, and lends Bertha a pair of black leather pumps. During the day, the shoes are damaged while Bertha is wearing them. Bertha's duty of care would be a duty of a. extraordinary care, because this is a bailment for the sole benefit of the bailee. b. ordinary care, because this is a bailment with both parties receiving mutual benefits. c. only slight care, because this is a bailment for the sole benefit of the bailor. d. none, as the sisters would share without condition. 23. Which of the following would NOT be considered personal property? a. collection of vinyl record albums b. field of soybeans c. antique quilt d. None of these are correct. 24. Sarah works for a company that has offered a promotion if she is willing to relocate. Sarah accepts the position and puts her house on the market right away. She sells her house the first day that the realtor holds an open house. The buyer agrees to pay cash for the full purchase price of the house. Sarah is thrilled, except that it means that she will have to put her furniture in storage until she finds another house in her new city. She enters into a written contract with Safe Storage, Inc. The agreement includes a clause excusing Safe Storage, Inc., from any liability for loss or damage, even if the loss or damage results from Safe Storage's negligent acts. Because of Self Storage's negligence, a fire destroys the warehouse and all of its contents, including Sarah's household goods and furniture. Sarah claims that Safe Storage, Inc., is liable for the full value of the contents, which is approximately $10,000. Is Sarah correct? a. Yes, because storage warehouses are strictly liable for loss or damage, regardless of fault and regardless of exculpatory clauses. b. No, because there was equal bargaining power between Sarah and Safe Storage, Inc. c. Yes, because exculpatory clauses are illegal and never enforceable. d. Probably, because often a court will reject an exculpatory clause against a bailor who is a consumer. 25. In the Tannenbaum v. New York Dry Cleaning, Inc. case, a. there was a bailment for hire, and the fact that the bailee was unable to return the bailed item except in a damaged condition created an irrebuttable presumption that the damage to the item was attributable to the bailee’s negligence. b. the court stated that a company cannot, under New York law, use an exculpatory clause to relieve itself from liability for the consequences of its own negligence. c. the court found that the claimant was not bound by the terms of the dry cleaning company’s limitation clause because, even if it applied to the situation before the court, the claimant had not read the clause nor had he assented to its terms. d. the court found that the claimant was negligent in not reading the limitation clause on the back of his claim ticket, so he could not recover the cost of his shirt.

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Chap 43_9e_Standard 26. Jeannie carelessly packed her grandmother's antique glassware and had it shipped to her 30-year-old daughter, Abby, via Common Freight Carriers. When the china arrived at Abby's house, most of the pieces were broken. As there is a contract between Jeannie and Common Freight Carriers, who will bear the loss? a. Under the Carmack Amendment, Jeannie is liable for the loss if Common Freight Carriers shows it was not negligent, and that the loss was caused by Jeannie’s failure to wrap and pack the glassware properly. b. Under the Carmack Amendment, Common Freight Carriers is liable. A common carrier is strictly liable. c. Under the Carmack Amendment, Common Freight Carriers is liable because of its negligence in not inspecting Jeannie's packing job. d. Liability is governed by state statute, and will depend on which state law will control. 27. Alexander loans Miko his baking dish so she can make lasagna for dinner tonight for her family. What kind of bailment is this? a. bailor benefit bailment b. bailee benefit bailment c. constructive bailment d. mutual benefit bailment 28. Lacy set her textbook under her chair in her business law class, and then forgot to take it with her when she left the classroom. A janitor later discovered the textbook and gave it to the Dean of the Business College. In this situation, a. the college is a constructive bailee, obligated to return the textbook to Lacy, and until it does, it is liable for harm to the property. b. the college is a bailee by agreement because holding items in a lost and found box is generally part of the college-student agreement when the student enrolls for classes. c. the college is responsible for the discovered textbook because in this situation, the college is subject to implied warranties unless the college has disclaimed such warranties in the student handbook. d. this is a bailment for the sole benefit of the bailee. 29. Farmer Fred is leasing pasture land from Wealthy Warren. Farmer Fred is working the soil to turn the pasture land into land that will be able to grow crops. As Farmer Fred is preparing the field, he discovers a treasure chest full of gold and silver coins. The coins are all dated before 1810. A finder of treasure trove under common law, a. is entitled to keep the treasure trove. b. is required to turn the property over to the owner. Here, under common law, Farmer Fred is required to turn the treasure trove over to Wealthy Warren. c. is required to turn the treasure trove over to the State. d. is required to turn the treasure trove over to the federal government who will give the treasure trove to the closest Native American reservation.

