Solution Manual For SM Essentials of Business Law, 7th Edition Jeffrey F. BeattySusan S. SamuelsonPa by welldoneassistant

Solution Manual For: SM Essentials of Business Law, 7th Edition Jeffrey F. BeattySusan S. SamuelsonPatricia Sanchez Abril, 2022, 9780357634059;

Solution Manual For SM Essentials of Business Law, 7th Edition Jeffrey F. BeattySusan S. SamuelsonPatricia Sanchez Abril, 2022, 9780357634059; Chapter 1: Introduction to Law

Table of Contents Multiple Choice Questions .......................................................................................................................................... 1 Case Questions ................................................................................................................................................................ 2 Discussion Questions..................................................................................................................................................... 4

Multiple Choice Questions 1. The United States Constitution is among the finest legal accomplishments in the history of the world. Which of the following influenced Franklin, Jefferson, and the rest of the Founding Fathers? A. English common-law principles B. The Iroquois’ system of federalism C. Both A and B D. None of the above Answer: C. Both English common-law principles and the Iroquois’ system of federalism shaped the Constitutional framers’ ideas.

2. Which of the following parts of the modern legal system are “borrowed” from medieval England? A. Jury trials B. Special rules for selling land C. Following precedent D. All of the above Answer: D. Countless parts of our modern system originated in Merry Olde England.

3. Union organizers at a hospital wanted to distribute leaflets to potential union members, but hospital rules prohibited leafleting in areas of patient care, hallways, cafeterias, and any areas open to the public. The National Labor Relations Board (NLRB), a government agency, ruled that these restrictions violated the law and ordered the hospital to permit the activities in the cafeteria and coffee shop. What kind of law was it creating? A. A statute B. Common law

Solution Manual For: Chapter 1: Introduction to Law

C. A constitutional amendment D. Administrative regulation Answer: D. The NLRB, as an agency, creates regulations. Congress creates statutes, and judges shape the common law.

4. If the Congress creates a new statute with the president’s support, it must pass the idea by a ____________ majority vote in the House and the Senate. If the president vetoes a proposed statute and the Congress wishes to pass it without their support, the idea must pass by a ____________ majority vote in the House and the Senate. A. simple; simple B. simple; two-thirds C. simple; three-fourths D. two-thirds; three-fourths Answer: B. More than 50 percent to pass initially (a simple majority), two-thirds if an override is necessary.

5. Dr. Martin Luther King, Jr., wrote “An unjust law is no law at all.” As such, “One has … a moral responsibility to obey unjust laws.” Dr. King’s view is an example of: A. legal realism. B. jurisprudence. C. legal positivism. D. natural law. Answer: D. It is an example of the natural law theory of jurisprudence.

Case Questions 1. Lance, an Internet hacker, stole 15,000 credit card numbers and sold them on the black market, making millions. Police caught Lance, and two legal actions followed, one civil and one criminal. Who will be responsible for bringing the civil case? What will be the outcome if the jury believes that Lance was responsible for identity thefts? Who will be responsible for bringing the criminal case? What will be the outcome if the jury believes that Lance stole the numbers? Answer: The civil cases will be brought by the victims of identity theft, and the outcome of a successful case against Lance would be some type of monetary award for damages suffered. The criminal case will be brought by state prosecutors and the outcome would be imprisonment for Lance. 2. As The Oculist’s Case indicates, the medical profession has faced large number of lawsuits for centuries. In Texas, a law provides that, so long as a doctor was not reckless and did not intentionally harm a patient, recovery for “pain and suffering” is limited to no more than $750,000. In many other states, no such limit exists. If a patient will suffer a lifetime of pain after a botched operation, for example, they might recover millions in compensation.

Solution Manual For: Chapter 1: Introduction to Law

Which rule seems more sensible to you—the “Texas” rule, or the alternative? Answer: Answers will vary. 3. You Be the Judge: WRITING PROBLEM Should trials be televised? Here are a few arguments to add to those in the chapter. You be the judge. Arguments against Live Television Coverage: We have tried this experiment and it has failed. Trials fall into two categories: Those that create great public interest and those that do not. No one watches dull trials, so we do not need to broadcast them. The few that are interesting have all become circuses. Judges and lawyers have shown that they cannot resist the temptation to play to the camera. Trials are supposed to be about justice, not entertainment. If a citizen seriously wants to follow a case, they can do it by reading online news reports or the daily newspaper. Arguments for Live Television Coverage: It is true that some televised trials have been unseemly affairs, but that is the fault of the presiding judges, not the media. Indeed, one of the virtues of television coverage is that millions of people now understand that we have a lot of incompetent people running our courtrooms. The proper response is to train judges to run a tight trial by prohibiting grandstanding by lawyers. Access to accurate information is the foundation on which a democracy is built, and we must not eliminate a source of valuable data just because some judges are ill-trained. Answer: For most of the “You Be the Judge” writing problems, we provide the case citation and holding. For this question, of course, there is no definitive answer. 4. Leslie Bergh and his two brothers, Milton and Raymond, formed a partnership to help build a fancy saloon and dance hall in Evanston, Wyoming. Later, Leslie met with his friend and drinking buddy, John Mills, and tricked Mills into investing in the saloon. Leslie did not tell Mills that no one else was investing cash or that the entire enterprise was already bankrupt. Mills mortgaged his home, invested $150,000 in the saloon—and lost every penny of it. Mills sued all three partners for fraud. Milton and Raymond defended on the ground that they did not commit the fraud, only Leslie did. The defendants lost. Was that fair? By holding them liable, what general idea did the court rely on? What Anglo-Saxon legal custom did the ruling resemble? Answer: The partners are indeed liable. Bergh v. Mills, 763 P.2d 214 (Wyo. 1988). That is the essence of a partnership: All partners are liable for the acts of any partner committed in the partnership’s normal business. This is the general idea of collective responsibility. It relates to the “tithing” of English legal history, in which all tithing members were legally responsible for the conduct of the others. 5. The father of an American woman killed in the Paris terrorist attacks sued Twitter, Facebook, and YouTube, alleging the sites knowingly allow ISIS terrorists to recruit members, raise money, and spread extremist propaganda. The sites defended themselves by saying that their policies prohibit terrorist recruitment and that, when alerted to it, they quickly remove offending videos. What type of lawsuit is this—criminal or civil? What responsibilities, if any, should social media sites have for the spread of terrorism? Answer: The case is a civil case, but answers will vary as to the scope of the responsibilities social media sites should have for the spread of terrorism.

Solution Manual For: Chapter 1: Introduction to Law

Discussion Questions 1. In the 1980s, the Supreme Court ruled that it is legal for protesters to burn the American flag. This activity counts as free speech under the Constitution. If the Court hears a new flag burning case in this decade, should it consider changing its ruling, or should it follow precedent? Is following past precedent something that seems sensible to you: always, usually, sometimes, rarely, or never? Answer: Answers will vary. 2. When should a business be held legally responsible for customer safety? Consider the following statements, and consider the degree to which you agree or disagree: a. A business should keep customers safe from its own employees. b. A business should keep customers safe from other customers. c. A business should keep customers safe from themselves. (Example: an intoxicated customer who can no longer walk straight.) d. A business should keep people outside its own establishment safe if it is reasonable to do so. Answer: Answers will vary. 3. In his most famous novel, The Red and the Black, the French author Stendhal (1783–1842) wrote: “There is no such thing as ‘natural law’: this expression is nothing but old nonsense. Prior to laws, what is natural is only the strength of the lion, or the need of the creature suffering from hunger or cold, in short, need.” What do you think? Does legal positivism or legal realism seem more sensible to you? Answer: Natural law should be a question in the back of our minds throughout the course, because it is a reminder of morality, and law without morality is despotism. Nonetheless, Stendhal is obviously correct that both strength and need help to create law. The important thing for this course is continually to apply moral principles to the rules you study, and make your own determinations about whether natural law really plays a role. 4. Before becoming a Supreme Court justice, Sonia Sotomayor stated in a speech to students: “I would hope that a wise Latina woman with the richness of her experiences would more often than not reach a better conclusion than a white male who hasn’t lived that life.” During her Senate confirmation proceedings, this statement was heavily probed and criticized. One senator said that the focus of the hearings was to determine whether Judge Sotomayor would “decide cases based only on the law as made by the people and their elected representatives, not on personal feelings or politics.” (Sotomayor convinced many of her critics, because the Senate confirmed her by a vote of 68–31.) Should judges ignore their life experiences and feelings when making judicial decisions? Answer: Answers will vary. 5. The late Supreme Court Justice Antonin Scalia argued that because courts are not elected representative bodies, they have no business determining certain critical social issues. He wrote: Judges are selected precisely for their skill as lawyers; whether they reflect the policy views of a particular constituency is not (or should not be) relevant. Not surprisingly then, the Federal Judiciary is hardly a cross section of America. Take, for example, this Court, which consists of only nine men and women, all of them successful lawyers who studied at Harvard or Yale Law School. Four of the nine are natives of New York City. Eight of them grew up in east- and west-coast States. Only one hails from the vast expanse in-between. Not a single Southwesterner or even, to tell the truth, a genuine Westerner (California does not count). Not a single evangelical Christian (a group that

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 2: Ethics and Corporate Social Responsibility

comprises about one quarter of Americans), or even a Protestant of any denomination. To allow [an important social issue] to be considered and resolved by a select, patrician, highly unrepresentative panel of nine is to violate a principle even more fundamental than no taxation without representation: no social transformation without representation. Do you agree? Answer: Answers will vary.

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 2: Ethics and Corporate Social Responsibility

Table of Contents Multiple Choice Questions .......................................................................................................................................... 5 Case Questions ................................................................................................................................................................ 6 Discussion Questions..................................................................................................................................................... 8

Multiple Choice Questions 1. The following statement is true: a. Milton Friedman argued that a corporate leader's sole obligation is to make money for the company's owners. b. Milton Friedman argued that corporate leaders should consider the well-being of all company stakeholders, not just shareholders.

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 2: Ethics and Corporate Social Responsibility

c. Milton Friedman argued that lying for prosocial reasons is appropriate. d. Milton Friedman argued that life prospects are a crucial determinant of success in life. Answer: A 2. Which of the following wrote the book Utilitarianism and believed that ethical actions should “generate the greatest good for the greatest number”? a. b. c. d.

Milton Friedman John Stuart Mill Immanuel Kant John Rawls

Answer: B 3. Which of the following believed that the dignity of human beings must be respected and that the most ethical decisions are made out of a sense of duty or obligation? a. b. c. d.

Milton Friedman John Stuart Mill Immanuel Kant John Rawls

Answer: C 4. Kant believed that: a. b. c. d.

it is ethical to tell a lie if necessary to protect an innocent person from great harm. it is ethical to tell a lie if the benefit of the lie outweighs the cost. it is ethical to make a true, but misleading, statement. it is wrong to tell an outright lie or to mislead.

Answer: D 5. The following statement is true: a. Most people rarely lie. b. Even people who do not believe in God are more likely to behave honestly after reading the Ten Commandments. c. Most people are accurate when comparing themselves to others. d. People make their best ethical decisions when in a hurry. Answer: B

Case Questions 1. Should engineers program driverless cars to protect pedestrians or the driver? Who gets to decide? In one study, participants said that, if a car had to choose between ten pedestrians and one driver, it should swerve into a wall, killing the driver and saving the ten people. But when asked what car they would actually buy, participants chose the one that would protect them— © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 2: Ethics and Corporate Social Responsibility

the driver. What would Kant and Mill say about this choice? What would result under the Front Page test? If drivers chose to protect themselves, would they be to blame, legally or ethically, for the deaths of the pedestrians? Answer: Both Kant and Mill would say that driverless cars should kill the driver and save the ten pedestrians. Under the categorical imperative, Kant believes you should not do something unless you’d be willing for everyone else to do it, but here you’d be making a different decision for yourself. Mill would say that saving ten lives maximizes overall happiness. It would be embarrassing under the Front Page test for everyone to know that you had chosen yourself over ten other people. It is difficult to think of the ethical argument for choosing one person over ten.

2. Located in Bath, Maine, Bath Iron Works builds high-tech warships for the Navy. Winning Navy contracts is crucial to the company’s success—it means jobs for the community and profits for the shareholders. Navy officials held a meeting at Bath’s offices with its executives and those of a competitor to review the specs for an upcoming bid. Both companies desperately wanted to win the contract. After the meeting, a Bath worker realized that one of the Navy officials had left a folder on a chair labeled “Business Sensitive.” It contained information about the competitors’ bid that would be a huge advantage to Bath. William Haggett, the Bath CEO, was notified about the file just as he was walking out the door to give a luncheon speech. What ethics traps did he face? How could he avoid these traps? What would result if he considered Mill, Kant, or the Front Page test? What should he do? How would you give voice to your values in this situation? Answer: Haggett ordered the file to be copied. By the time he got back from lunch, the company president had found out about the file and ordered the copy destroyed. But by then, other Bath executives had had a chance to examine the file. Haggett personally returned the file to the Navy, but by then it was too late. The Navy considered banning Bath from bidding on its contracts, which would have meant the end of the company. Haggett resigned. A much beloved CEO and an important figure in Maine, he had worked at Bath for 28 years and his father had been a pipe fitter there. The pitfalls were being in a hurry, money. 3. A group of medical schools conducted a study on very premature babies—those born between 24 and 27 weeks of gestation (instead of the normal 40 weeks). These children face a high risk of blindness and death. The goal of the study was to determine which level of oxygen in a baby’s incubator produced the best results. Researchers did not tell the families that being in the study could increase their child’s risk of blindness or death. The study made some important discoveries about the best oxygen level. These results could benefit many children. What would Mill and Kant say about this decision not to tell the families? Answer: Kant would say it was wrong. Mill would say that the study helped save the eyesight and lives of lots of other children. 4. Each year, the sale of Girl Scout cookies is the major fund-raiser for local troops. But because the organization was criticized for promoting such unhealthy food, it introduced a new cookie, Mango Cremes with Nutrifusion. It promotes this cookie as a vitamin-laden, natural whole food—“A delicious way to get your vitamins.” But these vitamins are a minuscule part of the cookie. The rest has more unhealthy fat than an Oreo. The Girl Scouts do much good for many

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 2: Ethics and Corporate Social Responsibility

girls. And to do this good, they need to raise money. What would Kant and Mill say? What about the Front Page test? What do you say? Answer: Mill would say that the benefit of selling the cookie is greater than the harm. Kant would say that it is the wrong thing to do. The Girl Scouts would not want this information on the front page. 5. The CEO of Volkswagen set an ambitious goal: to triple sales in the United States and become the largest car manufacturer in the world. Employees listened carefully because the CEO had a reputation for punishing those who did not make their goals. Then the VW engineers realized that the emissions equipment on the company’s cars could not meet tough U.S. standards. Fixing the equipment would take time, raise costs, and reduce sales. The engineers believed that other car companies had the same problem. Instead of fixing the equipment, an engineer figured out how to install software that would cheat on the emissions tests. Engineers predicted that the chance of being discovered was low, and executives thought the cost of being caught would be manageable. (Indeed, the company continued its cheating ways, even after it knew that regulators were investigating.) VW produced 11 million cars with this deceptive software. After the company was caught, it spent $18 billion on fines, legal costs, and car repairs. Its sales and stock price plummeted, and it faced criminal investigations. Into what traps did these VW employees fall? Answer: Answers will vary. But ethics traps include money, competition, rationalization, following orders, and a short-term perspective.

Discussion Questions 1. Darby has been working for 14 months at Holden Associates, a large management consulting firm. She is earning $95,000 a year, which sounds good, but does not go very far in New York City. It turns out that her peers at competing firms are typically paid 20% more and receive larger annual bonuses. Darby works about 60 hours a week, more if she is traveling. A number of times, she has had to reschedule her vacation or cancel personal plans to meet client deadlines. She hopes to go to business school in a year and has already begun the application process. Holden has a policy that permits any employee who works as late as 8:00 p.m. to eat dinner at company expense. The employee can also take Uber home. Darby is in the habit of staying until 8:00 p.m. every night, whether or not her workload requires it. She then orders enough food for dinner, with leftovers for lunch the next day. She has managed to cut her grocery bill to virtually nothing. Sometimes she invites her boyfriend to join her for dinner. As a student, he is always hungry and broke. Darby often uses the Holden Uber to charge a ride back to his apartment, although the cost is twice as high as to her own place. Darby has also been known to return online purchases through the Holden mailroom on the company dime. Many employees do that, and the mailroom workers do not seem to mind. Is Darby doing anything wrong? What ethics traps is she facing? What would your Life Principle be in this situation?

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 2: Ethics and Corporate Social Responsibility

Answer: Answers will vary. 2. Steve supervises a team of account managers. One night at a company outing, Lawrence, a visiting account manager, made some wildly inappropriate sexual remarks to Maddie, who is on Steve’s team. When she told Steve, he was uncertain what to do, so he asked his boss. She was concerned that if Steve took the matter further and Lawrence was fired or even disciplined, her whole area would suffer. Lawrence was one of the best account managers in the region, and everyone was overworked as it was. She told Steve to get Maddie to drop the matter—just tell her that these things happen and Lawrence did not mean anything by it. What should Steve do? What ethics traps does he face? What would be your Life Principle in this situation? What should Maddie do? Answer: Answers will vary. 3. Many people enjoy rap music at least in part because of its edgy, troublemaking vibe. The problem is that some of this music could cause real trouble. Thus, Ice-T’s song “Cop Killer” generated significant controversy when it was released. Among other things, its lyrics celebrated the idea of slitting a policeman’s throat. Rick Ross rapped about drugging and raping a woman. Time Warner Inc. did not withdraw Ice-T’s song, but Reebok fired Ross over his lyrics. One difference: Time Warner was struggling with a $15 billion debt and a depressed stock price. Reebok at first refused to take action, but then singing group UltraViolet began circulating an online petition against the song and staged a protest at the main Reebok store in New York. What obligation do media companies have to their customers? What factors matter when making a decision about the content of entertainment? Answer: Answers will vary. 4. You are negotiating a new labor contract with union officials. The contract covers a plant that has experienced operating losses over the past several years. You want to negotiate concessions from labor to reduce the losses. However, labor is refusing any compromises. You could tell them that, without concessions, the plant will be closed, although that is not true. Is bluffing ethical? Under what circumstances? What would Kant and Mill say? What is the result under the Front Page test? What is your Life Principle? Answer: Answers will vary. 5. Craig Newmark founded craigslist, the most popular website in the country for classified ads. Rather than maximizing its profits, craigslist instead focused on developing a community among its users. It was a place to find an apartment, a pet, a job, a couch, a date, a babysitter, and, it turned out, a prostitute. Most of the ads on craigslist were free, but blatant ads for sex were not. Much of the company’s revenue was from these illegal services. Many of the prostitutes available on craigslist were not independent entrepreneurs; they were women and girls bought and sold against their will. To fight sex trafficking, craigslist required credit cards and phone numbers, and it reported any suspicious ads. Law enforcement officials pressured craigslist to close the sex section of its website. But some people argued that blocking these ads was a violation of free speech and would just drive this business more underground where law enforcement officials were less likely to be © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 2: Ethics and Corporate Social Responsibility

able to find it. Others said that banning these ads made the business model of selling children for sex less profitable. Does it seem that trafficking women and children was in keeping with the founder’s Life Principles? What were his options? Could he have had any real impact on this thriving industry? What pitfalls did he face? Answer: Answers will vary. Craigslist ultimately shut down the sex section, but a look at the “therapeutic services” section reveals that prostitution still thrives on craigslist. 6. Many socially responsible funds are now available to investors who factor their values into their investment choices. For example, the Appleseed Fund avoids tobacco products, alcoholic beverages, gambling, weapons systems, or pornography. The TIAA-CREF Social Choice Equity Premier Fund invests in companies that are “strong stewards of the environment,” devoted to serving local communities and committed to high labor standards. Are socially responsible funds attractive to you? Would it matter if they are less profitable than other alternatives? How much less profitable? Do you now, or will you in the future, use them in saving for your own retirement? Answer: Answers will vary. 7. What percentage of your income should you donate to charities? Which charities are most worthwhile? Peter Singer, a Princeton professor, argues that people should give away one-third of their income to worthy charities. But, when entertainment mogul David Geffen donated $100 million to renovate a New York concert hall, Singer said that he could not understand “how anyone could think that giving to the renovation of a concert hall that could impact the lives of generally well-off people living in Manhattan and well-off tourists that come to New York could be the best thing that you could do with $100 million.” He added that a donation of less than $100 million could restore sight to someone who is blind. To what theory of ethics is Professor Singer subscribing? Do you agree with him? What obligation do you have to help others? What is the best way to help others? Answer: Answers will vary. 8. I was working on a trading desk. One year, my team did not make its number, which meant no bonuses and maybe even some of us would be fired. My boss was a good friend of the head of our division, so the head agreed to “reallocate” some of the profit from other teams to ours. So my team got a bonus. When I asked my boss about the ethics of this action, she was annoyed that I was not just grateful. What ethics traps did I face? What should I have done? What is the best way to implement my decision? Answer: Answers will vary. 9. I was a plant manager at a factory that used a lot of steel equipment. When a piece of equipment failed and was not worth repairing, it was sold for scrap. Plant managers usually kept the scrap money for themselves without telling headquarters. The money was considered an unofficial bonus. (After all, the equipment was no longer functional, and plant managers are underpaid.) I felt a little uncomfortable taking the money, but my boss warned me that, if I didn’t, I would make the other plant managers look bad. I could have paid off my credit card debt with that money, but instead, I hosted an employee BBQ and bought work boots for the low-wage workers. Did I do the right thing? What traps did I face? Answer: Answers will vary.

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 3: International Law

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 3: International Law

Table of Contents Multiple Choice Questions ....................................................................................................................................... 11 Case Questions ............................................................................................................................................................. 12 Discussion Questions.................................................................................................................................................. 13

Multiple Choice Questions 6. For which of the following activities can a foreign sovereign be sued? A. Operating a factory dangerously B. Issuing a law that discriminates against a certain group C. Suspending the civil rights of its people D. None of the above Answer: A

7. Outdoor Technologies (an Australian company) obtained a judgment for $500,000 against Silver Star (a Chinese company) in a court in Australia. Silver Star owned property in Iowa so Outdoor filed suit in Iowa to collect the judgment. Which of the following statements is true? A. Outdoor cannot collect in the United States a judgment that was issued by an Australian court. B. Outdoor cannot collect in the United States because Silver is not an American company. C. Outdoor can collect in the United States if the Australian court was fair and proper. D. Outdoor can collect in the United States, because both the United States and Australia have common law systems. Answer: C 8. The president negotiates a defense agreement with a foreign government. To take effect, the agreement must be ratified by which of the following? A. Two-thirds of the House of Representatives B. Two-thirds of the Senate C. The Supreme Court D. A and B E. A, B, and C Answer: B 9. Lynn is an author living in Nevada. She contracted with a company in China, which promised to print her custom children’s books. After receiving Lynn’s payment, the company disappeared without performing. Lynn wants to sue for fraud, but the contract does not say anything about

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 3: International Law

which country’s law will be used to resolve disputes. Both China and the United States are signatories of the CISG. Will the CISG apply in this case? A. Yes, because both countries are signatories. B. Yes, because the parties did not opt out of the CISG. C. No, because the contract does not involve goods. D. No, because the CISG does not establish rules for fraud. Answer: C 10. Austria, Indonesia, and Colombia are all members of the WTO. If Austria imposes a tariff on imports of coffee beans from Colombia, but not from Indonesia, is it in violation of WTO principles? A. Yes, the WTO prohibits tariffs. B. Yes, the WTO prohibits excise taxes. C. Yes, Austria is violating the WTO’s most favored nation rules. D. No, the WTO’s most favored nation rules permit Austria to do this. Answer: C

Case Questions 1. A Saudi Arabian government-run hospital hired American Scott Nelson to be an engineer. The parties signed the employment agreement in the United States. On the job, Nelson reported that the hospital had significant safety defects. For this, he was arrested, jailed, and tortured for 39 days. Upon his release to the United States, Nelson sued the Saudi government for personal injury. Can Nelson sue Saudi Arabia? Answer: Based on Saudi Arabia v. Nelson (US S. Ct. 1993). The Supreme Court found that FSIA applied to immunize Saudi Arabia from the suit. While employing someone is a commercial activity, the Court reasoned that the injury stemmed from his arrest. Since a private citizen cannot jail someone, this is purely a governmental activity. 2. The Instituto de Auxilios y Viviendas is a government agency of the Dominican Republic. Dr. Marion Fernandez, the general administrator of the Instituto and Secretary of the Republic, sought a loan for the Instituto. She requested that Charles Meadows, an American citizen, secure the Instituto a bank loan of $12 million. If he obtained a loan on favorable terms, he would receive a fee of $240,000. Meadows secured a loan on satisfactory terms, which the Instituto accepted. He then sought his fee, but the Instituto and the Dominican government refused to pay. He sued the government in U.S. district court. The Dominican government claimed immunity. Comment. Answer: The suit arose out of a loan agreement. Since this is activity that an individual can engage in, the Dominican government is not immune. 3. Many European nations fear the effects of genetically modified foods, so they choose to restrict their importation. The EU banned the entry of these foods and subjected them to strict labeling requirements. Does this policy contravene the principles of WTO/GATT? Answer: The United States challenged this practice and WTO ruled that GM food had to be allowed into the EU. The WTO held that no scientific evidence supported the EU’s fears and therefore the regulation unduly burdened trade. © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 3: International Law

4. Boston Scientific (BSC), an American multinational, hired Carnero to work in its Argentine subsidiary. Carnero was paid in pesos, and his contract was governed by Argentine law. After BSC fired Carnero, he sued in the United States, claiming that the company terminated him for blowing the whistle on its accounting fraud. If this allegation was true, BSC would be in violation of an American statute, the Sarbanes-Oxley Act (SOX). BSC argued that, because SOX made no mention of extraterritorial application, it did not apply to overseas employees. Should SOX apply to an employee of a U.S. subsidiary working abroad? Answer: Citing the “well-established presumption against the extraterritorial application of Congressional statutes.” the Court declined to extend whistleblower protection to overseas workers of U.S. corporations.

5. Chateau, a Canadian winery, contracted over the phone to buy 1.2 million wine corks from Sabate USA, the U.S. subsidiary of Sabate France. The parent company shipped the corks from France to Canada, along with a pre-printed invoice. The invoice contained a forum selection clause providing that any dispute would be heard in a French court. When Chateau realized that the corks altered the taste of its wine, it sued Sabate in California for breach of contract. Chateau argued that the forum selection clause was not part of the original deal. Furthermore, it had an enforceable oral agreement with Sabate USA, which was governed by the CISG because both Canada and the United States were signatories. Did the CISG govern the dealings between Chateau and Sabate USA? If so, did the contract between Chateau and Sabate USA have to be in writing? Was the forum selection clause enforceable against Chateau? Answer: Yes, the CISG did govern the dealings between the parties, and the agreement did not have to be in writing, as oral contracts were sufficient. But the forum selection clause, the court ruled, was a later attempted modification of an existing contract, and therefore, unenforceable.

Discussion Questions 1. After reading this chapter, do you believe that international law exists? Has your concept of law and legal rules changed? Answer: Answers will vary. 2. After the 9/11 terrorist attacks, the U.S. government imprisoned suspected terrorists in Guantanamo Bay, Cuba. Officials argued that these detainees did not enjoy constitutional rights because they were not on U.S. soil, even though they were held by Americans. Are the freedoms guaranteed by the U.S. Constitution reserved for U.S. citizens on U.S. soil or do they apply more broadly? Answer: In Boumediene v. Bush, 553 U.S. 723 (2008), the Supreme Court disagreed, holding that the Constitution protected the rights of noncitizens outside U.S. borders. 3.

The United Kingdom has not signed the CISG. Until recently, major world traders like Japan and Brazil had refused to sign. Imagine that you are a legislator from one of these countries. What might your objections be to ratifying a treaty on sales law? Answer: Answers may include the following:

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 4: Common Law, Statutory Law, and Administrative Law

 

Legal uncertainty is caused by introducing a new set of rules of sale. Who will interpret new rules and how? These broadly formulated rules contain many undefined and new terms that have to be developed in the international arena by courts and arbitral tribunals and no principles of stare decisis.  The introduction of foreign solutions to well-known problems.  The absence of certain underlying principles.  The law is robbed of its flexibility and is fossilized in a code that is almost impossible to change. The integrity of the Convention is threatened by diverse interpretational approaches and tradition. 4. Generally speaking, should the United States pass laws that seek to control behavior outside the country? Or, when in Rome, should our companies and subsidiaries be allowed to do as the Romans do? Answer: Answers will vary. 5. What responsibility, if any, does the United States have to obey international law? Is it any different from other countries’ responsibility to uphold international law? Why or why not? Answer: Answers will vary.

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 4: Common Law, Statutory Law, and Administrative Law

Table of Contents Multiple Choice Questions ....................................................................................................................................... 14 Case Questions ............................................................................................................................................................. 15 Discussion Questions.................................................................................................................................................. 17

Multiple Choice Questions 11. A bill is vetoed by ___. A. the speaker of the House B. a majority of the voting members of the Senate C. the president D. the Supreme Court Answer: C

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 4: Common Law, Statutory Law, and Administrative Law

12. If a bill is vetoed, it may still become law if it is approved by ___. A. two-thirds of the Supreme Court B. two-thirds of registered voters C. two-thirds of the Congress D. the president E. an independent government agency Answer: C 13. When courts interpret statutes, they ask ___. A. what the words in the statute ordinarily mean B. which political parties endorsed the law C. what Congress intended the law to do D. whether or not the law supports good public policy E. all of the above, except (B) Answer: E 14. Under the Freedom of Information Act (FOIA), any citizen may demand information about ___. A. how an agency operates B. how an agency spends its money C. files an agency has collected on the citizen themself D. all of the above Answer: D 15. If information requested under the FOIA is not exempt, an agency has ___ to comply with the request. A. 10 days B. 30 days C. 3 months D. 6 months Answer: A

Case Questions 1. In 1988, terrorists bombed Pan Am Flight 103 over Lockerbie, Scotland, killing all passengers on board. Congress sought to remedy security shortcomings by passing the Aviation Security Improvement Act (ASIA) of 1990, which, among other things, ordered the Federal Aviation Authority (FAA) to prescribe minimum training requirements and staffing levels for airport security. The FAA promulgated rules according to the informal rulemaking process. However, the FAA refused to disclose certain rules concerning training at specific airports. A public interest group called Public Citizen, Inc., along with family members of those who had died at Lockerbie, wanted to know the details of airport security. What steps should they take to obtain the information? Are they entitled to obtain it? Answer: The groups should, and did, file an “FOIA request”—that is, a request for documents pursuant to the Freedom of Information Act. Most agency information must be made available to the public. But certain information may be exempt. The FOIA exempts matters pertaining to

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 4: Common Law, Statutory Law, and Administrative Law

national security. In addition, the ASIA of 1990 added additional documents that can be exempt—namely, those pertaining to airport security. 2. The ASIA states that the FAA can refuse to divulge information about airport security. The FAA interprets this to mean that it can withhold data in spite of the FOIA. Public Citizen and the Lockerbie family members interpret FOIA as being the controlling statute, requiring disclosure. Is the FAA interpretation binding? Answer: No. Pursuant to the Chevron case, a court will look to see if there is clear congressional intent. If there is, it must be followed. If there is not, then the agency's interpretation will be followed if it is “permissible,” meaning reasonable. In Public Citizen, Inc. v. FAA, 988 F.2d 186, 1993 U.S. App. LEXIS 6024 (D.C. Cir. 1993), the court found that there was a clear congressional intent: to permit the ASIA to exempt additional information from public disclosure for purposes of airport security. The agency's view became irrelevant, but plaintiffs lost anyway. 3. Federal antitrust statutes are complex, but the basic goal is straightforward: to prevent a major industry from being so dominated by a small group of corporations that they destroy competition and injure consumers. Does Major League Baseball violate the antitrust laws? Many observers say it does. A small group of owners not only dominate the industry, but actually own it, controlling the entry of new owners into the game. This issue went to the United States Supreme Court in 1922. Justice Holmes ruled, perhaps surprisingly, that baseball is exempt from the antitrust laws, holding baseball is not “trade or commerce.” Suppose members of Congress dislike this ruling and the current condition of baseball. What can they do? Answer: The congressperson could introduce a bill overruling the Supreme Court’s interpretation of federal antitrust statutes. The bill would specify that baseball is part of trade and commerce, and that Congress intends that it be subject to the antitrust laws, the same as any other nationwide industry. 4. Iseberg, Slavin, and Gross were business partners. After Iseberg forced Slavin out of the business, Slavin told Gross he wanted to shoot Iseberg. Two years later, Slavin did just that, rendering Iseberg a paraplegic. Iseberg sued Gross, arguing he had a duty to warn his former partner of the danger. Who wins and why? Answer: The Supreme Court of Illinois held that there was no affirmative duty to warn or protect against the criminal conduct of a third party, and that such a duty would exist only if there was a special relationship between the parties. The court found no special relationship between the parties. Iseberg v. Gross, 879 NE 2d 278 (2007). 5. The FDA issued regulations requiring tobacco companies to put graphic warning images on their packages. The mandatory images included a corpse after an autopsy, a smoker’s damaged lung, and a man exhaling smoke out of a hole in his neck, among others. What recourse do tobacco companies have if they want to challenge the FDA’s rule? Answer: The tobacco companies could file suit against the FDA, challenging the legality or constitutionality of the regulations. The FDA gained the authority to regulate the tobacco © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 4: Common Law, Statutory Law, and Administrative Law

companies when Congress passed the Tobacco Control Act. The tobacco companies challenged that law and lost. But when they challenged the constitutionality of the regulations themselves, charging that they were in violation of their First Amendment free speech rights, the Court agreed, and the regulations were stricken. The government did not appeal that ruling. R.J. Reynolds Tobacco Co. v. U.S. Food and Drug Administration, 696 F.3d 1205, U.S. Ct. App, Dist. Of Columbia Circuit (2012).

Discussion Questions 1. Courts generally follow precedent, but in the Tarasoff case discussed early in this chapter, they did not. Consider the opening scenario based on the Seinfeld season finale. Should Jerry and his friends bear any civil legal responsibility for the carjacking or should a court follow precedent and hold the smug bunch blameless? Answer: Answers will vary. 2. Revisit the Fox case. Do you agree with the opinion? What would a sensible broadcast obscenity policy contain? When (if ever) should a network face fines for airing bad language? Answer: Answers will vary. 3. This chapter presents various examples where the law intersects with ethics. Jerry and his friends were rude and refused to help. Cher and Nicole Ritchie uttered profanity on live national television at a time when children were watching. What are your Life Principles on these issues? Answer: Answers will vary. 4. During live national coverage of a Super Bowl halftime show, Justin Timberlake tore off part of Janet Jackson’s shirt, exposing her breast for nine-sixteenths of a second. Television network CBS called it a “wardrobe malfunction,” but the “malfunction” coincidentally occurred just as Timberlake was singing the lyrics, “Gonna have you naked by the end of this song.” The FCC fined CBS $550,000 but the network challenged the fine in court. The appeals court held CBS did not have to pay because the FCC did not have a clear policy on momentary displays of nudity. Do you agree with this conclusion? Do you think the incident was intentional or truly accidental? If it was intentional, should CBS have known better, regardless of FCC policies? If it was accidental, should CBS still be held accountable? Should it matter if it was intentional or accidental? Answer: Answers will vary. 5. Should the law require restaurant employees to know and employ the Heimlich maneuver to assist a choking victim? If they do a bad job, they could cause additional injury. Should you permit them to do nothing at all? Is there a compromise position? What social policies are most important? Answer: Answers will vary.

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 5: Constitutional Law

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 5: Constitutional Law

Table of Contents Multiple Choice Questions ....................................................................................................................................... 18 Case Questions ............................................................................................................................................................. 19 Discussion Questions.................................................................................................................................................. 21

Multiple Choice Questions 16. Greenville College, a public community college, has a policy of admitting only male students. If the policy is challenged under the Fourteenth Amendment, ___ scrutiny will be applied. A. strict B. intermediate C. rational D. none of the above Answer: B 17. On your second day at work at Everhappy Corp., you wear a political button supporting your choice for governor in the upcoming election. Your boss glances at it and says, “Get that stupid thing out of this office or you’re fired.” On the walk home after work, you put the button back on. You pass a police officer who blocks your path and says, “Take off that stupid button or I will arrest you.” Which of the following is true? I. Only your boss violated your First Amendment right. II. Only the police officer violated your First Amendment right. III. Both your boss and the officer violated your First Amendment right. IV. Neither violated your First Amendment right. A. I B. II C. III D. IV Answer: C 18. Which of the following statements accurately describes statutes that Congress and the president may create? A. Statutes must be related to a power listed in Article I, section 8, of the Constitution. B. Statutes must not infringe on the liberties in the Bill of Rights. C. Both A and B D. None of the above Answer: C 19. Which of the following is true of the origin of judicial review? © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 5: Constitutional Law

A. B. C. D. E.

It was created by Article II of the Constitution. It was created by Article III of the Constitution. It was created in the Marbury v. Madison case. It was created by the Fifth Amendment. It was created by the Fourteenth Amendment.

Answer: C 20. Which of the following violate the Free Exercise Clause of the Constitution? I. State bans use of peyote (a hallucinogenic drug) in religious ceremonies. II. State prohibits polygamy generally, but a religious group that encourages the practice is affected. III. State erects a monument to the Ten Commandments in a public park. A. I B. II C. III D. I and II E. I and III Answer: A

Case Questions 1. In the landmark 1965 case of Griswold v. Connecticut, the Supreme Court examined a Connecticut statute that made it a crime for any person to use contraception. The majority declared the law an unconstitutional violation of the right of privacy. Justice Black dissented, saying, “I do not to any extent whatever base my view that this Connecticut law is constitutional on a belief that the law is wise or that its policy is a good one. [It] is every bit as offensive to me as it is to the majority. [There is no criticism by the majority of this law] to which I cannot subscribe—except their conclusion that the evil qualities they see in the law make it unconstitutional.” What legal doctrines are involved here? Why did Justice Black distinguish between his personal views on the statute and the power of the Court to overturn it? Answer: The right of privacy is nowhere stated in the Constitution, and its enforcement is an example of the Court applying substantive due process. Justice Black thought the law was terrible but he thought it was even worse for the Court to invent constitutional doctrine simply because it disliked a particular law. He would have preferred to practice judicial restraint—that is, to leave it up to the voters and the state legislature to decide the matter. Clearly a court should not go so far with judicial activism that it becomes a superlegislature. The constitution makes it clear that courts should have a more limited role. Yet since Marbury v. Madison, federal courts have taken it upon themselves to say what the law is, and that frequently means overturning state and federal statutes. An activist court presents society with the danger of unelected judges, with lifetime tenure, foisting their own social agenda on an unwilling populace—but it also offers the potential for powerful officials, who do not have to worry about polls or reelections, to protect the people and the rights that are most vulnerable.

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 5: Constitutional Law

2. Carter was an employee of the Sheriff’s office in Hampton, Virginia. When his boss, Sheriff Roberts, was up for reelection against Adams, Carter “liked” the Adams campaign’s Facebook page. Upon winning reelection, Sheriff Roberts fired Carter, who then sued on free speech grounds. Is a Facebook “like” protected under the First Amendment? Answer: This question is based on Bland v. Roberts (4th Circuit, 2013). The district court had held that “merely liking a Facebook page is insufficient speech to merit constitutional protection,” but the Fourth Circuit disagreed. 3. A state statute prohibits advertising by any sexually oriented business within 1 mile of the state highways. The state argues that the law protects minors and reduces prostitution. The businesses object, claiming that it is an impermissible restriction on commercial speech. Who should prevail? Answer: Answers will vary. But Missouri had such a statute that was challenged by the sexrelated businesses on the grounds that it was a violation of free speech and a denial of equal protection. A federal district court concluded that the law did not infringe on those rights. However, the 8th Circuit Court of Appeals reversed and remanded the decision, among other reasons, because the restrictions were not narrowly drawn. Passions Video, Inc, K.C. v. Nixon, 458 F.3d 837, 8th Circuit(2006). 4. The year is 1964. Ollie’s BBQ is a family-owned restaurant located on a state highway in Georgia, 11 blocks from an interstate highway. The restaurant does not allow African-Americans to eat inside; they must get takeout. More than half of the food serviced in the restaurant had passed through interstate commerce. According to Title II of the Civil Rights Act of 1964, the federal government has the right to prohibit racial discrimination in hotels, restaurants, and other public facilities because local activities have a substantial effect on interstate commerce. The owner of Ollie’s BBQ argues that his business is local and has no impact on interstate commerce. Whose argument will win? Answer: The United States Supreme Court ruled that discrimination in restaurants posed significant burdens on “the interstate flow of food and upon the movement on products generally,” and further imposed restrictions on blacks who traveled from state to state. Congress’s solution to this problem was appropriate and within its bounds to regulate state commerce. Katzenbach v. McClung, 375 U.S. 294 (1964). 5. Edward Salib owned a donut shop. To attract customers, he displayed large signs in his store window. The city ordered him to remove the signs because they violated its Sign Code, which prohibited covering more than 30 percent of a store’s windows with signs. Salib sued, claiming that the Sign Code violated his First Amendment free speech rights. What results? Answer: In his lawsuit, Salib’s main argument was that the Sign Code was not narrowly drawn, as to time, place, and manner, and that the Arizona Constitution provided more stringent protections in that regard than the Federal Constitution. However, the Arizona Court of Appeals ruled that the protections were the same, and found the Sign Code valid. Salib v. City of Mesa, 133 P.3d 756 (Ariz. Ct. App. 2006).

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 6: Dispute Resolution

Discussion Questions 1. What is the proper role of a judge in interpreting the Constitution? Do you believe in judicial activism or judicial restraint? Answer: Answers will vary. 2. ETHICS: The Supreme Court has stated that “although one may find sexually explicit material tasteless and even immoral, it is constitutionally protected so long as it is not obscene.” This chapter discusses the guidelines that determine if speech is obscene for purposes of the First Amendment. Should obscenity ever be protected under the First Amendment? Where do you draw the line? Answer: Answers will vary. 3. Do you believe that the federal government should be able to create whatever laws it deems to be in the country’s best interests, or do you believe that individual states should have more control over the laws within their own borders? Answer: Answers will vary. 4. This chapter is filled with examples of statutes that have been struck down by the courts. Do you like the fact that courts can void laws that they determine to be in violation of the Constitution? Or is it wrong for appointed judges to overrule “the will of the majority” as expressed by elected members of Congress and state legislatures? Answer: Answers will vary. 5. Gender discrimination currently receives “intermediate” Fourteenth Amendment scrutiny. Is this right? Should gender receive “strict” scrutiny as does race? Why or why not? Answer: Answers will vary.

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 6: Dispute Resolution

Table of Contents Multiple Choice Questions ....................................................................................................................................... 21 Case Questions ............................................................................................................................................................. 22 Discussion Questions..................................................................................................................................................... 3

Multiple Choice Questions 21. Nitesh sues Omar for breach of contract. Which of the following is true? A. Nitesh must prove Omar breached the contract beyond a reasonable doubt. B. Nitesh must prove Omar breached the contract by a preponderance of the evidence. C. Omar must prove that he did not breach the contract beyond a reasonable doubt.

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 6: Dispute Resolution

D. Omar must prove that he did not breach the contract beyond a preponderance of the evidence. Answer: B 22. Naquia is suing Allied Corporation. After the discovery process, Naquia believes that no relevant facts are in dispute and that there is no need for a trial. She should move for a _______________. A. judgment on the pleadings B. directed verdict C. summary judgment D. JNOV Answer: C 23. Giuliana lives in Illinois. She applies for a job with a Missouri company, but is rejected because the job is open only to people under 30. She decides to sue the Missouri company under the Age Discrimination in Employment Act, a federal statute. Can Giuliana sue in federal court? A. Yes, absolutely. B. Yes, but only if she seeks damages of at least $75,000. Otherwise, she must sue in a state court. C. Yes, but only because she and the company are citizens of different states. D. No, absolutely not. She must sue in a state court. Answer: A 24. A default judgment can be entered if which of the following is true? A. A plaintiff presents their evidence at trial and clearly fails to meet their burden of proof. B. A defendant loses a lawsuit and does not pay a judgment within 180 days. C. A defendant fails to file an answer to a plaintiff’s complaint on time. D. A citizen fails to obey an order to appear for jury duty. Answer: C 25. Bruno and Cedric are next-door neighbors. Bruno’s dog digs under Cedric’s fence and does $500 worth of damage to Cedric’s garden. Bruno refuses to pay for the damage, claiming that Cedric’s cats “have been digging up my yard for years.” The two argue repeatedly, and the relationship sours. Of the following choices, which has no outside decision maker and is most likely to allow the neighbors to peacefully coexist after working out the dispute? A. Trial B. Arbitration C. Mediation Answer: C

Case Questions

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 6: Dispute Resolution

1. You plan to open a store in Chicago, specializing in rugs imported from Turkey. You will work with a native Turk who will purchase and ship the rugs to your store. You are wise enough to insist on a contract establishing the rights and obligations of both parties and would prefer an ADR clause. But you do not want a clause that will alienate your overseas partner. What kind of ADR clause should you include, and why? Answer: Yes. Try blending ADR mechanisms. Have the ADR clause state that in the event of a dispute, the parties will negotiate it in good faith, and take no further steps for 30 days. If negotiation fails, an additional 30-day cooling-off period follows. The next step could be a minitrial in front of three people, two of whom represent the parties, respectively, and the third acts as a neutral mediator. Finally, if the minitrial fails to produce a settlement, the parties will hire an arbitrator. You might require that the arbitrator be a national of neither Turkey nor the United States. You must specify the law to be applied and where the arbitration will take place. List any claims that are not arbitrable, such as antitrust or securities claims. This should preserve a working relationship while ensuring that disputes will be settled rapidly. 2. Which court(s) have jurisdiction as to each of these lawsuits—state or federal? Explain your reasoning with each. (A) Pat wants to sue his next-door neighbor, Dorothy, claiming that Dorothy promised to sell him the house next door. (B) Paula, who lives in New York City, wants to sue Dizzy Movie Theatres, whose principal place of business is Dallas. She claims that while she was in Texas on holiday, she was injured by their negligent maintenance of a stairway. She claims damages of $30,000. (C) Phil lives in Tennessee. He wants to sue Dick, who lives in Ohio. Phil claims that Dick agreed to sell him 3,000 acres of farmland in Ohio, worth more than $2 million. (D) Pete, incarcerated in a federal prison in Kansas, wants to sue the U.S. government. He claims that his treatment by prison authorities violates three federal statutes. Answer: (A) The state trial court of general jurisdiction may hear the case. There is no federal court jurisdiction. (B) The general trial court of Texas, only. There is no federal court diversity jurisdiction because the money sought is less than $50,000. (C) Ohio’s general trial court has jurisdiction. U.S. District Court has concurrent jurisdiction, based on diversity. The parties live in different states and the amount in question is over $50,000. (D) U.S. District Court has federal question jurisdiction, based on the federal statutes at issue. The general trial court of Kansas has concurrent jurisdiction. 3. British discovery practice differs from that in the United States. Most discovery in Britain concerns documents. The lawyers for the two sides, called solicitors, must deliver to the opposing side a list of all relevant documents in their possession. Each side may then request to look at and copy those it wishes. Depositions are rare. What advantages and disadvantages are there to the British practice? Answer: Discovery is more efficient in Britain, since the solicitors are honor-bound to notify of relevant documents. The fighting over discovery motions that drains time and money in the United States is uncommon there. However, the absence of depositions means that the parties go into court with less information about the opponent’s case, making trials more open to surprise.