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Chap 43_9e_Standard 30. Griffith Manufacturing ships 40 crates of goods by Trusty Shipping, a common carrier. Trusty offers Griffith a shipping rate of $725 for a limited liability of $5,000, or a rate of $975 for full liability for any harm to the goods. Griffith chooses the $725 rate. In transit, Trusty’s driver has an accident during an ice storm and all of Griffith’s goods are destroyed, causing a loss of $12,000. If Griffith sues Trusty, a. Trusty will be liable for only $5,000 because a common carrier is allowed to limit its liability by contract. b. Trusty will be liable for the full $12,000 because common carriers have strict liability. c. Trusty will automatically be liable for the full $12,000 under the Carmack Amendment. d. Trusty is subject to normal bailment rules and can escape liability for any damage to the goods by proving that it exercised due care of the property, and that the loss was caused by an act of God. 31. Buck, fearing death from severe injuries suffered in a machinery accident, assigned over a certificate of deposit worth $100,000 and delivered the certificate to Pearl, a friend, who gladly accepts. Buck ends up recovering from the injuries. Why must Pearl give the certificate of deposit back to Buck? a. This type of gift is known as a gift causa mortis. It is a conditional gift which is conditioned on Buck actually dying. Because Buck recovered, the gift is automatically revoked. b. This is an inter vivos gift because Buck was still alive when the gift was made. Any inter vivos gift is revocable because there is no consideration to make Buck's delivery of the certificate binding under contract law. c. This is an inter vivos gift and due to state laws, gifts in contemplation of death must be written into a valid will or otherwise the deceased's assets will be distributed according to state statute. d. This gift is an ordinary gift, but it is revocable because we don't know if the certificate of deposit has matured or not. 32. Which of the following occurs when a person uses labor and/or materials to add value to personal property belonging to another? a. accession b. bailment c. an inter vivos gift d. a mutual-benefit bailment 33. Ali took a seat at a booth at Midway Diner. Between the salt and pepper shakers, Ali noticed something glittering. It was a diamond ring. The ring is a. abandoned property. b. an accession. c. mislaid property. d. treasure trove.

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Chap 43_9e_Standard 34. Jake owns an old piece of exercise equipment. He has been using the equipment merely to hang his clothes on, so Jake decides to get rid of the thing. He takes the unused exercise machine to the landfill and throws it off the back of the truck. Maggie, a teenager, is at the landfill rummaging for useful items. Maggie sees the exercise equipment and decides it is just the thing to give her sister for Christmas, so she decides to take it home. As she is loading it into the back of her pickup truck, Jake stops and tries to get it back. The landfill owner sees the commotion and decides he would like to have the equipment as well. Who has the best rights in the exercise equipment? a. they are all joint owners b. Maggie c. Jake d. the landfill owner. 35. George gave his great-grandfather's pocket watch to Nurse Nadene because he expected to die soon. This is a(n) a. testamentary gift. b. inter vivos gift. c. executed gift. d. gift causa mortis. 36. Which of the following is/are generally subject to a standard of strict liability for bailed goods? a. contract carriers and common carriers b. common carriers and innkeepers c. common carriers d. contract carriers 37. Select the correct answer: a. Rosie rents a locker at the airport, and she puts a bag in the locker. Rosie keeps the locker key. In this case, the bag has been delivered to and accepted by the airport. The airport is a bailee. b. Hill rents a boat to Dan. The boat is located at a lake 30 miles away. Hill gives Dan keys to the boat. Dan drives to the lake and takes possession of the boat. In this case, the boat has been delivered to and accepted by Dan, and Dan is a bailee. c. Unknown to Lon, Jeff left a bike at Lon's house. Lon has not found the bike, and he is not likely to find it because Jeff left the bike under the front porch. In this case, Lon is a bailee of the bike. d. Ken parked a car in a self-service lot, and Ken kept the keys. The parking lot is a bailee. 38. A bailment is different from a gift because a. a gift requires consideration, but a bailment does not. b. a gift requires delivery, but a bailment does not. c. in a bailment, only possession of the property is transferred to the bailee, whereas with a gift, both possession and ownership must pass to the donee. d. a gift is always a contract, but a bailment is generally not a contract.