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 6: Dispute Resolution

4. After Sam got a tattoo, he was fired by his employer, Douglas Corp. Irate, Sam hired an attorney and sued Douglas for discriminating against people with tattoos. His complaint alleged that he was fired days after he showed his supervisor the new tattoo. There is no law prohibiting employment discrimination on this basis. And the Douglas employee handbook clearly stated that employees should have no visible tattoos. What will likely happen in court after Sam’s attorney files the complaint? Answer: The defendant, Douglas Corp, will file a motion to dismiss the lawsuit for failure to state a cause of action on which relief can be granted. The judge will dismiss the lawsuit. 5. When Giant, Inc., hired Kelly, it gave her an entire binder of papers to sign. Buried in the fine print was a clause requiring any future dispute between the parties to go to arbitration, and the arbitrators would be chosen by Giant. Years later, Kelly filed a sexual harassment suit claiming that her boss fondled her. She demanded her day in court, but Giants’ attorneys claim she was barred due to the arbitration clause. Will Kelly prevail? Answer: Likely yes, because the arbitrator is not neutral, since the arbitrator was to be chosen by Giant, the court will be likely to hold the arbitration clause invalid, and Kelly will proceed with her lawsuit.

Discussion Questions 1.

In the Tony Caruso case described throughout this chapter, the defendant offers to settle the case as several stages. Knowing what you do now about litigation, would you have accepted any of the offers? If so, which ones? If not, why not? Answer: Answers will vary.

The burden of proof in civil cases is fairly low. A plaintiff wins a lawsuit if they are 51 percent convincing, and then they collect 100 percent of their damages. Is this result reasonable? Should a plaintiff in a civil case be required to prove their case beyond a reasonable doubt? Or, if a plaintiff is only 51 percent convincing, should they get only 51 percent of their damages? Answer: Answers will vary.

The Supreme Court has held that businesses can force consumers to arbitrate rather than bring class actions. But at least one study found that individuals rarely sue on their own because it is too expensive. Various consumer groups have proposed rules to block banks and credit card companies from this practice. Should the law ban consumer arbitration agreements? Answer: Answers will vary.

Imagine a state law that allows for residents to sue “spammers”—those who send uninvited commercial messages through email—for $30. One particularly prolific spammer sends messages to hundreds of thousands of people. John Smith, a lawyer, signs up 100,000 people to participate in a class action lawsuit. According to the agreements with his many clients, Smith will keep one-third of any winnings. In the end, Smith wins a $3 million verdict and pockets $1 million. Each individual plaintiff receives a check for $20. Is this a lawsuit reasonable use of the court’s resources? Why or why not? Answer: Answers will vary.

Higher courts are reluctant to review a lower court’s factual findings. Should this be so? Would appeals be fairer if appellate courts reviewed everything? Answer: Answers will vary.

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 7: Crime

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 7: Crime

Table of Contents Multiple Choice Questions ....................................................................................................................................... 25 Case Questions ............................................................................................................................................................. 26 Discussion Questions.................................................................................................................................................. 27

Multiple Choice Questions 26. In a criminal case, which statement is true? A. The prosecution must prove the government’s case by a preponderance of the evidence. B. The criminal defendant is entitled to a lawyer even if they cannot afford to pay for it themself. C. The police are never allowed to question the accused without a lawyer present. D. All federal crimes are felonies. Answer: B 27. The police are not required to obtain a warrant before conducting a search if: A. a reliable informant has told them they will find evidence of a crime in a particular location. B. they have a warrant for part of a property and another section of the property is in plain view. C. they see someone on the street who could possibly have committed a criminal act. D. someone living on the property has consented to the search. Answer: D. 28. Under the exclusionary rule, which statement is true? A. Evidence must be excluded from trial if the search warrant is defective, even if the police believed at the time of the search that it was valid. B. The prosecution cannot use any evidence the police found at the site of the illegal search, but it can use any evidence the police discover elsewhere as a result of the illegal search. C. Any statements a defendant makes after arrest are inadmissible if the police do not read them their Miranda rights. D. If a conviction is overturned because of the exclusionary rule, the prosecution is not allowed to retry the defendant. Answer: C.

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 7: Crime

29. Henry asks his girlfriend, Alina, to drive his car to the repair shop. She drives his car all right—to Las Vegas, where she hits the slots. Alina has committed: A. fraud. B. embezzlement. C. larceny. D. a RICO violation. Answer: C. 30. Which of the following elements is required for a RICO conviction? A. Investment in a legitimate business B. Two or more criminal acts C. Maintaining or acquiring businesses through criminal activity D. Operating a business through criminal activity Answer: B.

Case Questions 1. You Be the Judge: WRITING PROBLEM. An undercover drug informant learned from a mutual friend that Philip Friedman “knew where to get marijuana.” The informant asked Friedman three times to get him some marijuana, and Friedman agreed after the third request. Shortly thereafter, Friedman sold the informant a small amount of the drug. The informant later offered to sell Friedman three pounds of marijuana. They negotiated the price and then made the sale. Friedman was tried for trafficking in drugs. He argued entrapment. Was Friedman entrapped? Argument for Friedman: The undercover agent had to ask three times before Friedman sold him a small amount of drugs. A real drug dealer, predisposed to commit the crime, leaps at an opportunity to sell. If the government spends time and money luring innocent people into the commission of crimes, all of us are the losers. Argument for the Government: Government officials suspected Friedman of being a sophisticated drug dealer, and they were right. When he had a chance to buy three pounds, a quantity only a dealer would purchase, he not only did so, but he bargained with skill, showing a working knowledge of the business. Friedman was not entrapped—he was caught. Answer: Friedman argued entrapment, claiming that there was no evidence of his predisposition to traffic in drugs. The Alabama Supreme Court ruled against him. The court noted that Friedman admitted to occasional use of marijuana, that he had been able quickly to locate marijuana to resell to the agent, and that he showed a sophisticated knowledge of the drug when bargaining over the price of three pounds. The court held that there was no evidence of entrapment. Friedman v. State, 654 So.2d 50, 1994 Ala. Crim. App. LEXIS 179 (1994). 2. Conley owned video poker machines. Although they are outlawed in Pennsylvania, he placed them in bars and clubs. He used profits from the machines to buy more machines. Is he guilty of money laundering? Answer: Yes. It is money laundering to take the proceeds of illegal acts and either conceal them or, as he did, use them to promote additional crimes. © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 7: Crime

3. Shawn was caught stealing letters from mailboxes. After pleading guilty, he was sentenced to two months in prison and three years’ supervised release. One of the supervised release conditions required him to stand outside a post office for eight hours wearing a signboard stating, “I stole mail. This is my punishment.” He appealed this requirement on the grounds that it constituted cruel and unusual punishment. Do you agree? Answer: The appeals court affirmed the sentence on the grounds that it did not violate standards of decency. United States v. Gementera, 379 F.3d 596 (2004). 4. While driving his SUV, George Xinos struck and killed a pedestrian. He then fled the scene of the crime. A year later, the police downloaded information from his car’s onboard computer, which they were able to use to convict him of the crime. Should this information have been admissible at trial? Answer: A California court ruled that Xinos did have a reasonable expectation of privacy, and the data was not admissible in court because the computer had simply been recording his movements on a public road. People v. Xinos, 192 Cal. App. 4th 637 (Cal. App. 6th Dist. 2011). 5. Police arrested Hank on a warrant issued in a neighboring county. When they searched him, the police found drugs and a gun. Only later did the police discover that when they had used the warrant, it was not valid because it had been recalled months earlier. The notice of recall had not been entered into the database. Should the evidence of drugs and a gun be suppressed under the exclusionary rule? Answer: No. The police conduct at issue here comes under one of the exceptions to the exclusionary rule––the good faith exception. The police acted under what appeared to be a valid warrant, and there was no indication that it had been recalled.

Discussion Questions 1. Under British law, a police officer must say the following to a suspect placed under arrest: “You do not have to say anything. But if you do not mention now something which you later use in your defense, the court may decide that your failure to mention it now strengthens the case against you. A record will be made of anything you say and it may be given in evidence if you are brought to trial.” What is the goal of this British law? What does a police officer in the United States have to say, and what difference does it make at the time of an arrest? Which approach is better? Answer: Answers will vary. 2. ETHICS You are a prosecutor who thinks it is possible that Naonka, in her role as CEO of a brokerage firm, has stolen money from her customers, many of whom are not well-off. If you charge her and her company with RICO violations, you know that she is likely to plea bargain because otherwise her assets and those of the company may be frozen by the court. As part of the plea bargain, you might be able to get her to disclose evidence about other people who might have taken part in this criminal activity. But you do not have any hard evidence at this point. Would such an indictment be ethical? Do the ends justify the means? Is it worth it to harm Naonka for the chance of protecting thousands of innocent investors? Answer: Answers will vary. 3. Officer Trottier stopped Marie Winfield for driving 20 miles over the speed limit. He then became suspicious because her son would not make eye contact, and she was eating a

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 7: Crime

Powerbar in a “hurried manner.” The officer asked for and Winfield granted him permission to search her car. During the search, he found a letter, which he read. Has he committed an illegal search? Answer: The court ruled that it was illegal––permission to search a car does not mean permission to read a letter. Winfield v. Trottier, 710 F.3d 49 (2d Cir. 2013). 4. Mickle pleaded guilty to rape. The judge sentenced him to prison for five years and also ordered that he undergo a vasectomy. Was this cruel and unusual punishment? Answer: The appeals court ruled that this sentence was cruel and unusual. Although the operation in itself is not cruel (indeed, many men voluntarily undergo it), when imposed as punishment, it is degrading and in that sense cruel. It is also an unusual punishment. Mickle v. Henrichs, 262 F. 687 (1918).

5. Ramona Fricosu was indicted on charges of real estate fraud. During a legal search of her home, the police found a computer with encrypted files. Would it be a violation of her Fifth Amendment right against self-incrimination to force her to unencrypt these files? Answer: The courts are divided on this topic. This court did order Fricosu to unencrypt the files on the theory that she was already incriminated because the police knew the laptop was hers. United States v. Fricosu, 841 F. Supp. 2d 1232 (D. Colo. 2012). But a different court ruled that a man suspected of having child pornography on his computer did not have to unencrypt the files. United States v. Doe, 670 F.3d 1335 (11th Cir. Fla. 2012). 6. Suppose two people are living together: the suspect and a tenant. If the tenant consents to a police search of the premises, then the police are not required to first obtain a warrant. What if the suspect and the tenant disagree, with the tenant granting permission while the suspect forbids the police to enter? Should the police be required to obtain a warrant before searching? Or what if the suspect denies permission to enter but the police go back later and the tenant consents? Answer: In the first situation, the Supreme Court ruled that if the suspect is standing there and denies consent, the police may not conduct a search. Georgia v. Randolph, 547 U.S. 103 (U.S. 2006). As for the second situation, in 2014, the Supreme Court refused to extend Georgia v. Randolph’s requirement of a co-occupant consent to a situation where the objecting occupant is absent from the property. The decision has implications for people who live with others. Cooccupants should be aware that their fellow co-occupants may consent to a police search if they are not there, even if they previously objected to the consent search. Fernandez v. California, 34 S.Ct. 1126 (2014). 7.

Hiring relatives of foreign officials for no-show jobs is a violation of the FCPA. But what about hiring children of government officials into real jobs? Is that also a violation? The U.S. government is investigating JPMorgan Chase & Co.’s practice of hiring the children of top Chinese officials in Hong Kong. What are the rules in this situation? What should they be? Answer: According to the WSJ, “Factors that would help a company fend off bribery inquiries would include proof that there was a vacant position to start with (as opposed to the company having created a new position for the official’s relative); that the relative was qualified to fill it; and that the relative performed the duties of the position satisfactorily, legal experts said.” Of concern would be any evidence of a quid pro quo around the time of hiring.

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 8: Intentional Torts and Business Torts

8. A police officer in North Carolina stopped Nick’s car because it had a broken brake light. Nick allowed the officer to search the car and, during the search, the officer found cocaine. It turns out that the original stop was invalid because drivers in North Carolina are allowed to drive with only one brake light. The cop did not know the law. Does the exclusionary rule prevent the cocaine from being admissible in court? Answer: If the original stop was illegal, then the search following from it, even though Nick gave permission, cannot stand. The exclusionary rule will apply.

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 8: Intentional Torts and Business Torts

Table of Contents Multiple Choice Questions ....................................................................................................................................... 29 Case Questions ............................................................................................................................................................. 31 Discussion Questions.................................................................................................................................................. 32

Multiple Choice Questions 1.

Jane writes an article for a newspaper reporting that Ann was arrested for stealing a car. The story is entirely false. Ann is not a public figure. Which of the following torts has Jane committed? A. Ordinary slander B. Slander per se C. Libel D. None of the above Answer: C.

2. As a practical joke, Sami sneaks up on Tito, hits him with a baseball bat, and knocks him unconscious. Tito never saw Sami coming. He wakes up with a horrible headache. Which of the following torts has Sami committed? A. Assault B. Battery C. Both assault and battery

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 8: Intentional Torts and Business Torts

D. Neither assault nor battery because it was a practical joke Answer: C 3. Imagine a case in which a jury awards compensatory damages of $1 million. If this is not a maritime case, a jury would rarely be allowed to award more than ____ in punitive damages. A. $1 million B. $3 million C. $9 million D. $10 million E. $25 million Answer: C 4. Aldo runs a red light and hits Carol’s car. She suffers serious injuries and is unable to work for two months after the accident. Carol sues, claiming the following losses: I. $10,000—car repairs II. $10,000—medical expenses III. $10,000—lost wages IV. $10,000—pain and suffering If the jury believes all of Carol’s evidence and she wins her case, how much will she receive in compensatory damages? A. $40,000 B. $30,000 C. $20,000 D. $10,000 E. $0 Answer: A 5. Amil hired Barney, a realtor, to sell his house in exchange for a 3 percent commission. Barney showed the house to Courtney, who pretended she was not interested but then secretly approached Amil with an offer: Cut Barney out of the deal and she would pay full price. Amil accepted and sold the house to Courtney. When Barney found out, he was furious. What tort might Courtney have committed? A. Fraud B. Tortious interference with contract C. Tortious interference with prospective advantage

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 8: Intentional Torts and Business Torts

D. Intentional infliction of emotional distress Answer: B

Case Questions 1. You are a vice-president in charge of personnel at a large manufacturing company. In-house detectives inform you that Gates, an employee, was seen stealing valuable computer equipment. Gates denies the theft, but you believe the detectives and fire him. The detectives suggest that you post notices around the company, informing all employees what happened to Gates and why. This will discourage others from stealing. While you think that over, a phone call from another company’s personnel officer asks for a recommendation for Gates. Should you post the notices? What should you say to the other officer? Answer: These are difficult problems, which a manager must think through carefully. Negative statements can lead to a defamation lawsuit. If you have irrefutable proof that Gates did steal, you are probably on safe ground. But if you doubt your ability to prove his theft, you must be very careful. If you state to the personnel officer precisely what you know about the theft, and nothing more, you are probably on safe ground. Even if you are incorrect, most courts will hold that you have qualified privilege to speak to someone who needs to know the truth. As long as you display no malice, you are not committing slander. Some managers, though, are extra careful and simply refuse to say anything in such a situation. As to posting the notices, you should not do it. The other employees have no need to know your allegations about Gates, and thus you have no qualified privilege to inform them. If you are wrong, it is libel, and juries are often very sympathetic to injured employees. 2. Tata Consultancy of Bombay, India, is an international computer consulting firm. It spends considerable time and effort recruiting the best personnel from India’s leading technical schools. Tata employees sign an initial three-year employment commitment, often work overseas, and agree to work for a specified additional time when they return to India. Desai worked for Tata, but then quit and formed a competing company, which he called Syntel. His new company contacted Tata employees by phone, offering more money to come work for Syntel, bonuses, and assistance in obtaining permanent resident visas in the United States. At least 16 former Tata employees left their work without completing their contractual obligations and went to work for Syntel. Tata sued. What did it claim, and what should be the result? Answer: Tata sued for interference with contractual rights. The U.S. district court granted summary judgment for Syntel, but on appeal the court of appeals reversed. The court stated that Syntel had “sought to reap where it had not sown by actively and systematically soliciting Tata employees . . . before they were legally free to do so . . . “ It remanded the case for trial. 3. Pacific Express began operating as an airline in 1982. It had routes connecting western cities with Los Angeles and San Francisco, and by the summer of 1983, it was beginning to show a profit. In 1983, United Airlines tried to enter into a cooperative arrangement with Pacific in which United would provide Pacific with passengers for some routes so that United could concentrate on its longer routes. Negotiations failed. Later that year, United expanded its routes to include cities that only Pacific had served. United also increased its service to cities in which the two airlines were already competing. By early 1984, Pacific Express was unable to compete

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 8: Intentional Torts and Business Torts

and sought protection under bankruptcy laws. It also sued United, claiming interference with a prospective advantage. United moved for summary judgment. Comment. Answer: The U.S. district court gave summary judgment for United, and the court of appeals affirmed. Pacific Express, Inc. v. United Airlines, Inc., 959 F.2d 814, 1992 U.S. App. LEXIS 5139 (9th Cir. 1992). The primary issue was whether United was genuinely trying to compete, which it had the right to do, or was simply out to destroy Pacific, which would be interference with a prospective advantage (as well as an antitrust violation). United officials testified that the expanded routes would generate new connecting traffic for other San Francisco flights. That is a competitive purpose, which is legitimate, and enough to defeat Pacific’s claim. 4. Lindsay had a limp. As she exited a Marshall’s store and walked to her car, a store security guard asked her what was wrong. She said that she had been in a car accident and showed the security guard her handicapped parking permit. The security guard responded, “Hah man, she is all ‘f*****-up.” Lindsay cried all night and suffered damage to her self-esteem. She sued for IIEC. What result? Answer: The court concluded these crass statements did not rise to the requite level of major outrage. “Emotional distress inflicted by another is not an uncommon condition and includes all highly unpleasant mental reactions such as horror, fright, grief, shame, humiliation, embarrassment, anger, chagrin, disappointment, worry, and nausea. Although Broom’s statements were harsh, inappropriate, rude, vulgar, and unkind, we are constrained to find that his conduct does not meet the threshold of outrageousness and egregiousness necessary to sustain a claim for intentional infliction of emotional distress. Ashman v. Marshall’s of MA, Inc., 535 S.E.2d 165 (Ga. Ct. App. 2000). 5. Andrew Greene sued Paramount Pictures for defamation arising out of the film “The Wolf of Wall Street.” Although the film did not use his name, Greene alleged that the fictitious toupeewearing character Nicky “Rugrat” Kosksoff was based on him. The film portrayed Rugrat as a “criminal, drug user, degenerate, depraved, and devoid of any morality or ethics.” What would Greene need to prove to be successful in his claim? Answer: To prove defamation, a plaintiff must prove a defamatory statement that was false and communicated to others. He must also prove that the statement caused injury. The district judge denied Paramount’s motion to dismiss the lawsuit as to defamation. Even though the movie did not use Greene’s name or image, the court found that making the connection to the plaintiff was reasonable and the likeness “unmistakable.” Greene v. Paramount Pictures corp., 138 F.Supp.3d 226 (2015).

Discussion Questions 1. The Supreme Court limits punitive damages in most cases to nine times the compensatory damages awarded in the same case. Is this a sensible guideline? If not, should it be higher or lower? Answer: Answers will vary. 2. You have most likely heard of the Liebeck v. McDonald’s case. Liebeck spilled hot McDonald’s coffee in her lap and suffered third-degree burns. At trial, evidence showed that her cup of coffee was brewed at 190 degrees, and that, more typically, a restaurant’s "hot coffee" is in the range of 140 to 160 degrees.

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 9: Negligence, Strict Liability, and Product Liability

A jury awarded Liebeck $160,000 in compensatory damages and $2.7 million in punitive damages. The judge reduced the punitive award to $480,000, or three times the compensatory award. Comment on the case and whether the result was reasonable. Answer: Answers will vary. 3. With a national debt in the trillions, people are desensitized to "mere" billions. Stop for a moment and consider $1 billion. If you had that sum, invested it conservatively, and got a 5 percent return, you could spend roughly $1 million a week for the rest of your life without reducing your principal. This chapter described three lawsuits with jackpot punitive damages awards. The jury award was $10 billion in Texaco v. Pennzoil, $5 billion in the Exxon Valdez case, and $3 billion in Boeken v. Philip Morris. Is there any point at which the raw number of dollars awarded is just too large? Was the original jury award excessive in any of these cases? If so, which one(s)? Answer: Answers will vary. 4. Many retailers have policies that instruct employees not to attempt to stop shoplifters. Some store owners fear false imprisonment lawsuits and possible injuries to workers more than losses related to stolen merchandise. Are these "don’t be a hero" policies reasonable? Would you put one in place if you owned a retail store? Answer: Answers will vary.

5. The Supreme Court has defined public figures as those who have “voluntarily exposed themselves to increased risk of injury by assuming an influential role in ordering society.” When deciding whether someone is a public figure, courts look at whether this person has received press coverage, sought the public spotlight, and has the opportunity to publicly rebut the accusations. Some have argued that social media makes anyone with a public Facebook profile or a certain number of Twitter followers a public figure. Do you agree? Should the Court revisit the definition of “public figure” in light of social media? Answer: Answers will vary.

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 9: Negligence, Strict Liability, and Product Liability

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 9: Negligence, Strict Liability, and Product Liability

Table of Contents Multiple Choice Questions ....................................................................................................................................... 34 Case Questions ............................................................................................................................................................. 35 Discussion Questions.................................................................................................................................................. 37

Multiple Choice Questions 1. Two cars, driven by Fred and Barney, collide. At trial, the jury determines that the accident was 90 percent Fred’s fault and 10 percent Barney’s fault. Barney’s losses total $100,000. If he lives in a state that uses contributory negligence, Barney will recover ________________. A. $0 B. $10,000 C. $50,000 D. $90,000 E. $100,000 Answer: A 2. Assume the same facts as in question 1, except now, Barney lives in a state that follows comparative negligence. Now Barney will recover _____________________. A. $0 B. $10,000 C. $50,000 D. $90,000 E. $100,000 Answer: D 3. Zack lives in a state that prohibits factory laborers from working more than 12 hours in any 24hour period. The state legislature passed the law to cut down on accidents caused by fatigued workers. Ignoring the law, Zack makes his factory employees put in 14-hour days. Eventually, a worker at the end of a long shift makes a mistake and severely injures a coworker. The injured worker sues Zack. Which of the following terms will be most relevant to the case? A. Res ipsa loquitur B. Assumption of the risk C. Negligence per se D. Strict liability Answer: C 4. Randy works for a vending machine company. One morning, he fills up a vending machine that is on the third floor of an office building. Later that day, Mark buys a can of Pepsi from that machine. He takes the full can to a nearby balcony and drops it three floors onto Carl, a

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 9: Negligence, Strict Liability, and Product Liability

coworker who recently started dating Mark’s ex-girlfriend. Carl falls unconscious. Which of the following can be considered a factual cause of Carl’s injuries? A. Randy B. Mark C. Both Randy and Mark D. None of the above Answer: C 5. For this question, assume the same facts as in question 4. Now determine which of the following can be considered a proximate cause of Carl’s injuries? A. Randy B. Mark C. Both Randy and Mark D. None of the above Answer: B 6. CPA Question: Which of the following factors is least important in determining whether a manufacturer is strictly liable in tort for a defective product? A. The negligence of the manufacturer B. The contributory negligence of the plaintiff C. Modifications to the product by the wholesaler D. Whether the product caused injuries Answer: A

Case Questions 1. At approximately 7:50 p.m. bells at the train station rang and red lights flashed, signaling an express train’s approach. David Harris walked onto the tracks, ignoring a yellow line painted on the platform instructing people to stand back. Two men shouted to Harris, warning him to get off the tracks. The train’s engineer saw him too late to stop the train, which was traveling at approximately 99 mph. The train struck and killed Harris as it passed through the station. Harris’s widow sued the railroad, arguing that the railroad’s negligence caused her husband’s death. Evaluate her argument. Answer: Harris was a trespasser and as a result the railroad had no duty of due care to him. The railroad would be liable only if it caused Harris’s death by reckless or intentional conduct. There was no evidence of either. The widow was not permitted to introduce evidence of negligence, because even if the railroad had been negligent, it would be not be liable. Harris v. Mass. Bay Transit Authority (D. Mass. 1994), Mass. Lawyer’s Weekly, Feb. 7, 1994, p.15.

2. Ryder leased a truck to Florida Food Service. Powers, an employee, drove it to make deliveries. He noticed that the door strap used to close the rear door was frayed, and he asked Ryder to fix it. Ryder failed to do so in spite of numerous requests. The strap broke, and Powers replaced it with a nylon rope. Later, when Powers was attempting to close the rear door, the nylon rope broke and he fell, sustaining severe injuries to his neck and back. He sued Ryder. The trial court found that Powers’ attachment of the replacement rope was a superseding cause, relieving

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 9: Negligence, Strict Liability, and Product Liability

Ryder of any liability, and granted summary judgment for Ryder. Powers appealed. How should the appellate court rule? Answer: The case was reversed and remanded for trial. Powers v. Ryder Truck, 625 So. 2d 979, 1993 Fla. App. LEXIS 10729 (Fla. Dist. Ct. App. 1993). Whether an event is a superseding cause is a jury question, unless it is so bizarre as to be entirely unforeseeable by the defendant. Here, even if Powers was negligent in attaching a nylon rope, that negligence was not so bizarre as to be unforeseeable by Ryder. 3. A new truck, manufactured by General Motors Corp., (GMC), stalled in rush hour traffic on a busy interstate highway because of a defective alternator, which caused a complete failure of the truck’s electrical system. The driver stood nearby and waved traffic around his stalled truck. A panel truck approached the GMC truck, and immediately behind the panel truck, Davis was driving a Volkswagen Fastback. Because of the panel truck, Davis was unable to see the stalled GMC truck. The panel truck swerved out of the way of the GMC truck, and Davis drove straight into it. The accident killed him. Davis’s widow sued GMC. GMC moved for summary judgment, alleging (1) no duty to Davis, (2) no factual causation, and (3) no foreseeable harm. Comment. Answer: Summary judgment for GMC denied. General Motors Corp. v. Davis, 141 Ga. App. 495, 233 S.E.2d 825 (Ga. Ct. App. 1977). GMC owes a duty to everyone on the highway since the possibility of an accident is apparent. There was factual causation: had it not been for the faulty alternator the truck would never have stalled. And this chain of events is entirely foreseeable. GMC need not foresee precisely what happened; only that something like this could happen. 4. You Be the Judge: WRITING PROBLEM: When Thomas and Susan Tamplin were shopping at Star Lumber with their six-year-old daughter Ann Marie, a 150-pound roll of vinyl flooring fell on the girl, seriously injuring her head and pituitary gland. Ann was clearly entitled to recover for the physical harm, such as her fractured skull. The plaintiffs also sought recovery for potential future harm. Their medical expert was prepared to testify that, although Ann would probably develop normally, he could not rule out the slight possibility that her pituitary injury might prevent her from sexually maturing. Is Ann entitled to damages for future harm? Argument for Ann: This was a major trauma, and it is impossible to know the full extent of the future harm. Sexual maturation is a fundamental part of life; if there is a possibility that Ann will not develop normally, she is entitled to present her case to a jury and receive damages. Argument for Star Lumber: A plaintiff may not recover for speculative harm. The “slight possibility” that Ann could fail to develop is not enough for her to take her case to the jury. Answer: The expert should not have been permitted to testify, because there was only a slight possibility that Ann would fail to develop normally. If there had been a substantial possibility that she would not develop normally, then evidence could have been admitted concerning a reasonable fear of the future harm. Although the evidence was erroneously admitted, the court found that it was harmless error, because Ann’s injuries were serious enough to support the verdict. Tamplin v. Star Lumber & Supply Co., 251 Kan. 300, 836 P.2d 1102, 1992 Kan. LEXIS 148 (Sup. Ct. Kan. 1992). 5.

Texaco, Inc., and other oil companies sold mineral spirits in bulk to distributors, which then resold to retailers. Mineral spirits are used for cleaning. Texaco allegedly knew that the retailers, such as hardware stores, frequently packaged the mineral spirits (illegally) in used half-gallon milk containers and sold them to consumers, often with no warnings on the packages. Mineral spirits are harmful or fatal if swallowed. David Hunnings, aged 21 months, found a milk

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 9: Negligence, Strict Liability, and Product Liability

container in his home, swallowed the mineral spirits, and died. The Hunnings sued Texaco for negligence. The trial court dismissed the complaint, and the Hunnings appealed. What is the legal standard in a negligence case? Have the plaintiffs made out a valid case of negligence? Remember that at this stage, a court is not deciding who wins, but what standard a plaintiff must meet in order to take its case to a jury. Assume that Texaco knew about the repackaging and the grave risk but continued to sell in bulk because doing so was profitable. (If the plaintiffs cannot prove those facts, they will lose even if they do get to a jury.) Would that make you angry? Does that mean such a case should go to a jury? Or would you conclude that the fault still lies with the retailer, the parents, or both? Answer: Answers will vary. 6. Boboli Co. wanted to promote its “California-style” pizza, which it sold in supermarkets. The company contracted with Highland Group, Inc., to produce 2 million recipe brochures, which would be inserted in the carton when the freshly baked pizza was still very hot. Highland contracted with Comark Merchandising to print the brochures. But when Comark asked for details concerning the pizza, the carton, and so forth, Highland refused to supply the information. Comark printed the first lot of 72,000 brochures, which Highland delivered to Boboli. Unfortunately, the hot bread caused the ink to run, and customers opening the carton often found red or blue splotches on their pizzas. Highland refused to accept additional brochures, and Comark sued for breach of contract. Highland defended by claiming that Comark had breached its warranty of merchantability. Please comment. Answer: Answers will vary.

Discussion Questions 1. Self-driving cars are no longer science fiction. These vehicles are programmed to use lasers, sensors, software, and maps to drive themselves. A handful of states have passed laws allowing driverless technology on the road. But what happens when a driverless car harms someone? Who should be at fault? The passenger? The programmer? The manufacturer? Answer: Answers will vary. 2. Imagine an undefeated high school football team on which the average lineman weighs 300 pounds. Also, imagine a 0–10 team on which the average lineman weighs 170 pounds. The undefeated team sets out to hit as hard as they can on every play and to run up the score as much as possible. Before the game is over, 11 players from the lesser team have been carried off the field with significant injuries. All injuries were the result of "clean hits"––none of the plays resulted in a penalty. Even late in the game, when the score is 70–0, the undefeated team continues to deliver devastating hits that are far beyond what would be required to tackle and block. The assumption of the risk doctrine exempts the undefeated team from liability. Is this reasonable? Answer: Answers will vary. 3. Recall the Texas case Del Lago v. Smith from Chapter 1. In that case, a bartender served drinks when it was obvious that drunken patrons were about to engage in a dangerous bar fight. Smith, who voluntarily participated in the melee, was seriously injured and sued the establishment for negligence. Texas has a comparative negligence system. If you were the judge in that case, how would you assess each party’s fault?

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 10: Privacy and Internet Law

Answer: Answers will vary. 4. Are strict liability rules fair? Someone has to dispose of chemicals. Someone has to use dynamite if road projects are to be completed. Is it fair to say to those companies, “You are responsible for all harm caused by your activities, even if you are as careful as you can possibly be?” Answer: Answers will vary. 5. Congress passed the Protection for Lawful Commerce in Arms Act, which provides that gun manufacturers and retailers cannot be sued for injuries arising from the criminal misuse of a weapon. Critics argue that when gun makers market and sell military-style assault rifles to civilians, they should be held liable because these highly dangerous weapons are designed for specially trained soldiers, not the general public. Should makers of assault rifles be liable for these tragedies? Answer: Answers will vary.

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 10: Privacy and Internet Law

Table of Contents Multiple Choice Questions ....................................................................................................................................... 38 Case Questions ............................................................................................................................................................. 39 Discussion Questions.................................................................................................................................................. 41

Multiple Choice Questions 1. The following agency is charged with the regulation of electronic communications: A. National Security Agency B. Federal Trade Commission C. Federal Communications Commission D. None of the above Answer: C 2. Which of the following is not protected by the First Amendment? A. True threats B. Rap lyrics C. Offensive language D. Insults

Solution and Answer Guide:

Answer: A 3. Which of the following is not permitted under the Fourth Amendment? A. The police obtain information about Iris’s location through smart city cameras. B. The government monitors Lina’s public Twitter account for hate speech. C. During a routine traffic stop for speeding, a police officer takes away Nadya’s smartphone and swipes through the apps. D. None of these are protected by the Fourth Amendment. Answer: C 4. An employer has the right to monitor workers’ electronic communications if: A. the employee consents. B. the monitoring occurs in the ordinary course of business. C. the employer provides the computer system. D. All of these E. None of these Answer: D 5. Sushila suspects that her boyfriend Plum is being unfaithful. While he is asleep, she takes his smartphone out from under his pillow and goes through all of his texts. Which law has Sushila violated? A. The First Amendment B. The Communications Decency Act C. The Stored Communications Act D. The Wiretap Act E. None of these Answer: E

Case Questions 1. ETHICS Chitika, Inc., provided online tracking tools on websites. When consumers clicked the “opt-out” button, indicating that they did not want to be tracked, they were not––for ten days. After that, the software would resume tracking. Is there a legal problem with Chitika’s system? An ethical problem? What Life Principles were operating here? Answer: The FTC found that this system was unfair and deceptive under Section 5 of the FTC Act. Chitika entered into a consent order under which opt-out provision would last five years. 2. You Be the Judge: WRITING PROBLEM Jerome Schneider wrote several books on how to avoid taxes. These books were sold on Amazon.com. Amazon permits visitors to post comments about

Solution and Answer Guide:

items for sale. Amazon’s policy suggests that these comments should be civil (e.g., no profanity or spiteful remarks). The comments about Schneider’s books were not so kind. One person alleged Schneider was a felon. When Schneider complained, an Amazon representative agreed that some of the postings violated its guidelines and promised that they would be removed within one to two business days. Two days later, the posting had not been removed. Schneider filed suit. Argument for Schneider: Amazon has editorial discretion over the posted comments. It both establishes guidelines and then monitors the comments to ensure that they comply with the guidelines. These activities make Amazon an information content provider, not protected by the Communications Decency Act. Also, Amazon violated its promise to take down the content. Argument for Amazon: The right to edit material is not the same thing as creating the material in the first place. Answer: The court held for Amazon. Editing material does not create liability under the CDA. The court also ruled that Amazon was not liable for failing to remove the offending comments–– that failure to act is also protected under the CDA. Note that the court in the Yahoo! case would have held Amazon liable, under promissory estoppel, for not taking down the material after promising to do so. 3. Barrow was a government employee. Because he shared his office computer with another worker, he brought in his personal computer from home to use for office work. No other employee accessed it, but it was connected to the office network. The computer neither was password protected nor was it regularly turned off. When another networked computer was reported to be running slowly, an employee looked at Barrow’s machine to see if it was the source of the problem. He found material that led to Barrow’s termination. Had Barrow’s Fourth Amendment rights been violated? Answer: No. First, the person who accessed Barrow’s computer was not a representative of any government, but a private person, another employee of his employer. The Fourth Amendment prohibits only government activity. Second, Barrow did not demonstrate an expectation of privacy in his computer. He did not password-protect it, he left it on for long periods of time, and he left it unattended. 4. Someone posted a fake profile of actor Christianne Carafano on a dating website, Matchmaker.com. The profile, which included Carafano’s photo, telephone number, and home address, invited men with “a strong sexual appetite” to join her in a one-night stand. Carafano received many sexually explicit and threatening messages and was forced to move out of her home. She sued Matchmaker, arguing that the company was liable for invasion of privacy, defamation, and negligence. What result? Answer: The Ninth Circuit Court of Appeals ruled that the website was not liable because it did not create the content that was posted. This case represents the purpose of the CDA to protect internet service providers from liability for material posted by third parties. Carafano v. Metrosplash.com, Inc., 339 F.3d 1119; 2003 U.S. App. LEXIS 16548 United States Court of Appeals for the Ninth Circuit, 2003. 5. Suspecting his wife was unfaithful, Simpson attached a recording device to the telephone lines in their home. Through the secret recordings, he was able to prove that she was indeed having an affair. Simpson’s wife sued her husband under the Federal Wiretap Act. Who wins and why? Answer: Simpson’s wife wins, because she, and other parties to whom she spoke, had a reasonable expectation of privacy. © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Discussion Questions 1. Marina Stengart used her company laptop to communicate with her lawyer via her personal, password-protected, web-based email account. The company’s policy stated: Email and voice mail messages, internet use and communication, and computer files are considered part of the company’s business and client records. Such communications are not to be considered private or personal to any individual employee. Occasional personal use is permitted; however, the system should not be used to solicit for outside business ventures, charitable organizations, or any political or religious purpose, unless authorized by the Director of Human Resources. After she filed an employment lawsuit against her employer, the company hired an expert to access her emails that had been automatically stored on the laptop. Are these emails protected by the attorney-client privilege? How does this case compare with Scott v. Beth Israel earlier in the chapter? Answer: The court ruled the attorney-client privilege protected these emails. Stengart had a reasonable expectation of privacy because she had taken steps to protect the privacy of those emails and shield them from her employer. She used a personal, password-protected email account instead of her company email address and did not save the account’s password on her computer. Also, the company policy did not clearly reveal that it had the right to read emails stored on a company computer. Stengart v. Loving Care Agency, Inc., 201 N.J. 300. 2.

Eric Schmidt, former CEO of Google, has written: The communication technologies we use today are invasive by design, collecting our photos, comments, and friends into giant databases that are searchable and, in the absence of outside regulation, fair game for employers, university admissions personnel, and town gossips. We are what we tweet. Do you consider this a problem? If so, can the law fix it? Answer: Answers will vary.

3. Imagine that you are the judge in the Elonis case. Would you have excused Elonis’s conduct under the First Amendment? When is a threat a true threat, and when is it just social media banter? Answer: Answers will vary. 4. The European Union has created a “right to be forgotten” online. This right allows Europeans to request that websites take down their personal information, as long as it is not in the public interest. For example, a person would be able to request that Facebook delete their unflattering photograph, if it is outdated and is not newsworthy. Is this law a good idea? Would U.S. lawmakers ever consider a law like this? Why or why not? Answer: Answers will vary. 5. ETHICS JuicyCampus.com was a website where college students could anonymously gossip about their schools. To encourage users to “dish dirt,” the site promised total anonymity: It did not require a login or username; its slogan was “Always anonymous . . . Always juicy”; and it assured its users that it was impossible “for anyone to find out who you are and where you are

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 11: Introduction to Contracts

located.” The site also instructed users on how to download IP-cloaking software to further ensure anonymity. As a result, most of the Juicy Campus posts were more than just juicy: They ranged from shocking accusations to harassment and revenge. These rumors tarnished reputations, hurt feelings, and tore apart college communities. Women, minorities, and gay students were disproportionately affected. Whether or not it is legally liable, does JuicyCampus.com have an ethical duty to its users? What Life Principles are at stake? Answer: Answers will vary.

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 11: Introduction to Contracts

Table of Contents Multiple Choice Questions ....................................................................................................................................... 42 Case Questions ............................................................................................................................................................. 43 Discussion Questions.................................................................................................................................................. 45

Multiple Choice Questions 1. An actor, exhausted after their 10-hour workweek, agrees to buy a briefcase full of cocaine from Lewis for $12,000. Lewis and the actor have a(n) ______________ contract. A. valid B. unenforceable C. voidable D. void Answer: D 2. Carol says, “Pam, you’re my best friend in the world. I just inherited a million bucks, and I want you to have some of it. Come with me to the bank tomorrow, and I’ll give you $10,000.” “Sweet!” Pam replies. Later that day, Carol has a change of heart. She is allowed to do so. Examine the list of the elements of a contract, and cite the correct reason. A. The agreement was not put into writing. B. The agreement lacks a legal purpose. C. Pam did not give consideration. D. Pam does not have the capacity to make a contract. Answer: C 3. On the first day of the baseball season, Dean orders a new Cardinals hat from Amazon. At the moment he submits his order, Dean and Amazon have an ____ contract. Two days later,

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Amazon delivers the hat to Dean’s house. At this point, Dean and Amazon have an ____ contract. A. executory; executory B. executory; executed C. executed; executory D. executed; executed Answer: B 4. Linda goes to an electronics store and buys a smart television. Lauren hires a company to clean her swimming pool once a week. The ____ governs Linda’s contract with the store, and the ____ governs Lauren’s contract with the cleaning company. A. common law; common law B. common law; UCC C. UCC; common law D. UCC; UCC Answer: C 5. Consider the following scenarios: I. Madison says to a group of students, “I’ll pay $35 to the first one of you who shows up at my house and mows my lawn.” II. Lea posts a flyer around town that reads, “Reward: $500 for information about the person who keyed my truck last Saturday night in the Wag-a-Bag parking lot. Call Lea at 555-5309.” Which of these proposes a unilateral contract? A. I only B. II only C. Both I and II D. None of the above Answer: C

Case Questions 1. Interactive Data Corp. hired Daniel Foley as an assistant product manager at a starting salary of $18,500. Over the next six years, Interactive steadily promoted Foley until he became Los Angeles branch manager at a salary of $56,116. Interactive’s officers repeatedly told Foley that he would have his job as long as his performance was adequate. In addition, Interactive distributed an employee handbook that specified “termination guidelines,” including a mandatory seven-step pre-termination procedure. Two years later, Foley learned that his recently hired supervisor, Robert Kuhne, was under investigation by the FBI for embezzlement at his previous job. Foley reported this to Interactive officers. Shortly thereafter, Interactive fired Foley. He sued, claiming that Interactive could only fire him for good cause, after the seven-step procedure. What kind of a claim is he making? Should he succeed? Answer: Foley is arguing that he has an implied contract with Interactive based on the informal discussions concerning his future and the employee handbook. His argument convinced the California Supreme Court. Foley v. Interactive Data Corp., 47 Cal. 3d 654, 765 P.2d 373, 1988 Cal.

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LEXIS 269 (1988). Foley had no express contract for any period, and thus he started work as an employee-at-will. But the company’s repeated assurances, plus the handbook, created an implied contract. 2. ETHICS You want to lease your automobile to a friend for the summer but do not want to pay a lawyer to draw up the lease. Joanna, a neighbor, is in law school. She is not licensed to practice law. She offers to draft a lease for you for $100, and you unwisely accept. Later, you refuse to pay her fee, and she sues to collect. Who will win the lawsuit, and why? Apart from the law, was it morally right for the law student to try to help out by drafting the lease? Was she acting helpfully, or foolishly, or fraudulently? Is it just for you to agree to her fee and then refuse to pay it? What is society’s interest in this dispute? Should a court be more concerned with the ethical issue raised by the conduct of the two parties or with the social consequences of this agreement? Answer: Joanna loses the lawsuit. She is not licensed to practice law. Any contract she makes to perform legal work is void and unenforceable. Perhaps it was nice of her to try to help out, but she was foolish to think she should do legal work. She ought to have learned enough in law school to know that legal work is complicated and that a “client” deserves truly professional help. Even a simple lease may contain a dozen tricky issues that only an experienced lawyer can anticipate. It does seem hypocritical to agree to her fee and then avoid it on a principle of contract law. Yet society’s interest is clear: to discourage those who are untrained from causing harm. The court will look primarily at society’s interest, saying that to permit Joanna to collect her fee would encourage other cocky law students to venture into work they are not ready to do. 3. West purchased a horse from Strauss. When West discovered that the horse had a leg injury, he got a driver to return the horse to Strauss, but Strauss refused to accept delivery. Not knowing what to do with the injured animal, the driver took it to Bailey. Five months later, Bailey sent bills for the horse’s care to West, who returned them with a note saying he did not own the horse. Bailey sued West for the expenses incurred in boarding the horse. West argued that, when Bailey accepted the horse, he was aware of the controversy regarding the horse’s ownership, so he could not reasonably expect to be compensated. Who wins, and why? Answer: Bailey loses. There was no mutual agreement between Bailey and West to form a contract, so there could be no quasi-contract, no contract implied in fact. Bailey v. West, 249 A.2d 414, Supreme Court of Rhode Island (1969). 4. You Be the Judge: WRITING PROBLEM. John Stevens owned a dilapidated apartment that he rented to James and Cora Chesney for a low rent. The Chesneys began to remodel and rehabilitate the unit. Over a four-year period, they installed two new bathrooms, carpeted the floors, installed new septic and heating systems, and rewired, replumbed, and painted the apartment. Stevens periodically stopped by and saw the work in progress. The Chesneys transformed the unit into a respectable apartment. Three years after their work was done, Stevens served the Chesneys with an eviction notice. The Chesneys counterclaimed, seeking the value of the work they had done. Are they entitled to it? Argument for Stevens: Mr. Stevens is willing to pay the Chesneys exactly the amount he agreed to pay: nothing. The parties never contracted for the Chesneys to fix up the apartment. In fact, they never even discussed such an agreement. The Chesneys are making the absurd argument that anyone who chooses to perform certain work, without ever discussing it with another party, can finish the job and then charge it to the other person. If the Chesneys expected to get paid, obviously they should have said so. If the court were to allow this claim, it would be

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inviting other tenants to make improvements and then bill the landlord. The law has never been so foolish. Argument for the Chesneys: The law of quasi-contract was crafted for cases exactly like this. The Chesneys have given an enormous benefit to Stevens by transforming the apartment and enabling him to rent it at greater profit for many years to come. Stevens saw the work being done and understood that the Chesneys expected some compensation for these major renovations. If Stevens never intended to pay the fair value of the work, he should have stopped the couple from doing the work or notified them that there would be no compensation. It would be unjust to allow the landlord to seize the value of the work, evict the tenants who did it, and pay nothing. Answer: Yes, they are entitled to the value of their work, said the court in Chesney v. Stevens, 435 Pa. Super. 71, 644 A.2d 124.0, 1994 Pa. Super. LEXIS 2388 (Pa. Super. Ct. 1994). They have neither an express nor an implied contract for the work. Stevens did nothing to create either. But he was aware of the work they were doing, and he should know that they would reasonably expect compensation. It would be unjust, said the court, to permit him to keep the benefit without paying anything, and so the Chesneys won their case of quasi-contract, receiving quantum meruit damages for the value of their work. 5. Jennifer worked as a grant writer for Brightway, a Christian nonprofit. When she announced she was moving in with her boyfriend, all of her supervisors, including the company’s president, congratulated her and expressed their support. No one told her that her job was in jeopardy. Months later, Brightway fired Jennifer because “living together outside marriage is forbidden by the Scriptures.” Suppose Jennifer sues under the theory of promissory estoppel. What is her best argument? Answer: Jennifer’s best argument is that she relied on the congratulations and alleged support of her coworkers and did not seek other employment. No one told her, as they congratulated her, that her job was in jeopardy. Even though there was no explicit promise, their silence in this circumstance gives rise to promissory estoppel, since ordinarily, where an objection existed, reasonable people would have made a statement or taken action. If they had, Jennifer could have searched for another job, or reconsidered her decision. Trehar v. Brightway Center, Inc., 2015-Ohio-4144.