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Chap 43_9e_Standard 39. In which of the following scenarios has a gift been made? a. Alice takes her vacuum cleaner to the repair shop to be fixed. The owner tells her he won't be able to get to the repair for two weeks. "OK," says Alice. "Keep it until then, and then go ahead with the repair." b. Tim knows that Noah likes his collection of Spiderman comics. He tells Noah, "Even though my comics are worth $500, you can have them for $100." Noah agrees and pays Tim the reduced price. c. Grandpa chuckles as Jessica admires his pocket watch. "Go on, put it in your own pocket, Jessica," he tells her. "You can have it." Jessica thanks her grandpa, and happily tucks the watch into her pocket. d. Edith tells her friend, Mateo, that he may have her antique Victrola record player after she passes away. Mateo gratefully thanks Edith for her kindness. 40. Bruce tells his son, “You can have my 1990 truck, but if your grades fall, I’m taking it back.” Bruce a. has made no gift. b. has made a “revocable gift,” which is effective as a gift as long as the stated condition is met. c. intended to transfer ownership. d. has made a constructive gift. 41. Mitch takes his two best suits to Quality Cleaners and receives a ticket as a receipt. Quality tells Mitch his suits will be cleaned and will be ready to be picked up on Monday. Another customer overhears the exchange and early on Monday goes to Quality, convinces the worker he is Mitch but that he has lost his receipt. He identifies and retrieves the suits, which happen to fit him perfectly too. Quality Cleaners a. is strictly liable to Mitch for the suits. b. is liable to Mitch only if Mitch can prove Quality was grossly negligent. c. has no liability unless Mitch proves Quality did not use ordinary care. d. will avoid liability if the receipt contained an exculpatory clause excluding gross negligence. 42. Distinguish between a contract and a gift. Give an example of each.

43. Bill was shopping at the mall. As he was walking to Tonne's Department Store, his wallet fell out of his pants. While trying on a new suit, Bill left his leather jacket in the change room. Sue found Bill's wallet. Arnie, a sales associate, found his jacket. What kind of found property is Bill's wallet? What kind of property is his jacket? What rights do Sue and Arnie have in the found property?

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44. Discuss whether or not the following common transactions are bailments and if so, who the bailor/bailee is, and what type involved. Renting storage space in Farmer's Frank's huge barn to keep your classic car out of the snow and ice on win A) agreement provides for $100/month rent, and Farmer Frank has the only access to the barn. B) Hiring a moving company to move your belongings to a new residence. C) Loaning your lawn mower to your neighbor. D) Parking your car in a "park and lock" parking lot.

45. Most of the goods contained in a freight train (a common carrier) were destroyed when a tornado wrecked the train. The carrier was sued for damages by all the shippers that had merchandise on the train. Is the carrier strictly liable for the damage done to the goods by the tornado?