Discussion Questions 1. Have you ever made an agreement that mattered to you, only to have the other person refuse to follow through on the deal? Looking at the list of elements in the chapter, did your agreement amount to a contract? If not, which element did it lack? Answer: Answers will vary. 2. Consider promissory estoppel and quasi-contracts. Do you like the fact that these doctrines exist? Should courts have “wiggle room” to enforce deals that fail to meet formal contract requirements? Or, should the rule be “If it’s not an actual contract, too bad. No deal.” Answer: Answers will vary. 3. Is it sensible to have two different sets of contract rules––one for sales of goods and another for everything else? Would it be better to have a single set of rules for all contracts? Answer: Answers will vary. 4. Have you read your apartment lease lately? How about your cellular service agreement? One study found that 67 percent of consumers do not read the contracts they sign. But notice that a

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 12: The Agreement: Offers and Acceptances

contract is still enforceable, whether or not you read it. Which contracts should you read? iTunes terms and conditions? Your mortgage? An employment agreement? Answer: Answers will vary. 5. Some laws give consumers the right to cancel certain contracts for any reason within a short period of time after entering into them. For example, consumers in the European Union can return anything purchased online for any reason or no reason at all. Consumers in California can get out of gym membership contracts by sending the gym a cancellation notice within five business days of joining. Other state statutes cover insurance, weight loss services, door-to-door sales, and home repair contracts. If these agreements meet all of the requirements for a contract, why would a state allow people to get out of them so easily? Is this good policy? Alternatively, if consumers can cancel these contracts, why not allow everyone to cancel any contract within a few days? Answer: Answers will vary. Note that door-to-door sales are different. At home, people may feel trapped and almost forced to sign a contract. But anyplace else, they can just walk away. No one is forcing them.

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 12: The Agreement: Offers and Acceptances

Table of Contents Multiple Choice Questions ....................................................................................................................................... 46 Case Questions ............................................................................................................................................................. 48 Discussion Questions.................................................................................................................................................. 49

Multiple Choice Questions 1. Rebecca, in Honolulu, faxes a job offer to Spike, in Pittsburgh, saying, “We can pay you $55,000 per year, starting June 1.” Spike faxes a reply, saying, “Thank you! I accept your generous offer, though I will also need $3,000 in relocation money. See you June 1. Can’t wait!” On June 1, Spike arrives and find that his position is filled by Gus. He sues Rebecca. A. Spike wins $55,000. B. Spike wins $58,000. C. Spike wins $3,000. D. Spike wins restitution. E. Spike wins nothing. Answer: E. Spike wins nothing. Although he used the phrase, “I accept,” he included a counteroffer, which is a rejection of Rebecca’s offer. She has no obligation to him.

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2. Arturo hires Kate to work in his new sporting goods store. “Look,” he explains, “I can only pay you $9.00 an hour. But if business is good a year from now, and you’re still here, I’m sure I can pay you a healthy bonus.” Four months later, Arturo terminates Kate. She sues. A. Kate will win her job back, plus the year’s pay and the bonus. B. Kate will win the year’s pay and the bonus. C. Kate will win only the bonus. D. Kate will win only her job back. E. Kate will win nothing. Answer: E. Kate will win nothing. The only thing Arturo obligated himself to do was to pay $9.00 an hour while Kate worked. He did not promise her a year’s employment. The statement about the bonus was too indefinite to be enforceable: There is no way to measure whether “business is good” or what a “healthy” bonus is. 3. Manny offers to sell Gina his television for $100 on January 1. On January 2, Gina writes out a letter of acceptance. On January 3, Gina drops the letter in a mailbox. On January 4, a postal worker gets the letter out of the mailbox and takes it to the post office. On January 5, the letter arrives in Manny’s mailbox. When (if ever) was a contract formed? A. January 2 B. January 3 C. January 4 D. January 5 E. None of the above––a contract has not been formed. Answer: B. The contract was formed on January 3, when Gina mailed the letter. 4. Frank, an accountant, says to Missy, “I’ll sell you my laptop for $100.” Missy asks, “Will you give me until tomorrow to make up my mind?” “Sure,” Frank replies. Which of the following is true? A. Frank cannot revoke his offer, no matter what. B. Frank cannot revoke his offer only, if Missy pays him to keep the offer open until tomorrow. C. Frank can revoke his offer no matter what because he is not a merchant. D. Frank can revoke his offer no matter what because he did not promise Missy anything in writing. Answer: B. Frank may choose to keep the offer open, but he is not required to unless Missy pays for an options contract. 5. Which of the following amounts to an offer? I. Ed says to Carmen, “I offer to sell you my pen for $1.” II. Ed says to Carmen, “I’ll sell you my pen for $1.” III. Ed writes, “I’ll sell you my pen for $1,” and gives the note to Carmen. A. I only B. I and II C. III only D. I and III E. All of these Answer: D

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Case Questions 1. The town of Sanford, Maine, decided to auction off a lot it owned. The town advertised that it would accept bids through the mail, up to a specified date. Arthur and Arline Chevalier mailed in a bid that turned out to be the highest. When the town refused to sell them the lot, they sued. Result? Answer: No contract, no sale. An auction is with reserve unless stated otherwise. The ad was silent on the subject, so this auction was with reserve. That means that all of the bids, including the highest, are merely offers. The auctioneer, in this case the town, has the right to reject all of the offers, and the Chevaliers have no right to the lot. Chevalier v. Town of Sanford, 475 A.2d 1148 (Me. 1984). 2. The Tufte family leased a 260-acre farm from the Travelers Insurance Co. Toward the end of the lease, Travelers mailed the Tuftes an option to renew the lease. The option arrived at the Tuftes’ house on March 30 and gave them until April 14 to accept. On April 13, the Tuftes signed and mailed their acceptance, which Travelers received on April 19. Travelers claimed there was no lease and attempted to evict the Tuftes from the farm. May they stay? Answer: Yes, they may. Using the mail to accept is reasonable, since Travelers chose that medium to send its offer. Acceptance is effective on dispatch meaning that the Tuftes accepted Travelers’ offer on April 13, within the deadline. They have a binding lease. Travelers Insurance Co. v. Tufte, 435 N.W.2d 824 (Minn Ct. App. 1989). 3. When a Tom Cat Bakery delivery van struck Elizabeth Nadel, she suffered significant injuries, Nadel filed suit. Before the trial, Tom Cat’s attorney offered a $100,000 settlement, which Nadel refused. While the jury was deliberating, the bakery’s lawyer again offered Nadel the $100,000 settlement. She decided to think about it during lunch. Later that day, the jury sent a note to the judge. The bakery owner told her lawyer that if the note indicated the jury had reached a verdict, he should revoke the settlement offer. Back in the courtroom, the bakery’s lawyer said, “If the note is a verdict, my client wants to take the verdict.” Nadel’s lawyer then said, “My client will take the settlement.” The trial court judge allowed the forewoman to read the verdict, which awarded Nadel—nothing. Did Nadel’s lawyer accept the settlement offer in time? Answer: Excerpts from Judge Figueroa’s Decision: Plaintiff’s motion to enforce “the settlement” has generated considerable debate between the parties. Plaintiff asserts that the defendant is bound to a settlement. Plaintiff’s problem is that there was no “agreement” to speak of. To be sure, there was an offer from defendant. During the above-quoted colloquy, clearly there were also words of acceptance from plaintiff. But when the words, “my client will take the settlement” were uttered, it was too late for them to be effective. By that time, defense counsel had made it clear that if the jury had already come to a verdict, the offer was off the table. That condition could not be ignored, as the verdict that would mean all bets were off had already been reached. For the foregoing reasons, plaintiff’s motion is denied. 4. Machado Ford published the following newspaper ad: “Buy a New Ford and Get $3,000 Minimum Trade-In Allowance.” Izadi attempted to purchase a new Ford Ranger valued at $6,595 for $3,595 in cash plus his trade-in (assuming the minimum trade-in allowance). Machado refused. The ad’s superfine print indicated that the offer was only good toward two other vehicle models and that the trade-in must be worth at least $3,000. Izadi sued, arguing that the ad was misleading. Machado contended that it did not mean for the ad to be interpreted as it was. Who should prevail?

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Answer: Izadi prevails. The ad was misleading, whether or not Machado Ford intended for it to be so, and the fine print too fine. Ford’s ad amounted to a bait and switch tactic. Izadi v. Machado (Gus) Ford, Inc., 550 So.2d 1135 (Fla. 3d DCA 1989). 5. Miller listed her home for sale. On August 4, Norman made an offer, specifying that it must be accepted by 5:00 p.m. on August 5. Miller received the offer, made several changes, signed it, and returned it to Norman. Norman did not respond. On August 5 at noon, Segal offered to buy Miller’s house and Miller accepted. Miller than revoked the counteroffer to Norman. But right before 5:00 p.m., Norman initialed Miller’s counteroffer and delivered it with a deposit. To whom, if anyone, did Miller sell her home? Answer: Miller has sold her home to Segal. Although she made changes to Norman’s offer, signed it, and returned it to Norman, Norman did not respond to the changes, and his assent was required. Even though Norman’s offer specified that it had to be accepted by 5:00 p.m. on August 5, Miller’s counteroffer rejected Norman’s offer, and the rejection was received when she returned it to Norman, so no offer was pending between them. Meanwhile, Segal’s offer was made and accepted. Norman’s initialing of Miller’s counteroffer was too late, since at the time he initialed it, it was no longer pending and had been revoked. Normile v. Miller, 326 S.E.2d 11, Supreme Court of North Carolina (1985).

Discussion Questions 1. Each time employees at BizCorp enter their work computers, the following alert appears: “You are attempting to access the BizCorp network. By logging in, you agree to BizCorp’s Computer Usage Policy and certify that your use of this computer is strictly for business purposes. Any activities conducted on this system may be monitored for any reason at the discretion of BizCorp” Once an employee has logged in, have the parties formed a valid contract? Discuss. Answer: U.S. courts uphold these notices as valid consent for employee monitoring. Students might be engaged in a discussion on the use of technology in the office and whether these “contracts” should be enforceable. Are they coercive? 2. Case law tells us that a course syllabus is not a binding contract—but how about your school’s honor code? Under what conditions could an honor code be a contract? Answer: In the Gabriel case, the student contended that the academic honor code was also a contract. The court dismissed his claims on other grounds, but the question remains. On one hand, an academic honor code may be more likely to be upheld as an enforceable contract because its acceptance is often a condition to enrollment and it is incorporated into the enrollment contract with the university. On the other hand, are Honor Codes definite enough to constitute a valid offer? 3. The day after Thanksgiving, known as Black Friday, is the biggest shopping day of the year. One major retailer advertised a “Black Friday only” laptop for $150. On Thanksgiving night, hundreds of people waited for the store to open to take advantage of the laptop deal—only to learn that the store only had two units for sale at the discounted price. Did the retailer breach its contract with the hundreds of consumers who sought the deal? What obligation, if any, does the retailer have to its consumers? Answer: These cases resulted in numerous complaints to the FTC. Students might note that after these incidents, retailers began listing how many products of each they would have in stock. Regardless of these consumer protection issues, an advertisement is not a valid offer to contract. It is merely an invitation to offer.

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 13: Consideration

4. Someone offers to sell you a concert ticket for $50, and you reply, “I’ll give you $40.” The seller refuses to sell at the lower price, and you say, “OK, OK, I’ll pay you $50.” Clearly, no contract has been formed because you made a counteroffer. If the seller has changed their mind and no longer wants to sell for $50, they don’t have to. But is this fair? If it is all part of the same conversation, should you be able to accept the $50 offer and get the ticket? Answer: Answers will vary. 5. If you click an “I agree” box, odds are that its terms are binding on you, even if the box contains dozens or even hundreds of lines of dense text. Is this fair? Should the law change to limit the enforceability of clickwraps? Answer: Answers will vary. 6. Ryan Leslie, a rapper, was distraught when someone stole his computer and external hard drive because they contained some music he was writing. In an effort to retrieve his items, he created a series of YouTube videos, news articles, and social media postings in which he promised to pay $20,000 to anyone who returned his property. Leslie later increased the reward to $1 million in another YouTube video, which included the following text: In the interest of retrieving the invaluable intellectual property contained on his laptop and hard drive, Mr. Leslie has increased the reward offer from $20,000 to $1,000,000 USD. Armin returned the computer and hard drive, but Leslie refused to pay, saying that he could not get his intellectual property from his hard drive. Did Leslie make a valid offer? Did Armin make a valid acceptance? Answer: Leslie made a valid offer, and Armin made a valid acceptance of the unilateral contract. The rapper was ordered to pay the reward. Augstein v. Leslie, No. 11 Civ. 7512 (HB).

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 13: Consideration

Table of Contents Multiple Choice Questions ....................................................................................................................................... 50 Case Questions ............................................................................................................................................................. 52 Discussion Questions.................................................................................................................................................. 53

Multiple Choice Questions 1. For consideration to exist, there must be: A. a bargained-for exchange. B. a manifestation of mutual assent. C. genuineness of assent.

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 13: Consideration

D. substantially equal economic benefits to both parties. Answer: A 2. Which of the following requires consideration in order to be binding on the parties? A. Modification of a contract involving the sale of real estate B. Modification of a sale of goods contract under the UCC C. Both (a) and (b) D. None of the above Answer: A 3. Ted’s wallet is as empty as his bank account, and he needs $3,500 immediately. Fortunately, he has three gold coins that he inherited from his grandfather. Each is worth $2,500, but it is Sunday, and the local rare coins store is closed. When approached, Ted’s neighbor Andrea agrees to buy the first coin for $2,300. Another neighbor, Cami, agrees to buy the second for $1,100. A final neighbor, Lorne, offers “all the money I have on me”––$100––for the last coin. Desperate, Ted agrees to the proposal. Which of the deals is supported by consideration? A. Ted’s agreement with Andrea only B. Ted’s agreements with Andrea and Cami only C. All three of the agreements D. None of the agreements Answer: C 4. In a(n) ____________ contract, the seller guarantees to sell 100 percent of its output to one buyer, and the buyer agrees to accept the entire quantity. This kind of arrangement ____________ acceptable under the Uniform Commercial Code. A. output; is B. output; is not C. requirements; is D. requirements; is not Answer: A 5. Non-compete agreements are common features of employment contracts. Currently, courts ____________ enforce these clauses. A. always B. usually C. rarely D. never Answer: B

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 13: Consideration

Case Questions 1. American Bakeries had a fleet of over 3,000 delivery trucks. Because of the increasing cost of gasoline, the company was interested in converting the trucks to propane fuel. It signed a requirements contract with Empire Gas, in which Empire would convert “approximately 3,000” trucks to propane fuel, as American Bakeries requested, and would then sell all required propane fuel to run the trucks. But American Bakeries changed its mind and never requested a single conversion. Empire sued for lost profits. Who won? Answer: Empire won over $3.2 million dollars, and the appeals court affirmed. Empire Gas Corp. v. American Bakeries Co., 840 F.2d 1333, 1988 U. S. App. LEXIS 2482 (7th Cir. 1988). Since this was a requirements contract for the sale of goods (the conversion units and the propane gas were the goods), it was governed by UCC §2-306. American Bakeries did have the right to reduce the number of conversions from the estimated 3,000. It could potentially reduce them even to zero, but any reduction had to be done in good faith, meaning that changed circumstances made a reduction important. Here, American Bakeries never offered any reason at all, and the jury verdict was reasonable. 2. CeCe Hylton and Edward Meztista, partners in a small advertising firm, agreed to terminate the business and split assets evenly. Meztista gave Hylton a two-page document showing assets, liabilities, and a bottom line of $35,235.67, with one half due to each partner. Hylton questioned the accounting and asked to see the books. Meztista did not permit Hylton to see any records and refused to answer her phone calls. Instead, he gave her a check in the amount of $17,617.83, on which he wrote “Final payment/payment in full.” Hylton cashed the check but wrote on it, “Under protest—cashing this check does not constitute my acceptance of this amount as payment in full.” Hylton then filed suit, demanding additional monies. Meztista claimed that the parties had made an accord and satisfaction. What is the best argument for each party? Who should win? Answer: Hylton argued that in denying her access to the books, Meztista had not shown the good faith required to support accord and satisfaction. Meztista argued that the good faith requirement applies only to offering the accord, not to any of the underlying business negotiations. The court agreed with Meztista, who won. Although he may have shown bad faith while dividing up the assets, he offered his accord in good faith, knowing that the parties disagreed about the value of the business. At that point, Hylton’s only choices were to reject the check or to accept it as full payment. Her “restrictive endorsement” had no legal effect. Ex Parte Meztista, 2001 WL 1021725, Alabama Supreme Court, 2001

ETHICS Melnick built a house for Gintzler, but the foundation was defective. Gintzler agreed to accept the foundation if Melnick guaranteed to make future repairs caused by the defects. Melnick agreed but later refused to make any repairs. Melnick argued that his promise to make future repairs was unsupported by consideration. Who will win the suit? Is either party acting unethically? Which one, and why? Answer: Gintzler should, and did. The consideration to support Melnick’s promise of repairs was Gintzler’s acceptance of the defective foundation. He was under no obligation to accept a house in that condition. Gintzler v. Melnick, 116 N.H. 566,364 A.2d 637 (1976).

4. In the bleachers . . . “You’re a prince, George!” Mike exclaimed. “Who else would give me a ticket to the big game?” © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 13: Consideration

“No one, Mike, no one.” “Let me offer my thanks. I’ll buy you a beer!” “Ah,” George said. “A large beer would hit the spot right now.” “Small. Let me buy you a small beer.” “Ah, well, good enough.” Mike stood and took his wallet from his pocket. He was distressed to find a very small number of bills inside. “There’s bad news, George!” he said. “What’s that?” “I, ah, I can’t buy you the beer, George.” George considered that for a moment. “I’ll tell you what, Mike,” he said. “If you march to the concession stand right this minute and get me my beer, I won’t punch you in the face.” “It’s a deal!” Mike said. Discuss the consideration issues raised by this exchange. Answer: Mike’s initial promise to buy the beer is a gratuitous promise. He did receive a ticket from George, but the ticket was not given to induce Mike to promise to buy the beer. In the second half of the dialogue, George does not commit a forbearance when he agrees not to punch Mike, because he has no legal right to hit him. And so, Mike is under no contractual obligation to buy the beer. 5. Wells Fargo Armored Service offered a $25,000 reward for information leading to the arrest and conviction of the person who shot one of its guards. Slattery worked as an independent contractor conducting lie detector tests in the State Attorney’s office. While he was questioning a man about an unrelated event, the fellow confessed to the Wells Fargo crime and was ultimately convicted. When Slattery sued Wells Fargo for the reward, it refused to pay. Is Slattery entitled to the reward? Why? Answer: Slattery was under a preexisting duty to report all useful information revealed during his interrogation to his employers. A preexisting duty does not provide consideration for the alleged agreement. Slattery v. Wells Fargo Armored Serv. Corp., 366 So.2d 157 (1979).

Discussion Questions Apply the following material to the questions 1 and 2: Some view consideration as a technicality that allows people to make promises and then back out of them. Perhaps all promises should be enforced. In Japan, for example, promises to give gifts are enforceable without consideration.1 In the United States, if I promise to give you a gift merely because I feel like being nice, I can freely change my mind as far as contract law is concerned. A court will not make me follow through, because there is no consideration. 1

See Japan’s Civil Code, Article 549.

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 14: Legality

In Japan, I would be obligated to buy the gift if all other elements of a contract were present––an offer, and acceptance, and so forth. 1. When it comes to giving gifts, which is better––the Japanese or American rule? Answer: Answers will vary. 2. Are there any specific types of agreements (perhaps high-value, long-term, extremely timeconsuming) that should definitely require consideration? Answer: Answers will vary. 3. Albert and Luis, lifelong friends, had a tradition. Every Friday, they took turns going to the corner store and buying what they called a “package”—some vodka and a lottery ticket. One lucky Friday, Albert purchased the package, but Luis scratched off the lottery ticket, only to learn that it was a $20,000 winner. Luis refused to share. Albert sued, claiming the former friends had an enforceable contract supported by valid consideration. Rule. Answer: Answers will vary. 4. The consideration doctrine is controversial. Critics argue that it is a remnant of a bygone era, lacking any reasonable modern purpose and that it undermines the purpose of contract law, which is to enforce the intention of the parties to an agreement. Should consideration be abolished? Answer: Answers will vary. 5. Amber Williams and Frederick Ormsby were lovers, embroiled in a turbulent romantic relationship. After knowing each other for a short time, Frederick moved into Amber’s house and paid off her $310,000 mortgage. She then gave him title to the house. But their happiness was not to last. The couple canceled their plans to marry, and Amber moved out of the house. Two months later, Frederick sought reconciliation. Amber refused to get back together unless Frederick gave her half ownership of the house. Frederick agreed. After the couple split up for the last time, Amber sued for her half of the house. Frederick argued that his promise was not supported by adequate consideration. Was it? Answer: Answers will vary.

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 14: Legality

Table of Contents Multiple Choice Questions ....................................................................................................................................... 55 Case Questions ............................................................................................................................................................. 56 Discussion Questions.................................................................................................................................................. 58

Solution and Answer Guide:

Multiple Choice Questions 1. At a party, George casually mentions that he is going to learn to BASE jump during spring break. (BASE jumping involves jumping off a cliff and deploying a parachute to land.) Vicki, an acquaintance, overhears him, and the next day she purchases a $100,000 life insurance policy on George’s life. George has a happy week of BASE jumping. But on the way home, he is bitten by a parrot and dies of a rare tropical illness. Vicki files a claim for $100,000. The insurance company refuses to pay. A. Vicki will win $100,000, but only if she mentioned animal bites to the insurance agent. B. Vicki will win $100,000 regardless of whether she mentioned animal bites to the insurance agent. C. Vicki will win $50,000. D. Vicki will win nothing. Answer: D. Vicki will win nothing. She has no insurable interest in George’s life, and her policy is therefore an unenforceable wagering contract. 2. Now assume the same facts, except that Vicki has loaned George $50,000. If the insurance company refuses to pay, A. Vicki will win $100,000, but only if she mentioned animal bites to the insurance agent. B. Vicki will win $100,000 regardless of whether she mentioned animal bites to the insurance agent. C. Vicki will win $50,000. D. Vicki will win nothing. Answer: C. Vicki has an insurable interest in George’s life but only to the amount he owes her. 3. KwikFix, a Fortune 500 company, contracts with Allied Rocket, another huge company, to provide the software for Allied’s new Jupiter Probe rocket for $14 million. The software is negligently designed, and when the rocket blasts off from Cape Kennedy, it travels only as far as Fort Lauderdale. Allied Rocket sues for $200 million and proves that as a result of the disaster it lost a huge government contract, worth at least that much, which KwikFix was aware of. KwikFix responds that its contract with Allied included a clause limiting its liability to the value of the contract. Is the contract clause valid? A. The clause is unenforceable because it is unconscionable. B. The clause is unenforceable because it is exculpatory. C. The clause is enforceable because both parties are sophisticated corporations. D. The clause is enforceable because $200 million is an unconscionable claim. Answer: C. The clause is enforceable. There is no unconscionability problem because this is not an adhesion contract and the terms were negotiated by sophisticated corporations that could have taken their business elsewhere if they were dissatisfied with the contract.

Solution and Answer Guide:

4. Ryder goes to a baseball game. The back of his ticket clearly reads: “Fan agrees to hold team blameless for all injuries occurring at the stadium—pay attention to the game at all times for your own safety!” In which of the following scenarios can Ryder sue the baseball franchise? A. In the first inning, a foul ball hits Ryder in the elbow, injuring her. B. After Ryder heckles the star player for several innings, he grabs the ballboy’s chair and throws it into the stands, injuring Ryder’s other elbow. C. Ryder eats a stadium hot dog, which causes terrible stomach upset. D. None of these are actionable because Ryder agreed to the exculpatory clause. Answer: C 5. When Boris arrives at the restaurant, he realizes that his cell phone only has 3 percent charge left. The waiter offers to charge his phone in the kitchen but requires him to sign an exculpatory clause saying that the restaurant is not liable for anything that happens to the phone under any circumstance. A kitchen worker with a known criminal past hacks Boris’s phone, steals all of his passwords and credit card information, and sends embarrassing emails on Boris’s behalf. Is the restaurant responsible? A. No, because Boris signed the exculpatory clause. B. No, because contemporary society is dependent on charged cell phones. C. Yes, because the restaurant was not in the business of charging phones. D. Yes, because the restaurant worker intentionally hacked the phone. Answer: B

Case Questions 1. Guyan Machinery, a West Virginia manufacturing corporation, hired Albert Voorhees as a salesman and required him to sign a contract stating that if he left Guyan, he would not work for a competing corporation anywhere within 250 miles of West Virginia for a two-year period. Later, Voorhees left Guyan and began working at Polydeck Corp., another West Virginia manufacturer. The only product Polydeck made was urethane screens, which comprised half of 1 percent of Guyan’s business. Is Guyan entitled to enforce its non-compete clause? Answer: No. The non-compete clause is unenforceable here because the two companies are not really in competition and Guyan therefore has no confidential information or customer lists to protect. Voorhees v. Guyan Machinery Co., 191 W. Va. 450, 446 S.E.2d 672, 1994 W.Va. LEXIS 27 (1994). 2. Barbara Richards leased an apartment at a complex owned by Twin Lakes. The lease declared that Twin Lakes would maintain the common areas, but it would not be responsible for any harm, anywhere on the property, even if it was caused by Twin Lakes’ negligence. Richards slipped and fell on snow-covered ice in the Twin Lakes parking lot. What result? Answer: The exculpatory clause was invalid as against public policy. Judgment for Plaintiff. Ransburg v. Richards, 770 N.E.2d 393 Indiana Court of Appeals, 2002.

Solution and Answer Guide:

3. The Basultos were Cuban immigrants who spoke only Spanish. When they purchased a new minivan from Potamkin Dodge, the dealer had them sign a blank, English-language contract with the promise that he would fill in the agreed-upon numbers later. But then the dealer completed the sales contract with numbers that were higher than those agreed upon. The couple tried to sue, only to realize that they had inadvertently signed away their rights because the contract contained, in tiny print, an arbitration clause. What remedy is available to the Basultos? Answer: The arbitration clause can be stricken for unconscionability, and an injunction issued; the Basultos may sue. Basulto v. Ialeah Automotive, 3D07-855 (Fl.App.3 Dist. 10-15-2008); affirmed on appeal. 4. Cranwell Associates owned a 42-story skyscraper in midtown Manhattan. The building had a central station fire alarm system, which was monitored by Holmes Protection. A fire broke out and Holmes received the signal. But Holmes’s inexperienced dispatcher misunderstood the signal and failed to summon the fire department for about nine minutes, permitting tremendous damage. 810 sued Holmes, which defended based on an exculpatory clause that relieved Holmes of any liability caused in any way. Holmes’s dispatcher was negligent. Does it matter how negligent he was? Answer: It does matter. Because the exculpatory clause was negotiated and was reasonable, the New York Court of Appeals held that it was valid as to ordinary negligence. However, the clause was held invalid as to gross negligence. The court remanded the case to determine whether the dispatcher was grossly negligent. Sommuer v. Federal Signal Corp. 79 N.Y.2d 540, 593 N.E.2d 1365, 1992 N.Y. LEXIS 1305 (1992). 5. You Be the Judge: WRITING PROBLEM Oasis Waterpark, located in Palm Springs, California, sought out Hydrotech Systems, Inc., a New York corporation, to design and construct a surfing pool. Hydrotech replied that it could design the pool and sell all the necessary equipment to Oasis but could not build the pool because it was not licensed in California. Oasis insisted that Hydrotech do the construction work because Hydrotech had unique expertise in these pools. Oasis promised to arrange for a licensed California contractor to “work with” Hydrotech on the construction; Oasis also assured Hydrotech that it would pay the full contract price of $850,000, regardless of any licensing issues. Hydrotech designed and installed the pool as ordered. But Oasis failed to make the final payment of $110,000. Hydrotech sued. Can Hydrotech sue for either breach of contract or fraud (trickery)? Argument for Oasis: The licensing law protects the public from incompetence and dishonesty. The legislature made the section strict: no license, no payment. If the court were to start picking and choosing which unlicensed contractors could win a suit, it would be inviting incompetent workers to endanger the public and then come into court and try their luck. That is precisely the danger the legislature seeks to avoid. Argument for Hydrotech: This is not the kind of case the legislature was worried about. Hydrotech has never solicited work in California. Hydrotech went out of its way to avoid doing any contracting work, informing Oasis that it was unlicensed in the state. Oasis insisted on bringing Hydrotech into the state to do work. If Oasis has its way, word will go out that any owner can get free work done by hiring an unlicensed builder. Make any promises you want, get the work done to your satisfaction, and then stiff the contractor—you’ll never have to pay. Answer: Oasis Waterpark won, and Hydrotech’s case was dismissed. The court was not persuaded that many owners would seek out unlicensed builders and then trick them into working with the © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Solution and Answer Guide:

intention of denying payment. The judges believed that awarding damages would encourage unlicensed builders to ignore the statute’s requirement; in the long run, homeowners and others who rely on licensed workers would suffer. Hydrotech Systems, Ltd. v. Oasis Waterpark, 52 Cal.3d 988, 803 P.2d 370, 1991 Cal. LEXIS 139, (Sup. Ct. Cal. 1991).

Discussion Questions 1. ETHICS: Richard and Michelle Kommit traveled to New Jersey to have fun in the casinos. While in Atlantic City, they used their MasterCard to withdraw cash from an ATM conveniently located in the “pit”––the gambling area of a casino. They ran up debts of $5,500 on the credit card and did not pay. The Connecticut National Bank sued for the money. Law aside, who has the moral high ground? Is it acceptable for the casino to offer ATM services in the gambling pit? If a credit card company allows customers to withdraw cash in a casino, is it encouraging them to lose money? Do the Kommits have any ethical right to use the ATM, attempt to win money by gambling, and then seek to avoid liability? Answer: They should and did claim that they borrowed the money to gamble. They argued correctly that a gambling debt is unenforceable in Connecticut. The appellate court remanded the case so that the trial court could determine whether the bank knew that the money was borrowed for gambling. If the bank knew the intended use of the money (which a court could but need not infer from the location of the ATM), the debt is void. Connecticut National Bank of Hartford v. Kommit, 31 Mass. App. Ct. 348, 577 N.E.2d 639, 1991 Mass. App. LEXIS 660 (Mass. Ct. App. 1991). As to which party has the high ground, of course, the answer is that it is a tie for last place. Clearly the credit card company is encouraging people to gamble by placing its ATM in the gambling pit. Just as certainly, the Kommits are trying to have it both ways, gambling in the hopes of a quick gain, then attempting to avoid liability by invoking this legal principle. Generally, when faced with two parties who are both less than saintly, courts attempt to make rulings that will be in the best interests of society, in the long term. 2. The Justice Department recently shut down three of the most popular online poker websites (Poker Stars, Absolute Poker, and Full Tile Poker). State agencies take countless actions each year to stop illegal gaming operations. Do you believe that gambling by adults should be regulated? If so, which types? Rate the following types of gambling from most acceptable to least acceptable: -online poker -state lotteries -horse racing -casino gambling -bets on pro sports -bets on college sports Answer: Answers will vary. 3. Van hires Terri to add an electrical outlet to his living room for his new HDTV. Terri does an excellent job, and the new outlet works perfectly. She presents Van with a bill for $200. But Terri is not a licensed electrician. Her state sets licensing standards in the profession to protect the public. And so, Van can refuse to pay Terri’s bill. Is this reasonable? Should he be able to avoid payment? Answer: Answers will vary. 4.

Imagine that you are starting your own company in your hyper-competitive industry: You are putting your life savings, your professional contacts, and your innovative ideas on the line. As you

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 15: Voidable Contracts: Capacity and Consent

begin to hire a sales force, you consider binding new employees to non-compete agreements. Outline the ideal terms of your employees’ non-competes. What is its duration? What is its geographical radius? Are these terms appropriate for your industry? When you are done, pass your proposed terms to classmates and discuss its enforceability. Answer: Answers will vary.

5. When Ruth Klopp was injured in a serious accident with an uninsured motorist, she filed a claim under her own policy with Worldwide Insurance. Her policy contained an arbitration provision, stating that if the arbitrators awarded more than $15,000, either side could appeal to the courts, but a low award could not be appealed. The arbitrators awarded Klopp $90,000, and Worldwide demanded a full trial. Klopp claimed that the appeal provision was unconscionable. What result? Answer: Answers will vary. 6. ETHICS: Some commentators argue that Walker-Thomas was providing a valuable service to Mrs. Williams and that the litigation ultimately harmed her community. No other business of the time was willing to offer credit to people of such limited means, much less to African-Americans. As a result of that landmark case, Walker-Thomas went out of business and an entire group of people lost access to essential household items. Comment. Answer: Answers will vary.

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 15: Voidable Contracts: Capacity and Consent

Table of Contents Multiple Choice Questions ....................................................................................................................................... 59 Case Questions ............................................................................................................................................................. 61 Discussion Questions.................................................................................................................................................. 62

Multiple Choice Questions 1. Kerry finds a big green ring in the street. She shows it to Leroy, who says, “Wow. That could be valuable.” Neither Kerry nor Leroy knows what the ring is made of or whether it is valuable. Kerry sells the ring to Leroy for $100, saying, “Don’t come griping if it turns out to be worth two dollars.”

Solution and Answer Guide:

Leroy takes the ring to a jeweler who tells him it is an unusually perfect emerald, worth at least $75,000. Kerry sues to rescind. A. Kerry will win based on fraud. B. Kerry will win based on mutual mistake. C. Kerry will win based on unilateral mistake. D. Kerry will lose. Answer: D. Kerry will lose, based on conscious uncertainty. If Leroy knew the ring was valuable, Kerry could win based on unilateral mistake. If both parties were certain that it was worthless, Kerry could win based on mutual mistake. But here, the parties are aware that it might be priceless and might be worthless. Each has accepted the risk and must live with the results. 2. Veronica has a beer and then makes a contract. She continues drinking, and her blood alcohol level eventually rises to .09, which is just above her state’s threshold for drunk driving. She makes a second contract while in this condition. Veronica’s first contract is ____, and her second contract is ____. A. valid; valid B. valid; voidable C. voidable; voidable D. voidable; void Answer: A 3. Jerry is so mentally ill that he is unable to understand the nature and consequences of his transactions, but he has not been adjudicated insane. Penny has been adjudicated insane and has a court-appointed guardian. Jerry’s contracts are ____, and Penny’s contracts are ____. A. valid; valid B. valid; voidable C. valid; void D. voidable; voidable E. voidable; void Answer: E 4. Angela makes a material misstatement of fact to Lance, which he relies on it when he signs Angela’s contract. Fraud exists if Angela made the misstatement ____. A. intentionally B. recklessly C. carelessly D. A and B only E. A, B, and C Answer: D

Solution and Answer Guide:

5. Scarborough’s Department Store opens for business on a busy shopping day just before Christmas. A hurried clerk places a sign in the middle of a table piled high with red cashmere sweaters. The sign reads, “SALE––100% Cashmere––$0.99 Each”. The sign, of course, was supposed to read “$99 each.” This is a ____ mistake, and customers ____ be able to demand that Scarborough’s sell the sweaters for 99 cents. A. unilateral; will B. unilateral; will not C. mutual; will D. mutual; will not Answer: B

Case Questions 1. On television and in magazines, Maurine and Mamie Mason saw numerous advertisements for Chrysler Fifth Avenue automobiles. The ads described the car as “luxurious,” “quality-engineered,” and “reliable.” When they went to inspect the car, the salesman told them the warranty was “the best comparable to Cadillacs and Lincolns.” After the Masons bought a Fifth Avenue, they began to have many problems with it. Even after numerous repairs, the car was unsatisfactory and required more work. The Masons sued, seeking to rescind the contract based on the ads and the dealer’s statement. Will they win? Answer: No. The statements are all puffery. Mason v. Chrysler Corp., 1995 Ala. LEXIS 30 (Ala. 1995). 2. Roy Newburn borrowed money and bought a $49,000 truck from Treadwell Ford. A few months later, the truck developed transmission problems. Newburn learned that the truck had 170,000 more miles on it than the odometer indicated. The company admitted the mileage error and promised to install a new transmission free. Treadwell did install the new transmission, but when Newburn came to pick up the truck, Treadwell demanded that he sign a general release absolving the dealership of any claims based on the inaccurate mileage. Treadwell refused to turn over the truck until Newburn finally signed. The truck broke down again, and delays cost Newburn so much income that he fell behind on his loan payments and lost the truck. He sued Treadwell, which defended based on the release. Is the release valid? Answer: No. Newburn signed under economic duress. Treadwell had no right to hold the truck, Newburn had no reasonable alternative, and Treadwell’s conduct caused economic distress. The release was invalid, and Newburn was entitled to damages for his losses. Newburn v. Dobbs Mobile Bay, Inc., 657 So.2d 849, 1995 Ala. LEXIS 137 (Ala.1995). 3. Morell bought a security guard business from Conley, including the property on which the business was located. Neither party knew that underground storage tanks were leaking and contaminating the property. After the sale, Morell discovered the tanks and sought to rescind the contract. Should he be allowed to do so? Answer: Yes. There was no fraud or misrepresentation because Conley knew nothing of the tanks. But there is mutual mistake: The parties were both in error about an important factual assumption– –namely, the ground’s condition. Morell was permitted to rescind. Morell v. Conley Detective and Security Guard Agency, Inc., Michigan Lawyers Weekly No. 18079, Nov. 28, 1994 (Mich. Ct. App. 1994).

Solution and Answer Guide:

4. While on a cruise, DePrince inquired about the price of a 20-carat diamond in the ship’s gift shop. After confirming with the cruise line’s corporate office, the sales person told DePrince that the price was $235,000. DePrince’s traveling companions, who both happened to be gemologists, told him that the price was too good to be true: A diamond that large should cost at least $2 million. DePrince ignored their advice and purchased the diamond. Soon after the sale was completed, the cruise line realized that the $235,000 price quote was per carat, not the total price. What kind of mistake did the cruise line make? Can the cruise line void the transaction? Answer: They did void the transaction, based on unilateral mistake, saying that DePrince well knew the true value of the diamond. DePrince v. Starboard Cruise Services, Inc., 163 So.3d 586, Ct. of App. of Fla. (2015). 5. Sixteen-year-old Travis Mitchell brought his Pontiac GTO into M&M Precision Body and Paint for body work and a paint job. M&M did the work and charged $1,900, which Travis paid. When Travis later complained about the quality of the work, M&M did some touching up, but Travis was still dissatisfied. He demanded his $1,900 back, but M&M refused to refund it because all of the work was “in” the car and Travis could not return it to the shop. The state of Nebraska, where this occurred, follows the majority rule on this issue. Does Travis get his money? Is this a fair result? Answer: Yes, Travis gets his money. In most states, a minor is permitted to disaffirm a contract and get a full refund of his money, even if he is unable to make restitution. Since restitution is impossible here, Travis wins his money while M&M gets nothing. Mitchell v. Mizerski, 1995 Neb. Asp. LEXIS 99 (Neb. 1995). The common law rule is intended to discourage wily hucksters from preying on minors, selling them goods they cannot afford and do not need. The best way to insure against such sales is to let the seller know the minor has the right to rescind, even if the goods are destroyed. Few judges have shown any inclination to change the rule. It is true that some minors are street smart and might take advantage of the rule. However, the answer, in the opinion of most courts, is that a concerned seller can easily protect himself by not making the sale.

Discussion Questions 1. Contract law gives minors substantial legal protection. But does a modern high school student need so much protection? Older teens may have been naïve in the 1700s, but today, they are quite savvy. Should the law change so that only younger children––perhaps those aged 14 and under––have the ability to undo agreements? Or is the law reasonable the way it currently exists? Answer: Answers will vary. 2. Ball-Mart, a baseball card store, had a 1968 Nolan Ryan rookie card in almost perfect condition for sale. Any baseball collector would have known that the card was worth at least $1,000; the published monthly price guide listed its market value at $1,200. Bryan was a 12-year-old boy with a collection of over 40,000 baseball cards. When Bryan went to Ball-Mart, Kathleen, who knew nothing about cards, was filling in for the owner. The Ryan card was marked “1200,” so Bryan asked Kathleen if this meant twelve dollars. She said yes and sold it to him for that amount. When BallMart’s owner realized the mix-up, he sued to rescind the contract. Who wins? Answer: This 1991 case sparked much public discussion, as it should in class even today. The case was settled mid-trial so no rule of law ensued. The settlement provided that the card would be auctioned off and each party would donate his half to charity. By the time the case was settled, the card was worth between $3,000–$5,000, but no doubt the parties spent more than that on legal

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 16: Written Contracts

fees. Bryan’s family sued Ball-Mart’s owner for libel on the grounds that he stated publicly that Bryan had stolen the card. 3. Paula was alone, pregnant, and confused. She needed help and support, which she found at Methodist Mission Home of Texas. In the days following her child’s birth, representatives of Methodist Mission forcefully told her that she had no moral or legal right to keep her child: She had to place her baby for adoption. Paula signed the adoption papers, but days later, she decided she wanted to keep the baby after all. Was there any ground to rescind? Answer: In the Methodist Mission case, the court held that the plaintiff had been young and extremely vulnerable during the days following the birth of her child. The mission’s counselor, to whom she turned for support, had spent day after day forcefully insisting that the young woman had no moral or legal right to keep her child. This amounted to undue influence. The court voided the adoption agreement. Methodist Mission Home of Texas v. N A B, 451 S.W.2d 539(Tex. Civ. App. 1970). 4. Do you have sympathy for intoxicated people who make agreements? Should the law ever let them back out of deals when they sober up? After all, no one forced them to get drunk. Or should the law be more lenient? Or is it reasonable as it currently exists? Answer: Answers will vary. 5. When Steven Simkin and Laura Blank divorced in 2006, they agreed to split their $13.5 million fortune evenly. Two years later, it became evident that Simkin had a problem: His half was invested in Bernard Madoff’s giant Ponzi scheme and he lost millions. Simkin asked Blank to revise their deal and she refused, so he sued for to rescind their 2006 settlement based on mutual mistake of fact. He argued that the fatal mistake was that neither party knew that his half was invested in a fraud. Should a court invalidate the settlement for this mistake? Answer: Any court of appeals rejected Simkin’s argument. The court likened the mistake to a mutual mistake of value, writing “The asset had value at the time of the settlement but the purported value did not remain consistent.”

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 16: Written Contracts

Table of Contents Multiple Choice Questions ....................................................................................................................................... 64

Solution and Answer Guide:

Case Questions ............................................................................................................................................................. 65 Discussion Questions.................................................................................................................................................. 66

Multiple Choice Questions 1. CPA QUESTION Two individuals signed a contract that was intended to be their entire agreement. The parol evidence rule will prevent the admission of evidence offered to: A.

explain the meaning of an ambiguity in the written contract.

establish that fraud had been committed in the formation of the contract.

prove the existence of a contemporaneous oral agreement modifying the contract.

D. prove the existence of a subsequent oral agreement modifying the contract. Answer: C. The rule prevents reliance on any oral agreements made while signing the integrated written contract. CPA Examination, November 1991, #23. 2. Rafaella wants to plant a garden, and she agrees to buy a small piece of land for $300. Later, she agrees to buy a table for $300. Neither agreement is put in writing. The agreement to buy the land ____ enforceable, and the agreement to buy the table ____ enforceable. A. is; is B. is; is not C. is not; is D. is not; is not Answer: C 3. The common law Statute of Frauds requires that to be “in writing,” an agreement must be signed by ____. A. the plaintiff B. the defendant C. both A and B D. None of the above Answer: B 4. Mandy verbally tells a motorcycle dealer that she will make her son’s motorcycle payments if he falls behind on them. Will Mandy be legally required to live up to this agreement? A. Yes, absolutely. B. Yes, if her son is under 18. C. Yes, if Mandy will be the primary driver of the motorcycle. D. Yes, if the motorcycle is worth less than $500. E. No, absolutely not. © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Solution and Answer Guide:

Answer: C. If Mandy drives the motorcycle, she can be held to this oral agreement because she benefits from the “leading object,” the motorcycle. 5. In December 2018, Eric hires a band to play at a huge graduation party he is planning to hold in May, 2020. The deal is never put into writing. In January 2020, if he wanted to cancel the job, Eric ____ be able to do so. If he does not cancel, and if the band shows up and plays at the party in May, 2020. Eric ____ have to pay them. (a) will; will (b) will; will not (c) will not; will (d) will not; will not Answer: A

Case Questions 1. Richard Griffin and three other men owned a grain company called Bearhouse, Inc., which needed to borrow money. First National Bank was willing to loan $490,000, but insisted that the four men sign personal guaranties on the loan, committing themselves to repaying up to 25 percent of the loan each if Bearhouse defaulted. Bearhouse went bankrupt. The bank was able to collect some of its money from Bearhouse’s assets, but it sued Griffin for the balance. At trial, Griffin wanted to testify that before he signed his guaranty, a bank officer assured him that he would only owe 25 percent of whatever balance was unpaid, not 25 percent of the total loan. How will the court decide whether Griffin is entitled to testify about the conversation? Answer: Under the parol evidence rule, if the parties intended the guaranty to be integrated, which they almost certainly did, Griffin may testify only if the writing is ambiguous or incomplete. The state supreme court ruled that the document was complete and unambiguous, and Griffin owed the entire remaining balance. First National Bank v. Griffin, 310 Ark. 164, 832 S.W.2d 816, 1992 Ark. LEXIS 439 (1992). 2. Landlord owned a clothing store and agreed in writing to lease the store’s basement to another retailer. The written lease, which both parties signed, (1) described the premises exactly, (2) identified the parties, and (3) stated the monthly rent clearly. But an appeals court held that the lease did not satisfy the Statute of Frauds. Why not? Answer: The writing must contain all essential terms. This lease said nothing about duration, an essential part of a lease. The tenant lost. Simon v. Simon, Mass. Lawyers Weekly No. 11-002-94 (Mass. App. Ct. 1994). 3. You Be the Judge: WRITING PROBLEM Because of his success in a big case, a lawyer named Melbourne promised his assistant, Barbara, a large bonus. After the case settled, Melbourne met with Barbara to discuss when and how much he would pay her. In the conversation that she secretly recorded, Melbourne agreed to pay Barbara $1 million, plus $65,000 for a luxury automobile. Payments were to be made in monthly installments of $10,000 for ten years. Melbourne also agreed to sign a document confirming his promise. Barbara’s lawyer drafted the writing, but Melbourne never signed it. He did pay nine monthly installments, along with an extra payment of $100,000. Did Melbourne and Barbara have a valid contract? Argument for Barbara: The Statute of Frauds exists to prevent fraud. The fear that a plaintiff would lie about a contract is not an issue here. We know

Solution and Answer Guide:

what Melbourne agreed to do because we heard him. Argument for Melbourne: If there was an agreement, it could not have been performed in one year because it had ten years’ worth of installment payments.

Answer: Because the terms of the agreement and the parties’ intentions demonstrate it could not be completed within one year, the Statute of Frauds required that it be in writing, but that was never done. 4. Robins, an art collector, sold a painting by artist Marlene Dumas named Reinhardt’s Daughter to Zwirner, an art dealer. Since both men knew that Dumas would disapprove of the sale, Zwirner promised Robins that he would always keep the transaction confidential. Years later, Robins learned that Dumas would not sell to him anymore because Zwirner had told her about the sale. Will a court enforce Zwirner’s oral promise? Why or why not? Answer: No, because the agreement cannot be performed within one year, and it is not in writing. Zwirner allegedly promised Robins that he would never disclose the sale to Dumas, which means the agreement could not have been completed within a year. Robins v. Zwirner, 713 F.Supp.2d 467, 376 (S.D.N.Y. 2010). 5. When they were dating, Kris promised his wife Wendellyn that, if she moved to Wyoming and married him, he would take care of her for the rest of her life. Three years later, the couple filed for divorce and Wendellyn claimed that Kris’s oral promise entitled her to care for life. Kris argued that his promise was unenforceable because it should have been in writing. Who is right? Answer: The court held for the husband. The husband’s alleged promises relating to support should have been in writing, since it was a promise in consideration of marriage. Wendellyn Kay Dane v. Kris Alan Dane, 2016 WY 38; 368 P.3d 914, 2016 Wyo LEXIS 40.