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Chap 43_9e_Standard Answer Key 1. False 2. False 3. False 4. True 5. False 6. False 7. False 8. False 9. False 10. True 11. False 12. False 13. True 14. True 15. True 16. False 17. a 18. d 19. c 20. b 21. d 22. a 23. b 24. d 25. c 26. a

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Chap 43_9e_Standard 27. b 28. a 29. a 30. a 31. a 32. a 33. c 34. b 35. d 36. c 37. b 38. c 39. c 40. a 41. a 42. The factor that distinguishes a contract from a gift is that a gift lacks consideration. Consideration can be an act or a promise. Normally, it is either doing or promising to do something you are not legally required to do (or refraining from doing something you are legally entitled to do). A contract usually consists of mutual promises, but a gift is a one-way transaction. An example of a contract is: Jane promises to pay Whit $1,500 to repair her roof by October 1, and Whit agrees. Each promise is consideration for the other promise. An example of a gift is: Myra hands Kim four tickets to a soccer tournament, saying, “We hope you and your family can use these to go to see Debra play on Saturday.” Kim says, “Thanks, we’d love to go.” This is an inter vivos gift whereby Myra intends to transfer ownership immediately. She delivered the tickets to Kim, who accepted them. 43. Lost property is something accidentally given up. The wallet is lost property. Usually the finder has the superior rights to all except the true owner. Mislaid property is something the owner has intentionally placed somewhere and then forgotten. The jacket is mislaid property. Generally, the finder gets no rights in property that has simply been mislaid. If the true owner cannot be located, the mislaid item belongs to the owner of the premises where the item was found —in this situation, Tonne's Department Store.

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44. A bailment involves transferring possession of goods to one who is not the owner. To create a bailment, the bailee must assume p control with intent to possess and return the property (or deliver the property to whomever the bailor designates). This is a bailment. The car owner is the bailor and Farmer Frank is the bailee. The owner of the classic car delivers p A) control to Farmer Frank. The bailment is a mutual benefit bailment. Yes, this is a bailment. The owner of the residential goods is the bailor. The moving company is the bailee. The movin B) company takes physical possession and control of the residential goods. This is a mutual benefit bailment. Yes, this is a bailment. As the owner of the lawn mower, you are the bailor. The neighbor is the bailee. The neighbor C) physical possession of the mower. This is a bailment for the sole benefit of the bailee. No, this is not a bailment. The owner of the car is not giving up control of the car. The owner of the parking lot is not D) possession of the keys to the car.

45. Generally, common carriers are strictly liable for harm to the bailor's goods. Common carriers are governed by a statute known as the Carmack Amendment. If the goods are delivered to the carrier in good condition and the goods are damaged, the carrier is liable. An exception to this is if the carrier can show that it was not negligent and the goods were damaged by an act of God, such as this tornado.

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Chap 44_9e_Standard Indicate whether the statement is true or false. 1. Per capita means each heir gets an equal share of an estate. a. True b. False 2. Jacob has been quite ill. When three of his neighbors come to visit one day, he tells them that he is dying and that he wants them to witness his oral will. In some states, he can validly dispose of his personal property by his witnessed, oral statements. a. True b. False 3. A will is a legal document that disposes of the testator’s property after death. a. True b. False 4. A holographic will must be in a testator’s own handwriting—it cannot be typed or written by someone else. a. True b. False 5. Comprehensive insurance pays the medical expenses and lost wages of the owner, his passengers, and anyone living in his house or authorized to drive the car. a. True b. False 6. The percentage of a decedent's estate that a spouse can claim is called a forced share. a. True b. False 7. In purchasing life insurance, Kelsey concealed the fact that she has a muscular disease. The insurance company can void the policy if the muscular disease is found to be a material fact. a. True b. False 8. Property of a person who dies without a will is distributed according to intestacy laws. a. True b. False 9. Estate planning has two primary goals: to ensure property is distributed as the owner desires and to minimize estate taxes. a. True b. False 10. An executor who is related to the testator is not entitled to compensation. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 44_9e_Standard 11. Reva prepares and signs a document that she intends to be her will. If she has not followed the legal technicalities of her state regarding executing a will, the court may not enforce the will. a. True b. False 12. Jose and Juanita are first cousins. Jose lives in San Francisco, California; Juanita lives in Toronto, Canada. The two have met only once in life and may never meet again. Nonetheless, because they are blood relatives, Juanita has an insurable interest in Jose's life. a. True b. False 13. Parents may not disinherit their minor children without good reason. a. True b. False 14. April purchased a life insurance policy on herself. On her death, the proceeds of the insurance were to be paid to her minor child, Ryan. Ryan is the beneficiary. a. True b. False 15. The Uniform Probate Code has been adopted in all states. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 16. Which type of automobile insurance covers the cost of damage caused by fire, theft, or vandalism? a. liability insurance b. comprehensive insurance c. collision insurance d. uninsured motorist insurance 17. The person who receives the proceeds from an insurance policy is the a. owner. b. testator. c. insurer. d. beneficiary.