Discussion Questions 1. ETHICS Jacob Deutsch owned commercial property. He orally agreed to rent it for six years to Budget Rent-A-Car. Budget took possession, began paying monthly rent, and over a period of several months expended about $6,000 in upgrading the property. Deutsch was aware of the repairs. After a year, Deutsch attempted to evict Budget. Budget claimed it had a six-year oral lease, but Deutsch claimed that such a lease was worthless. Please rule. Is it ethical for Deutsch to use the Statute of Frauds in attempting to defeat the lease? Assume that, as landlord, you had orally agreed to rent premises to a tenant, but then for business reasons preferred not to carry out the deal. Would you evict a tenant if you thought the Statute of Frauds would enable you to do so? How should you analyze the problem? What values are most important to you? Answer: Normally a long-term oral lease is worthless, but here the tenant took possession and made expensive improvements, to the landlord's knowledge. This is part performance, considered strong evidence that the parties had in fact reached an agreement. Budget wins. Deutsch v. Budget Rent A Car, 213 N.J. Super. 385, 517 A.2d 491 (N.J. Super. Ct. 1986). Some would argue, for Deutsch, that “business is business.” If an opportunity presents itself to make more money, and the law arguably supports your position, you should take advantage. Others would say that the parties had an oral deal, Deutsch accepted rent for several months, and there is no justification for his sudden attempt to sabotage a good faith agreement. 2. Mast Industries and Bazak International were two textile firms. Mast orally offered to sell certain textiles to Bazak for $103,000. Mast promised to send documents confirming the agreement but never did. Finally, Bazak sent a memorandum to Mast confirming the agreement, describing the

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 17: Third Parties

goods, and specifying their quantity and the price. Bazak’s officer signed the memo. Mast received the memo but never agreed to it in writing. When Mast failed to deliver the goods, Bazak sued. Who will win? Why? Answer: Bazak. This contract is for the sale of goods and thus is governed by UCC §2-201. Both parties are merchants. Under the merchants’ exception, UCC §2-201 (2), when Bazak sent a signed memo sufficient to hold it, Bazak, liable on the deal, Mast would also be held to the terms of the deal unless it objected within 10 days. It made no objection and Bazak won. Bazak International Corp. v. Mast Industries, 73 N.Y.2d 113, 535 N.E.2d 633, 1989 N.Y. LEXIS 200 (1989). 3. A disc jockey named Z-Trip made a remix of a Beastie Boys song with the hip-hop group’s permission. Monster Energy (ME), an energy drink company, wanted to use the remix as part of a video promotion. Monster Energy sent an email asking Z-Trip to approve the video. In an email, ZTrip responded “Dope!” When the Beastie Boys sued ME for copyright infringement, ME claimed that Z-Trip’s reply was a contract granting it approval to use the remix. Is there an enforceable contract between Z-Trip and ME? Answer: Based on Beastie Boys v. Monster Energy Company (S.D.N.Y. 2013), generally email contracts are valid, as are electronic signatures. While courts view these transactions liberally, the court ruled that the word “Dope!”—although “memorable”—was “entirely too enigmatic and elliptical to constitute the clear and unambiguous acceptance necessary for contract formation.” 4. Now that you know about Browning v. Poirier and the Statute of Frauds, will you change the way you enter into lottery pools? Answer: Answers will vary. 5. Compare the common law Statute of Frauds to the UCC version. What are the specific differences? Which is more reasonable? Why? Answer: Answers will vary.

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 17: Third Parties

Table of Contents Multiple Choice Questions ....................................................................................................................................... 67 Case Questions ............................................................................................................................................................. 69 Discussion Questions.................................................................................................................................................. 70

Multiple Choice Questions 1. CPA QUESTION Yost contracted with Egan for Yost to buy certain real property. If the contract is otherwise silent, Yost’s rights under the contract are: A. assignable only with Egan’s consent. B. nonassignable because they are personal to Yost.

Solution and Answer Guide:

C. nonassignable as a matter of law. D. generally assignable. Answer: D. CPA Examination, November 1991, #24. 2. CPA QUESTION One of the criteria for a valid assignment of a sales contract to a third party is that the assignment must: A. not materially increase the other party’s risk or duty. B. not be revocable by the assignor. C. be supported by adequate consideration from the assignee. D. be in writing and signed by the assignor. Answer: A. See UCC §2-210 (2). CPA Examination, May 1991, #28. 3. Amanda agrees to pay Jennifer $300 for a pair of tickets to see Jerry Seinfeld. “Seinfeld is my boyfriend Octavio’s favorite comedian, and the tickets will be a great birthday present for him,” she tells Jennifer. Amanda pays up and tells a delighted Octavio about the tickets, but Jennifer never delivers them. Octavio is a(n) ____ beneficiary of the agreement, and as such, he ____ have a right to enforce the contract himself. A. donee; does B. donee; does not C. incidental; does D. incidental; does not Answer: A 4. A novation completely releases an ____ from any further liability. To be effective, it ____ require the agreement of both the obligor and obligee. A. obligor; does B. obligor; does not C. obligee; does D. obligee; does not Answer: A 5. Will misses three straight payments on his SUV, and his bank repossesses it. The right to repossess ____ a security interest. Security interests are governed by Article ____ of the Uniform Commercial Code. A. is; 2 B. is; 9 C. is not; 2 D. is not; 9 Answer: B

Solution and Answer Guide:

Case Questions 1.

Intercontinental Metals Corp. (IMC) contracted with the accounting firm of Cherry, Bekaert & Holland to perform an audit. Cherry issued its opinion about IMC, giving all copies of its report directly to the company. IMC later permitted Dun & Bradstreet to examine the statements, and Raritan River Steel Co. saw a report published by Dun & Bradstreet. Relying on the audit, Raritan sold IMC $2.2 million worth of steel on credit, but IMC promptly went bankrupt. Raritan sued Cherry, claiming that IMC was not as sound as Cherry had reported and that the accounting firm had breached its contract with IMC. Comment on Raritan’s suit. Answer: Raritan was hoping to be a third party beneficiary of the contract between IMC and Cherry, Bekaert. But the court was unpersuaded. It found that the accountants had no intention of benefiting anyone other than IMC, that they had no knowledge at all of Raritan, and that Raritan had never even seen the original audit, but merely a report of the audit. The court declared that Raritan was an incidental beneficiary and hence a loser. Raritan River Steel Co. v. Cherry, Bekaert & Holland, 329 N.C. 646, 407 S.E.2d 178, 1991 N.C. LEXIS 519 (1991).

2. Woodson Walker and Associates leased computer equipment from Park Ryan Leasing. The lease said nothing about assignment. Park Ryan then assigned the lease to TCB as security for a loan. Park Ryan defaulted on its loan, and Walker failed to make several payments on the lease. TCB sued Walker for the lease payments. Was the assignment valid, given the fact that the original lease made no mention of it? If the assignment was valid, may Walker raise defenses against TCB that it could have raised against Park Ryan? Answer: The assignment was valid. Nothing in the contract prohibited it, and there is no common law rule against assigning leases. The obligor is generally entitled to raise defenses against the assignee that it could have maintained against the assignor. The assignor may demand that the contract prohibit the obligor from raising those defenses against the assignee, but here there was no such clause and Walker may respond to TCB just as it would have to Park Ryan. Woodson Walker & Assoc. v. Twin City Bank, 1988 Ark. App. LEXIS 373 (Ark. Ct. App. 1988). 3.

You Be the Judge: WRITING PROBLEM David Ricupero suspected his wife Polly of having an affair, so he taped her phone conversations and, based on what he heard, sued for divorce. David’s lawyer, William Wuliger, had the recorded conversations transcribed for use at trial. The parties settled the divorce out of court and signed an agreement that included this clause: Except as herein otherwise provided, each party hereto completely and forever releases the other and his attorneys from any and all rights each has or may have . . . to any property, privileges, or benefits accruing to either by virtue of their marriage, or conferred by the Statutory or Common Law of Ohio or the United States of America. After the divorce was final, Polly sued William Wuliger for invasion of privacy and violation of federal wiretapping law. Wuliger moved to dismiss the case based on the clause quoted. Polly argued that Wuliger was not a party to the divorce settlement and had no right to enforce it. Issue: May Wuliger enforce the waiver clause from the Ricuperos’ divorce settlement? Argument for Wuliger: The contract language demonstrates that the parties intended to release one another and their attorneys from any claims. That makes Wuliger an intended third party beneficiary, and he is entitled to enforce the agreement. If Polly did not want to release Wuliger from such claims, she was free not to sign the agreement.

Solution and Answer Guide:

Argument for Polly Ricupero: A divorce agreement settles the affairs between the couple. That is all it is ever intended to do, and the parties here never intended to benefit a lawyer. Wuliger is only an incidental beneficiary and cannot use this contract to paper over his violation of federal wiretapping law. Answer: Wuliger wins. David intended that Wuliger benefit from Polly’s promised release. The contract expressly included the attorneys in the release. Further, Polly’s divorce attorney indicated in deposition that David Ricupero would not have signed the decree if the release did not include the attorneys. The lawyers are the intended beneficiaries of the release, and they may enforce it. Ricupero v. Wuliger, 1994 U.S. Dist. LEXIS 12538, U.S. Dist. Ct., No. Dist. Ohio, 1994. 4. The Rosenbergs sold their Dairy Queen franchsie to Mary Pratt. The contract requried Pratt to pay most of the purchase price over a 15-year period. Two years later, Pratt assigned her rights and delegated her duties under the sales contract to Son, Inc. The Rosenbergs agreed to the new arrangement. But the agreement made no mention of discharging Pratt from any further liability on the contract. When Son failed to pay, the Rosenbergs sued Mary Pratt. What result? Answer: Pratt loses. The agreement was an assignment, not a novation, and did not release Pratt from her duties under the original sales contract. Rosenberg v. Pratt, 491 N.W.2d 71, 1992 N.D. LEXIS 202 Supreme Court of North Dakota (1992). 5. Raymond and Connie Loftus hired American Realty Co. to manage and sell their vacant home. ARC secured a buyer. Prior to closing, ARC hired Fitzpatrick to light the home’s gas water heater. During the lighting, Fitzpatrick burned the house down. The Loftuses argued that ARC improperly delegated the duty to Fitzpatrick and that the realty company should be liable. What result? Answer: The realty company was held liable. Although they had the right to delegate the duty to light the water heater, they did not excuse it from liability for the faulty performance of the subcontractor. Loftus v. American Realty Company, 334 AN.W.2d 366 (1983).

Discussion Questions 1. A century and a half ago an English judge stated: “All painters do not paint portraits like Sir Joshua Reynolds, nor landscapes like Claude Lorraine, nor do all writers write dramas like Shakespeare or fiction like Dickens. Rare genius and extraordinary skill are not transferable.” What legal doctrine is the judge describing? What is the ethical basis of this rule? Answer: The judge is giving examples of why a party may not delegate their duties if the obligee has a substantial interest in personal performance by the obligor. It is only fair that if someone contracts with another party who possesses special talent, and pays for that talent, the contracting party should get that talent. If you hire Alannis Morrisette to sing at your dinner party, you should not have to listen to her chauffeur sing, merely because Alannis is meditating and chose to send in her musically inclined driver. The outcome is opposite when the contract is for work anyone can do, such as mowing a lawn. 2. Nationwide Discount Furniture hired Rampart Security to install an alarm in its warehouse. A fire would set off an alarm in Rampart’s office, and the security company was then supposed to notify Nationwide immediately. A fire did break out, but Rampart allegedly failed to notify Nationwide,

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 18: Performance, Breach, and Discharge

causing the fire to spread next door and damage a building owned by Gasket Materials Corp. Gasket sued Rampart for breach of contract, and Rampart moved for summary judgment. Comment. Answer: Rampart’s motion was allowed. Gasket was merely an incidental beneficiary of the Rampart-Nationwide contract. Neither party intended to benefit Gasket, and Gasket thus had no right to enforce the contract. Orion Group v. Nationwide Discount Sleep Center, 1990 U.S. Dist. LEXIS 10197 (E.D. Pa. 1990). 3. If a person promises to give you a gift, there is usually no consideration. The person can change his mind and decide not to give you the present, and there is nothing you can do about it. But if a person makes a contract with someone else and intends that you will receive a gift under the agreement, you are a donee beneficiary and you do have rights to enforce the deal. Are these rules unacceptably inconsistent? If so, which rule should change? Answer: Answers will vary. 4. In response to the subprime mortgage crisis, the federal government created the Home Affordable Modification Program (HAMP) to help struggling homeowners refinance their mortgage debt, thereby reducing the foreclosure rate. HAMP facilitates contracts between the U.S. Treasury and mortgage lenders, who modify eligible homeowners’ mortgage loans in return for incentive payments. The Mackenzies applied for a HAMP modification of their home. Although they were eligible, Flagstar bank foreclosed on their Massachusetts home. The Mackenzies sued Flagstar for breach of contract, claiming they were intended third party beneficiaries of the lender’s contract with the government. Will the Mackenzies succeed on this theory? Answer: Answers will vary. 5. In our society, a person can buy and sell almost anything. But as the chapter describes, you cannot sell personal injury claims. Should you be able to? Imagine that you are injured in a car wreck. You are told that you might eventually win $100,000 in a lawsuit, but that you might not receive payment for years, and you might also lose the case and recover nothing. If someone is willing to pay you $20,000 cash-on-the-barrelhead today for the rights to your claim, is it fair that public policy concerns prohibit you from taking the money? Answer: Answers will vary.

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 18: Performance, Breach, and Discharge

Table of Contents Multiple Choice Questions ....................................................................................................................................... 72 Case Questions ............................................................................................................................................................. 73 Discussion Questions.................................................................................................................................................. 75

Solution and Answer Guide:

Multiple Choice Questions 1. CPA QUESTION: Nagel and Fields entered into a contract in which Nagel was obligated to deliver certain goods by September 10. On September 3, Nagel told Fields that he had no intention of delivering the goods. Prior to September 10, Fields may successfully sue Nagel under the doctrine of: A. promissory estoppel. B. accord and satisfaction. C. anticipatory breach. D. substantial performance. Answer: C. CPA Examination, November 1989, #19. 2. Most contracts are discharged by: A. agreement of the parties. B. full performance. C. failure of conditions. D. commercial impracticability. E. a material breach. Answer: B 3. If a contract contains a condition precedent, the ____ has the burden of proving that the condition actually happened. If a condition subsequent exists, the ____ has the burden of showing that the condition occurred. A. plaintiff; plaintiff B. plaintiff; defendant C. defendant; plaintiff D. defendant; defendant Answer: B 4. Big Co., a construction company, builds a grocery store. The contract calls for a final price of $5 million. Big Co. incurred $4.5 million in costs and stands to make a profit of $500,000. On a final inspection, the grocery store owner is upset. His blueprints called for 24 skylights, but the finished building has only 12. Installing the additional skylights would cost $100,000. Big Co. made no other errors. How much must the grocery store owner pay Big Co.? A. $5,000,000 B. $4,900,000 C. $4,500,000 D. $0 Answer: B

Solution and Answer Guide:

5. Lenny makes K2, a synthetic form of marijuana, in his basement. He signs an agreement with the Super Smoke Shop to deliver 1,000 cans of K2 for $10,000. After the contract is signed, but before the delivery, Super Smoke Shop’s state legislature makes the sale of K2 illegal. Lenny’s contract will be discharged because of ____. A. true impossibility B. commercial impracticability C. frustration of purpose D. None of the above Answer: A

Case Questions 1. ETHICS Commercial Union Insurance Co. (CU) insured Redux, Ltd. The contract made CU liable for fire damage but stated that the insurer would not pay for harm caused by criminal acts of any Redux employees. Fire destroyed Redux’s property. CU claimed that the “criminal acts” clause was a condition precedent, but Redux asserted it was a condition subsequent. What difference does it make, and who is legally right? Does the insurance company’s position raise any ethical issues? Who drafted the contract? How clear were its terms? Answer: The type of condition determines who must prove the source of the fire. CU claimed that the clause was a condition precedent, meaning that Redux had the burden of proving the fire was not arson. Redux argued that the clause was a condition subsequent, meaning that CU became liable to pay benefits as soon as the fire started, and could escape its duty only if the insurer proved Redux had committed arson. The court agreed with Redux, held that the clause was a condition subsequent, and placed the burden on CU to prove arson. Redux, Ltd. v. Commercial Union Ins. Co., 1995 U.S. Dist. LEXIS 2545 (D. Kan. 1995). The most obvious ethical issues arise around the language of the contract and the sale of the policy. The contract says that the insurer is not liable for harm caused by criminal acts of employees. However, the contract says nothing about who must prove whether the harm was caused by such crimes. Further, it is very unlikely that the insurance agent explained, when selling the policy, that in the event of fire the insured company would have to prove the harm was not caused by employee arson. Some would say, as this court did, that the company is attempting to sneak one by its policyholders, using ambiguous language to help sell the policy, then sandbagging the insured once a loss occurs, claiming a contract interpretation that it had never before mentioned. Many would argue that the company that drafts a contract has an ethical obligation to make its terms clear. It is hard to believe that the insurance company would desire to be treated this way––for example, by reinsurers upon whom it depends. 2. Mustang Pipeline Co. hired Driver Pipeline Co. to lay 100 miles of pipeline in 98 days. On day 58, Driver had only completed 14 miles of pipe and gave up. Realizing that Driver was unlikely to make the deadline, Mustang terminated the contract. Under what principle did Mustang terminate? Was the termination justified? Answer: By its failure to lay more than 15 miles of pipe, and then walking off the job, Driver Pipeline had anticipatorily breached its contract with Mustang Pipeline, and it was a material breach. The contract provided that “all time limits . . . are of the essence of the contract,” and found evidence of a material breach. Mustang Pipeline Co., v. Driver Pipeline Co., 134 S.W.3d 195 (Tex. 2004).

Solution and Answer Guide:

3. Brunswick owned a tennis club on property that it leased form Route 18. Upon expiration of its 25year lease, Brunswick had the option of either buying the property or purchasing a 99-year lease, both on very favorable terms. To exercise its option, Brunswick had to notify Route 18 no later than September 30 and had to pay the option price of $150,000. If Brunswick failed to exercise its options, the existing lease automatically renewed for 25 more years at more than triple the current rent. Over a year before the deadline, Brunswick informed Route 18 that it intended to exercise the option for a 99-year lease and asked to review the new lease. Route 18 responded with delays and did not provide a new lease, despite repeated pleas. After the September deadline passed, Route 18 notified Brunswick that it was too late to exercise the option because it did not pay the $150,000 on time. Brunswick sued, claiming that Route 18 had breached its duty of good faith and fair dealing. What result? Answer: Judgment for Brunswick. Route 18 breached its duty of good faith and fair dealing. Brunswick Hills Racquet Club, Inc., v. Route 18 Shopping Center Associates, a Limited Partnership, 182 N.J. 210, 864 A.2d 387 (2005). 4. Loehmann’s clothing stores, a nationwide chain with headquarters in New York, was the anchor tenant in the Lincoln View Plaza Shopping Center in Phoenix, Arizona, with a 20-year lease from the landlord, Foundation Development, beginning in 1978. Loehmann’s was obligated to pay rent the first of every month and to pay common area charges four times a year. The lease stated that if Loehmann’s failed to pay on time, Foundation could send a notice of default, and that if the store failed to pay all money due within 10 days, Foundation could evict. On February 23, 1987, Foundation sent to Loehmann’s the common-area charges for the quarter ending January 31, 1987. The balance due was $3,500. Loehmann’s believed the bill was in error and sent an inquiry on March 18, 1987. On April 10, 1987, Foundation insisted on payment of the full amount within 10 days. Foundation sent the letter to the Loehmann’s store in Phoenix. On April 13, 1987, the Loehmann’s store received the bill and, since it was not responsible for payments, forwarded it to the New York office. Because the company had moved offices in New York, a Loehmann’s officer did not see the bill until April 20. Loehmann’s issued a check for the full amount on April 24 and mailed it the following day. On April 28, Foundation sued to evict; on April 29, the company received Loehmann’s check. Please rule. Answer: Loehmann’s violated the lease by failing to pay common charges within 10 days of the default letter, regardless of whether 10 days is measured from the day of mailing or receipt. But the breach was trivial. It would be a “dangerous doctrine to permit forfeiture” for any breach, no matter how inconsequential. Loehmann’s is still selling clothes at the mall. Foundation Development Corp. v. Loehmann's, Inc., 163 Ariz. 438, 788 P.2d 1189, 1990 Ariz. LEXIS 44 (1990). 5.

You Be the Judge: WRITING PROBLEM Kuhn Farm Machinery, a European company, signed an agreement with Scottsdale Plaza Resort, of Arizona, to use the resort for its North American dealers’ convention during March 1991. Kuhn agreed to rent 190 guest rooms and spend several thousand dollars on food and beverages. Kuhn invited its top 200 independent dealers from the United States and Canada and about 25 of its own employees from the United States, Europe, and Australia, although it never mentioned those plans to Scottsdale. On August 2, 1990, Iraq invaded Kuwait, and on January 16, 1991, the United States and allied forces were at war with Iraq. Saddam Hussein and other Iraqi leaders threatened terrorist acts against the United States and its allies. Kuhn became concerned about the safety of those traveling to Arizona, especially its European employees. By mid-February, 11 of the top 50 dealers with expense paid

Solution and Answer Guide:

trips had either canceled their plans to attend or failed to sign up. Kuhn postponed the convention. The resort sued. The trial court discharged the contract under the doctrines of commercial impracticability and frustration of purpose. The resort appealed. Did commercial impracticability or frustration of purpose discharge the contract? Argument for Scottsdale Plaza Resort: The resort had no way of knowing that Kuhn anticipated bringing executives from Europe, and even less reason to expect that if anything interfered with their travel, the entire convention would become pointless. Most of the dealers could have attended the convention, and the resort stood ready to serve them. Argument for Kuhn: The parties never anticipated the threat of terrorism. Kuhn wanted this convention so that its European executives, among others, could meet top North American dealers. That is now impossible. No company would risk employee lives for a meeting. As a result, the contract has no value at all to Kuhn, and its obligations should be discharged by law. Answer: Reversed. Summary judgment granted for Scottsdale Plaza, with the case remanded to the trial court to assess damages. Kuhn has no legitimate claim for impossibility or impracticability. Kuhn does not and cannot allege that it was impossible for it to perform, but rather that the resort's performance had been rendered worthless. That is a claim of frustration of purpose. To win on such a claim, Kuhn must show that the principal purpose in entering the contract was a convention at which the European employees would appear. That was not a principal purpose of the contract. Further, the majority of dealers were still prepared to attend. There has been no frustration of purpose. 7200 Scottsdale Road v. Kuhn Farm Machinery, Inc., 909 P.2d 408, 1995 Ariz. App. LEXIS 108 (Ariz. Ct. App. 1995).