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Chap 44_9e_Standard 18. Pamela applies for a life insurance policy with Forever Young Insurance Company. When completing the application form about past surgeries, Pamela forgot about a past outpatient surgery when she had an infected hangnail removed and her toe treated. One year after issuing the policy, Pamela died suddenly from a brain aneurysm. Forever Young denies payment under the policy based on misrepresentation. If Pamela's sister, Paula, sues Forever Young, she will most likely a. win, because once an application has been accepted, an insurer may not use a misrepresentation on the application to avoid liability. b. win, because Pamela's misrepresentation was not a material fact and did not increase Forever Young's risk in insuring Pamela's life. c. lose, because Pamela's application contained a misrepresentation of material fact. d. lose, because an insurer can always use any misrepresentation on an application to avoid paying. 19. Traditional health insurance plans are a. managed care plans. b. value-based plans. c. pay for service plans. d. HMO plans. 20. The cheapest life insurance option is a. straight life insurance. b. whole life insurance. c. casualty insurance. d. term insurance. 21. In estate planning, a person's direct descendants are called a. issue. b. testators. c. heirs. d. grantors. 22. A child who is left nothing under the parent's will is called a a. beneficiary. b. decedent. c. pretermitted child. d. settlor. 23. Darcy buys a life insurance policy on her own life, under which she pays the annual premiums. The insurance is issued for a specific period but is renewable for similar periods. Darcy is covered only as long as she makes the payments. There is no cash value portion to the policy. Darcy probably owns a. whole life insurance. b. key-person life insurance. c. term life insurance. d. an annuity.

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Chap 44_9e_Standard 24. Which of the following is true about wills? a. A will can be amended to change specific terms by execution of a codicil. b. The testatrix cannot disinherit her minor children without stating a reason in the will. c. If the will meets the legal technicalities, the surviving spouse cannot override it. d. Once a will is written, it cannot be changed. 25. Abraham has just purchased his first car. His bank, First State Bank, loaned him the money to buy the car and has required him to purchase insurance to protect the car as the collateral for the loan. Which basic type(s) of coverage should Abraham buy to satisfy the bank requirement and to best protect himself from the risks of operating an automobile? a. collision coverage only b. collision and comprehensive coverage only c. collision, uninsured motorist, and comprehensive coverage d. collision, uninsured motorist, comprehensive, and liability coverage 26. Dr. Gavornne advises his very ill patients to prepare a living will. The purpose of a living will is to a. make a disposition of property. b. express a desire not to have extreme medical treatment that would prolong their lives. c. transfer life insurance. d. consent to organ donation. 27. A short document acknowledging receipt of an application and premium for an insurance policy is called a(n) a. codicil. b. binder. c. power of attorney. d. proxy. 28. Which of the following is NOT required to create a valid trust? a. legal age and sound mind of the grantor b. witnesses c. a beneficiary(ies) d. property transferred to the trust 29. Which is true of an inter vivos trust? a. It is created by a will. b. The grantor cannot serve as trustee. c. It is established while the grantor is still alive. d. Such a trust is not revocable.

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Chap 44_9e_Standard 30. Liability policies, such as personal liability, professional malpractice, or business liability insurance, do NOT protect the insured against a. a personal injury on the insured's property, such as the mail carrier who slips and falls on the owner's sidewalk. b. intentional harm caused by the insured. c. claims for property damaged by the insured. d. someone injured by the insured away from home or business. 31. Which of the following does NOT act as a revocation of a will? a. creating a codicil b. the testator putting an X through it c. physically destroying the will by intentionally shredding it d. signing a new will that expressly revokes prior wills 32. Under the Uniform Anatomical Gift Act, a. an individual may indicate the desire to be an organ donor by putting a provision in his will. The provision will take effect after probate of the will. b. the willingness to be an organ donor may be indicated by signing an organ donation card in the presence of one disinterested witness. c. family members of a decedent have no right to make a gift of the decedent’s organs if the decedent did not make an affirmative indication of the desire to be a donor during her lifetime. d. an effective donation may be made by an individual in a will or on a witnessed organ-donation card or by family members after the person’s death as long as the person did not indicate a desire not to be a donor. 33. If Walter becomes incompetent to manage his affairs, a. his chosen attorney-in-fact can make decisions for him if he appointed the person in a durable power of attorney with a springing power to become effective upon Walter’s incompetence. b. a court will allow an immediate family member to manage his affairs. c. his will becomes effective, and his executor or executrix will manage his business and personal decisions. d. his property will be placed in a trust until such time as he is able to manage his affairs himself. 34. In order to travel extensively and not worry about handling her affairs, Lee transfers most of her assets into a trust, with her bank serving as trustee. She has created a(n) ________ trust. a. travel b. testamentary c. constructive d. inter vivos

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Chap 44_9e_Standard 35. Myron had two children, Cheryl, and Pete, who predeceased him. Cheryl had three children and Pete had one child. Myron had a will. Which of the following is true? a. If Myron's will indicates that the issue are to inherit per stirpes, Pete's child will receive one-half of Myron's estate. b. If Myron's will indicates that the issue are to inherit per stirpes, Pete's child will receive one-fourth of Myron's estate. c. If Myron's will indicates that the issue are to inherit per capita, Pete's child will receive one-half of Myron's estate. d. If Myron's will indicates the issue are to inherit per capita, each of Cheryl's children will receive one-sixth of Myron's estate. 36. Experts estimate that more than _______ percent of the population will not be capable of making their own medical decisions at the end of their lives. a. 25 b. 50 c. 75 d. 90 37. The major disadvantage of a trust is a. expense. b. lack of privacy. c. an often lengthy probate process. d. lack of control. 38. How many witnesses are required for a nuncupative will to be valid? a. one b. two c. five d. seven 39. Which of the following insurance policies continues for a stated period of time with the premiums increasing with the life of the policy? a. double indemnity b. term insurance c. annuity contract d. comprehensive insurance 40. For a nuncupative will to be valid, a. it must be in writing. b. the testatrix must know she is dying, c. it must contain the testator’s signature. d. witnesses who will not inherit under the will must be present.

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Chap 44_9e_Standard 41. Singleton, an 80-year-old widower, remarried. The next day, he made a will leaving everything to his son, Joey. A week after his marriage, Singleton died. How will his estate be handled?

42. Discuss the differences between a will and a trust.

43. Mountain Ridge Bank has been named trustee for a $100,000 trust Fred and Martha Betts established for “the living children of the grantors.” List the requirements for establishing a trust. Identify the primary obligation of the trustee and discuss the fiduciary duty of the trustee.

44. Identify four ways a trust can be terminated.

45. Insurance policies often contain a covenant of good faith and fair dealing. Even if the clause is not in the policy, often courts will imply it. Explain the covenant of good faith and fair dealing and provide an example illustrating when an insurance company might breach this covenant.

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Chap 44_9e_Standard Answer Key 1. True 2. True 3. True 4. True 5. False 6. True 7. True 8. True 9. True 10. False 11. True 12. False 13. False 14. True 15. False 16. b 17. d 18. b 19. c 20. d 21. a 22. c 23. c 24. a 25. d 26. b

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Chap 44_9e_Standard 27. b 28. b 29. c 30. b 31. a 32. d 33. a 34. d 35. a 36. c 37. a 38. b 39. b 40. b 41. In a community property state, a spouse is entitled to claim one-half of all marital property acquired during the marriage. Obviously, this is not a big problem here in that Singleton was only married a week. However, in noncommunity property states, a spouse can claim some percentage of the decedent's probate estate. One of the complaints about a forced share is that it may be unfair in a marriage of short duration. Singleton's bride may get onethird to one-half of the estate after only being married a week. 42. A will is an instrument that helps a person direct her assets to the desired beneficiaries after death. It generally can be revoked or altered at any time prior to death. Without a will, the decedent's property will be distributed according to the intestacy statute of the state where the decedent resided at the time of death. The reasons to have a will include: to distribute assets according to your wishes; to select a personal representative to oversee the estate; to avoid legal issues and expenses that are more likely to arise if there is no will; and to name a guardian for minor children. A trust is an entity that separates legal and beneficial ownership. The trustee becomes the legal owner of the trust assets but must use them for the benefit of the beneficiary, who has equitable title. There are three entities involved in a trust: the settlor, the trustee, and the beneficiary. Trusts may be created while the settlor is alive or through a will. The advantages of a trust include: the settlor can leave instructions for the control of the trust assets after death; a trust can be set up to manage property that will ultimately go to individuals who are currently minors; a trust can save taxes; and the assets of a trust are not probated.

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Chap 44_9e_Standard 43. There are four requirements for establishing a trust: legal capacity of the grantor; appointment of at least one trustee; specific beneficiaries, although they may be listed as a class rather than by name; and specific assets to be the trust property. The primary obligation of Mountain Ridge Bank as the trustee is to carry out the terms of the trust. In carrying out the terms, the trustee has a fiduciary duty to the beneficiaries. The fiduciary duty includes a duty of loyalty (in managing the trust, Mountain Ridge must put the interest of the beneficiaries first, disclose any relevant information to them, not commingle its own assets with those of the trust, not do business with the trust, and not favor one beneficiary over another). The trustee also has a duty of care, acting as a reasonable person would when managing the assets of another. The trustee must make careful investments, keep accurate records, and collect debts owed to the trust. 44. A trust ends: (1) on the date indicated by the grantor; (2) if the trust is revocable, when the grantor revokes it, or if the trust is irrevocable and the grantor and all the beneficiaries agree to revoke it, or if the grantor is dead; (3) when the purpose of the trust has been fulfilled; or (4) the Rule Against Perpetuities comes into effect. The Rule Against Perpetuities provides that a trust must end within 21 years of the death of some named person who is alive when the trust is created. However, nearly half of the states now permit dynasty or perpetual trusts that last forever. 45. This covenant requires the insurance company to act in good faith in investigating, representing, and paying legitimate claims on behalf of its client, the insured. If a court determines that the covenant is intentionally breached, the court may order punitive damages in addition to compensatory damages. Examples include refusing to pay a valid claim or "low balling" with an unreasonably low offer to settle. An insurer might also breach this covenant by wrongfully refusing to settle a claim of a third party. If the rejection of a reasonable offer to settle means that the insured ends up paying much more than the limits of the policy, the insurer may have some liability for a breach of good faith and fair dealing. Fraudulently inducing someone to buy a policy is another example of breach of the covenant of good faith and fair dealing.

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