Discussion Questions 1. Evans built a house for Sandra Dyer, but the house had some problems. The garage ceiling was too low. Load-bearing beams in the “great room” cracked and appeared to be steadily weakening. The patio did not drain properly. Pipes froze. Evans wanted the money promised for the job, but Dyer refused to pay. Comment. Answer: This case creates an issue of substantial performance. The court held that the low garage ceiling was a minor problem and would not defeat substantial performance. But the cracked beams were very serious and might require major reconstruction. The water collecting in the patio could seep under the house and destroy the foundation. The freezing pipes posed a danger of bursting. The contractor had failed to substantially perform and was not entitled to his contract price. He was owed only the value of work completed, if any. Evans & Associates v. Dyer, 246 Ill. App. 3d 231, 615 N.E.2d 770, 1993 Ill. App. LEXIS 826 (Ill. App. Ct. 1993). 2. Krug International, an Ohio corporation, had a contract with Iraqi Airways to build aeromedical equipment for training pilots. Krug then contracted for Power Engineering, an Iowa corporation, to build the specialized gearbox to be used in the training equipment for $150,000. Power did not know that Krug planned to resell the gearbox to Iraqi Airways. When Power had almost completed the gearbox, the Gulf War broke out and the United Nations declared an embargo on all shipments to Iraq. Krug notified Power that it no longer wanted the gearbox. Power sued. Please rule. Answer: Power wins. Although it was impossible for Krug to complete its deal with Iraqi Airways, it was entirely possible for Krug to accept and pay for the gearbox. Defenses of commercial impracticability and frustration of purpose both fail because Power did not know that Krug intended to reship to Iraq. The international resale was not part of the Krug-Power contract, and its failure is

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 19: Remedies

no defense. Power Engineering & Mfg. v. Krug International, 501 N.W.2d 490, 1993 Iowa LEXIS 157 (Iowa 1993). 3. Westinghouse sold uranium in long-term contracts at fixed prices, betting that market prices would be stable or fall (as they had been). But this was a bad bet: Uranium prices skyrocketed as a result of a cartel. Faced with large losses if it had to fulfill its contracts, Westinghouse argued that the unanticipated spike in uranium prices made its performance impossible. Should Westinghouse be freed of its contractual duties to sell uranium at a loss? Answer: The argument failed; the court observed that Westinghouse and its customers had negotiated over the risk of higher prices for uranium, and that the occurrence of the risk did not excuse one side’s performance. Even if the losses drove Westinghouse into bankruptcy, that would not make performance “impossible”; it would just assure that all of Westinghouse’s creditors received equal treatment. See In re Westinghouse Electric Corp. Uranium Contracts Litigation, 563 F.2d 992 (10th Cir.1977). 4. Jacobs Builders entered into a contract with Kent to build him a home. The agreement stated that Jacobs would use only certain brand-name materials. Upon completion of the home, Kent discovered that Jacobs had installed high-quality, but not brand-name, pipes throughout the house. This was an oversight, which even the architect failed to catch. Kent asked Jacobs to replace all the pipes, but this meant destroying all of the floors and walls in the house. Should Kent have to rebuild the house to get paid? Answer: Based on Jacobs & Young v. Kent, 230 N.Y. 239 (1921). In this case, Justice Cardozo laid out the doctrine of substantial performance. To Cardozo, denying the contractor recovery because of an innocent mix-up in the use of virtually identical pipes seemed arbitrary and unfair. The court held that Kent was entitled to the difference between a house with brand-name pipes and a house with non-brand name pipes, which was an insignificant amount. The dissent however, opted for a stricter reading of the contract. 5. Franklin J. Moneypenny hires Angela to paint his portrait. She is to be paid $50,000 if the painting is acceptable “in Franklin’s sole judgment.” At the big unveiling, 99 of 100 attendees think that Angela has done a masterful job. Franklin disagrees. He thinks the painting makes him look like a toad. (He does in fact look like a toad, but he does not like to contemplate this fact.) Franklin refuses to pay, and, because he signed a personal satisfaction contract, Angela gets nothing. Is this fair? Should the law allow personal satisfaction contracts? Answer: Answers will vary.

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 19: Remedies

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 19: Remedies

Table of Contents Multiple Choice Questions ....................................................................................................................................... 77 Case Questions ............................................................................................................................................................. 78 Discussion Questions.................................................................................................................................................. 79

Multiple Choice Questions 1. CPA QUESTION Master Mfg., Inc., contracted with Accur Computer Repair Corp. to maintain Master’s computer system. Master’s manufacturing process depends on its computer system operating properly at all times. A liquidated damages clause in the contract provided that Accur would pay $1,000 to Master for each day that Accur was late responding to a service request. On January 12, Accur was notified that Master’s computer system had failed. Accur did not respond to Master’s service request until January 15. If Master sues Accur under the liquidated damage provision of the contract, Master will: A. win unless the liquidated damages provision is determined to be a penalty. B. win because under all circumstances liquidated damage provisions are enforceable. C. lose because Accur’s breach was not material. D. lose because liquidated damage provisions violate public policy. Answer: A. CPA Examination, May 1993, #25. 2. CPA QUESTION Kaye contracted to sell Hodges a building for $310,000. The contract required Hodges to pay the entire amount at closing. Kaye refused to close the sale of the building. Hodges sued Kaye. To what relief is Hodges entitled? A. Punitive damages and direct damages B. Specific performance and direct damages C. Consequential damages or punitive damage D. Direct damages or specific performance Answer: D. CPA Examination, May 1992, #35. 3. A manufacturer delivers a new tractor to Farmer Ted on the first day of the harvest season. But the tractor will not start. It takes two weeks for the right parts to be delivered and installed. The repair bill comes to $1,000. During the two weeks, some acres of Farmer Ted’s crops die. He argues in court that his lost profit on those acres is $60,000. If a jury awards $1,000 for tractor repairs, it will be in the form of ____ damages. If it awards $60,000 for the lost crops, it will be in the form of ____ damages. A. direct; direct B. direct; consequential C. consequential; direct D. consequential; consequential E. direct; incidental Answer: B

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 19: Remedies

4. Julie signs a contract to buy Nick’s 2012 Mustang GT for $20,000. Later, Nick changes his mind and refuses to sell his car. Julie soon buys a similar 2012 Mustang GT for $21,500. She then sues Nick and wins $1,500. The $1,500 represents her ____. A. expectation interest B. reliance interest C. restitution interest D. None of the above Answer: A 5. Under the Uniform Commercial Code (UCC), a seller ____ generally entitled to recover consequential damages. Under the UCC, a buyer ____ generally entitled to recover consequential damages. A. is; is B. is; is not C. is not; is D. is not; is not Answer: C

Case Questions 1. Lewis signed a contract for the rights to all timber located on Nine-Mile Mine. He agreed to pay $70 per thousand board feet ($70/mbf). As he began work, Nine-Mile became convinced that Lewis lacked sufficient equipment to do the job well and forbade him to enter the land. Lewis sued. NineMile moved for summary judgment. The mine offered proof that the market value of the timber was exactly $70/mbf, and Lewis had no evidence to contradict Nine-Mile. The evidence about market value proved decisive. Why? Please rule on the summary judgment motion. Answer: Motion granted. Nine-Mile may have breached the agreement, but there is no evidence that Lewis lost money. To win, he must demonstrate a difference between the contract price and the market value of the timber. There was no difference, and he recovers nothing. Lewis v. NineMile Mines, Inc., 886 P.2d 912, 1994 Mont. LEXIS 283 (Mont. 1994). 2. Parkinson was injured in an auto accident by a driver who had no insurance. Parkinson filed a claim with her insurer, Liberty Mutual, for $2,000 under her “uninsured motorist” coverage. Liberty Mutual told her that if she sought that money, her premiums would go “sky high,” so Parkinson dropped the claim. Later, after she had spoken with an attorney, Parkinson sued. What additional claim was her attorney likely to make? Answer: A claim for punitive damages, based on Liberty Mutual’s bad faith in discouraging Parkinson from filing a claim for money to which she was entitled. The court awarded her $2,000 for uninsured motorist coverage and $40,000 punitive damages. Liberty Mutual Insurance Co. v. Parkinson, 487 N.E.2d 162, reh’g denied, 491 N.E.2d 229 (Ind. Ct. App. 1986). 3. The Madariagas owned a restaurant where they served “Albert’s Famous Mexican Hot Sauce.” They entered into a contract to sell the restaurant and the formula for the secret sauce to Morris. Although Morris paid the agreed-upon price, the sellers refused to give him the recipe unless he also

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 19: Remedies

paid them lifetime royalties for the sales. Which of these remedies should Morris seek; expectation, restitution, specific performance, or reformation? Why? Answer: Morris should seek specific performance, and compel the Madariagas to give him the recipe, as was set forth in their contract. Madariaga v. Morris, 639 S.W.2d 709 (1982). 4.

You Be the Judge: WRITING PROBLEM John and Susan Verba sold a Vermont lakeshore lot to Shane and Deborah Rancourt for $115,000. The Rancourts intended to build a house on the property, but after preparing the land for construction, they learned that a wetland protection law prevented building near the lake. They sued, seeking rescission of the contract. The trial court concluded that the parties had reached their agreement under a “mutual, but innocent, misunderstanding.” The trial judge gave the Verbas a choice: They could rescind the contract and refund the purchase price, or they could give the Rancourts $55,000, the difference between the sales price and the actual market value of the land. The Rancourts appealed. Were the Rancourts entitled to rescission of the contract? Argument for the Rancourts: When the parties have made a mutual mistake about an important factual issue, either party is entitled to rescind the contract. The land is of no use to us and we want our money back. Argument for the Verbas: Both sides were acting in good faith and both sides made an honest mistake. We are willing to acknowledge that the land is worth somewhat less than we all thought, and we are willing to refund $55,000. The buyers shouldn’t complain—they are getting the property at about half the original price, and the error was as much their fault as ours. Answer: The Rancourts win and are entitled to rescission. Both parties clearly intended that the Rancourts would build a house near the lake. They cannot do so. That is a basic error of fact, and the Rancourts get their money back. The judge has no power to reshape the contract to express expectations that neither party ever held.

5. The Basketball Marketing Company (BMC) signed a long-term endorsement contract with a 16-yearold basketball player, Darko Milicic. Soon after his 18th birthday, Milicic successfully disaffirmed the contract. To prevent Milicic from entering into a contract with its competitors, BMC sent them letters claiming it had an enforceable contract with Milicic. Because of BMC’s letter, Adidas ceased negotiating with Milicic. He sued BMC, seeking a preliminary injunction that would prohibit BMC from sending such letters to competitors. Should the court grant this injunction? Why or why not? Answer: Judgment for Milicic affirmed. He had proven all four elements necessary for the imposition of an order of preliminary injunction. Milicic v. Basketball Marketing Company, Inc, 857 A.2d 689 Superior Ct. of Pa. (2004) [Note: this case appears as one of the bonus cases in this chapter].

Discussion Questions 1.

ETHICS The National Football League owns the copyright to the broadcasts of its games. It licenses local television stations to telecast certain games and maintains a “blackout rule,” which prohibits stations from broadcasting home games that are not sold out 72 hours before the game starts. Certain home games of the Cleveland Browns team were not sold out, and the NFL blocked local broadcast. But several bars in the Cleveland area were able to pick up the game’s signal by using special antennas. The NFL wanted the bars to stop showing the games. What did it do? Was it

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 19: Remedies

unethical of the bars to broadcast the games that they were able to pick up? Apart from the NFL’s legal rights, do you think it had the moral right to stop the bars from broadcasting the games? Answer: Answers will vary. 2. Consequential damages can be many times higher than direct damages. Consider the “Farmer Ted” scenario raised in multiple choice question 3, which is based on a real case.2 Is it fair if consequential damages are 60 times higher than direct damages? The Supreme Court is skeptical that punitive damages should be more than nine times compensatory damages in a tort case. Should a similar “soft limit” apply to consequential damages in contract cases? Answer: Answers will vary. 3. PepsiCo entered into a contract to sell its corporate jet to Klein for $4.6 million. Before the deal closed, the plane was sent to pick up PepsiCo’s chairman of the board, who was stranded at Dulles airport. The chairman then decided that the company should not part with the plane. Klein sued PepsiCo for specific performance, arguing that he could not find a similar jet on the market for that price. Should a court force PepsiCo to sell its plane? Answer: Based on Klein v. PepsiCo 845 F.2d 76 (4th Cir. 1988). The court said that specific performance cannot be granted where damages are recoverable and adequate. The fact that there was no other plane on the market in that price range was not enough to say it was “unique” for purposes of equitable relief. 4. Walgreens operated a pharmacy in the Sara Creek mall. As part of this long-term lease, Sara Creek agreed not to lease mall space to another pharmacy. During an economic recession, Sara Creek’s largest tenant left and the landlord informed Walgreens that it intended to rent that space out to a “deep discount” store that would contain a pharmacy. It was the only way to remain profitable, according to Sara Creek. Walgreens sued for an injunction against Sara Creek until its contract expired in ten years. Should a court hold Sara Creek to its contract, even if this decision means bankrupting it? Answer: Based on Walgreen Co. v. Sara Creek Property Co. 966 F. 2d 273 (7th Cir. 1992). Judge Posner upheld the permanent injunction. In deciding the propriety of an injunction, courts must weigh the costs and benefits of granting monetary damages versus an injunction. Here, the costs of damages would exceed the cost of the injunction because the lease had ten years left. 5. Is it reasonable to require the mitigation of damages? If a person is wronged because the other side breached a contract, should she have any obligations at all? For example, suppose that a tenant breaches a lease by leaving early. Should the landlord have an obligation to try to find another tenant before the end of the lease? Answer: Answers will vary.

Prutch v. Ford 574 P.2d 102 (Colo. 1977)

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 20: Practical Contracts

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 20: Practical Contracts

Table of Contents Multiple Choice Questions ....................................................................................................................................... 81 Case Questions ............................................................................................................................................................. 82 Discussion Questions.................................................................................................................................................. 83

Multiple Choice Questions 1. Which of the following statements is true? A. Vagueness occurs when the parties do not want the contract to be clear. B. Ambiguity occurs when the parties do not want the contract to be clear. C. Vagueness in a contract is often appropriate as a way to clinch a deal. D. Ambiguity is an appropriate tactic, particularly by the party drafting the contract. Answer: A 2. A contract provided, “On January 5, Purchaser shall provide Seller with a certified check in the amount of $100,000. Seller shall transfer a deed for the Property to Purchaser.” What is wrong with this provision? A. It is not clear who Purchaser and Seller are. B. The number $100,000 should be written in words. C. The promises are reciprocal. D. The promises are conditional. Answer: C 3.

In the case of a scrivener’s error, what happens? A. A court will not reform the contract. The parties must live with the document they signed. B. A court will reform the contract if there is clear and convincing evidence that the clause in question does not reflect the true intent of the parties. C. A court will reform the contract if a preponderance of the evidence indicates that that the clause in question does not reflect the true intent of the parties. D. A court will invalidate the contract in its entirety. Answer: B

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 20: Practical Contracts

A contract states (1) that Buzz Co. legally exists and (2) will provide 2,000 pounds of wild salmon each week. Which of the following statements is true?

A. Clause 1 is a covenant and Clause 2 is a representation. B. Clause 1 is a representation and Clause 2 is a covenant. C. Both clauses are representations. D. Both clauses are covenants. Answer: B 5. Simon has signed a contract with Miley agreeing to provide her company with 1,000 frozen pizzas each week. The contract states: “This agreement can only be modified by a written instrument signed by the party to be charged with such amendment.” But when Simon and Miley run into each other on the train, they agree that he will provide 750 pizzas instead. Which of the following statements is true? A. As long as they both agree, they can amend the contract orally. They do not have to sign anything. B. For the change to be valid, both parties must sign an amendment because both parties are affected by it. C. Only Miley has to sign the amendment because she is the one to be charged by it. D. Only Simon must sign the amendment because he is the one to be charged by it. Answer: D

Case Questions 1. Give an example of three types of contracts that should definitely be in writing and one that probably does not need to be. Answer: Should be in writing: The sale of stock, a merger agreement, the sale of land, anything that falls under the Statute of Frauds. Need not be in writing: An agreement with friends in which not much money is involved––to chip in to buy a present together. It is with someone with whom you have an on-going relationship and who has proved to be trustworthy in the past, and you can afford the loss––a routine supplier. You do not have time to do a proper written contract and you would prefer to bear the risk of loss over the risk of not getting the deal done. 2. List three provisions in a contract that would be material and three that would not be. Answer: Material: payment, item to be sold or services to be rendered, term of the contract; not material: notices, choice of law, arbitration, attorney’s fees. 3. Blair Co.’s top officers asked an investment bank to find a buyer for the company. The bank sent an engagement letter to Blair with the following language: If, within 24 months after the termination of this agreement, Blair is bought by anyone with whom bank has had substantial discussions about such a sale, Blair must pay bank its full fee. Is there any problem with the drafting of this provision? What could be done to clarify the language? Answer: The main problem is that the language about “substantial discussions” is vague or ambiguous, depending on whether or not the bank left the language deliberately unclear. The term “substantial discussions” is not defined. A better measure might be any referral of a potential buyer made by the bank to Blair. Both parties would have records to such occurrences.

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 20: Practical Contracts

4. Juan purchased an insurance policy on his house that did not protect against vandalism or burglary. An arsonist burned down the house. Did the insurance company have to pay? Answer: Yes. Vandalism would be some relatively minor damage to the house not the destruction of the entire property. And burglary is not an issue in this case. 5. Marc canceled his Comcast cable service. When the cable guy removed the Comcast equipment, he mistakenly left behind a modem worth $220. By some mix-up, this amount was sent to a collection agency. Upon discovering the error, Marc returned to modem to Comcast, which promised to correct his account. But the mistake remained on Marc’s credit report. Because of the error, Marc had to pay an additional $26,000 when he refinanced his mortgage. Did Comcast violate its duty of good faith? Answer: It certainly seems so. It was Comcast’s three errors, leaving the modem, charging him for it, and referring that “debt” to a credit reporting agency, that led to Marc’s losses. Yet Comcast did nothing to correct its mistakes.

Discussion Questions 1. In the movie contract, which side was the more successful negotiator? Can you think of any terms that either party left out? Are any of the provisions unreasonable? Answer: Answers will vary. 2. What are the advantages and disadvantages of hiring a lawyer to draft or review a contract? Answer: Advantages: Lawyers understand the law. They can protect you against unexpected events in the future. They can be the “bad guys” in negotiations––you can blame them for playing hardball. Important signal to the other side that you are well-protected. Contracts are more likely to be internally consistent without obvious mistakes. Less likely to make typographical errors. Disadvantages: Lawyers cost time and money. 3. What are the penalties if Artist breaches the movie contract? Are these reasonable? Too heavy? Too light? Answer: Answers will vary. Producer does not have to pay Artist any further compensation but Artist gets to keep what he has been paid to date. 4. Upon graduation from business school, Zoe has been offered a job as a product manager at a startup, Appsley Co. She would be Employee #18. But first she has to negotiate a contract with the CEO, Phil. He would like to pay her $75,000, which is half of what a product manager at a more established company would earn. However, Appsley has yet to earn a profit and Zoe might also be able to negotiate an equity interest in the company. Do a role-play with another student in your class in which one of you takes the role of Zoe and the other is Phil. What terms should each party consider? What does each side want? Draft the contract. Now compare your results with others in the class. Who has negotiated the best deal? Who has written the best contract? Answer: Answers will vary.

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 21: Introduction to Sales

5. ETHICS Sophia negotiated a contract with Pete under which she would buy his company for $10 million plus the amount of the company’s outstanding debt (approximately $1 million). But when Pete sent a draft of the contract, it stated that the purchase price would be $10 million less the company’s debt. What is Sophia’s ethical obligation to Pete? Should she tell him about the mistake? What Life Principles would you apply in this situation? Answer: Answers will vary.

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 21: Introduction to Sales

Table of Contents Multiple Choice Questions ....................................................................................................................................... 84 Case Questions ............................................................................................................................................................. 85 Discussion Questions.................................................................................................................................................. 86

Multiple Choice Questions 1. For a contract governed by the Uniform Commercial Code (UCC) sales article, which one of the following statements is correct? (a) Merchants and non-merchants are treated alike. (b) The contract may involve the sale of any type of personal property. (c) The obligations of the parties to the contract must be performed in good faith. (d) The contract must involve the sale of goods for a price $500 or more. Answer: C 2. Which one of the following transactions is not governed by Article 2 of the UCC? (a) Purchasing an automobile for $35,000 (b) Leasing an automobile worth $35,000 (c) Purchasing a stereo worth $501 (d) Purchasing a stereo worth $499 Answer: B 3. Brendan assembles gaming computers in his garage and sells them. He makes an agreement with Alpha Company under which Alpha will deliver 100 graphics cards. The agreement does not specify when payment is due. Which of the following is true? (a) Brendan has no obligation to pay because there was no “meeting of the minds” and no contract was formed. (b) Brendan must pay within ten days of making the agreement. (c) Brendan must pay within ten days of accepting the graphics cards. (d) Brendan must pay within a commercially reasonable time. Answer: D

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 21: Introduction to Sales

4. Chef Carolina sells 40 cakes to Natasha at a price of $25 each for a total of $1,000. Under the UCC Statute of Frauds, which of the following must be in writing? (a) The name of the buyer: Natasha (b) The name of the seller: Chef Carolina (c) The quantity of goods: 40 (d) The price to be paid: $25 (e) The UCC Statute of Frauds does not require anything to be in writing in this case. Answer: C 5. In which of the following cases must the contract modification have additional consideration to be binding? (a) Tony’s boss promises him a higher salary because he did a good job. (b) Tiana’s Toys agrees to upgrade Tal’s order of tricycles to expedited shipping. (c) Both require new consideration. (d) Neither requires new consideration. Answer: A

Case Questions 1. The Massachusetts Bay Transit Authority (MBTA) awarded the Perini Corp. a large contract to rehabilitate a section of railroad tracks. The work involved undercutting the existing track, removing the ballast and foundation, rebuilding the track, and disposing of the old material. Perini solicited an offer from Atlantic Track & Turnout Co. for Atlantic to buy whatever salvageable material Perini removed. Perini estimated the quantity of salvageable material that would be available. Atlantic offered to purchase “all available” material over the course of Perini’s deal with the MBTA, and Perini accepted. But three months into the project, the MBTA ran short of money and told Perini to stop the undercutting part of the project. That was the work that made Perini its profit, so Perini requested that the MBTA terminate the agreement, which the agency did. By that point Perini had delivered to Atlantic only about 15 percent of the salvageable material that it had estimated. Atlantic sued. What kind of contract do the parties have? Who should win and why? Answer: The parties have an output contract because Perini has promised to deliver to Atlantic 100 percent of its output of certain material and Atlantic has agreed to buy it all. Under UCC §2-306, such contracts are valid, even though the quantity of goods is, by definition, not stated. The parties must act in good faith. Here, Perini’s reason for stopping delivery is entirely legitimate: The original contract with MBTA has been terminated for business reasons. In an output contract, the buyer assumes the risk that the seller may have a legitimate reason for greatly reducing, or even halting, its supply of goods. Judgment for Perini. Atlantic Track & Turnout Co. v. Perini Corporation, 989 F.2d 541, 1993 U.S. App. LEXIS 6248 (1st Cir. 1993). 2. Lara owns a used-car lot. She emails Seth, a used-car wholesaler who has a huge lot of cars in the same city. The email reads, “Confirming our agrmt—I pick any 15 cars from your lot—30 percent below Blue Book Value.” Seth reads the email, laughs, and deletes it. Two weeks later, Lara arrives and demands to purchase 15 of Seth’s cars beneath market. Is he obligated to sell?

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 21: Introduction to Sales

Answer: Probably. Under UCC §2-201(2), a signed memo between merchants that would be binding against the sender is sufficient to satisfy the statute of frauds against the recipient if he reads it and fails to object within ten days. 3. The Brugger Corp. owned a farm operated by Jason Weimer, who acted as the company’s business agent. Tri-Circle, Inc., was a farm equipment company. On behalf of Brugger, Weimer offered to buy from Tri-Circle certain equipment for use on the farm. Tri-Circle accepted the offer, using a preprinted form. The form included a finance charge for late payment. Weimer’s offer had said nothing about finance charges, but he made no objection to the new term. Tri-Circle supplied the farm equipment but later alleged that Brugger had refused to pay for $12,000 worth of the supplies. TriCircle sued. In deciding whether Tri-Circle was entitled to finance charges, the court first inquired whether Brugger, Weimer, and Tri-Circle were merchants. Why did it look into that issue? Were they merchants? Answer: Tri-Circle has added an additional term to Weimer’s offer. Under UCC §2-207, in a contract between merchants an additional term becomes part of the contract unless (1) the offer insisted on its own terms, (2) the additional term materially alters the offer, or (3) the offeror promptly objects to the added term. None of those things occurred, so the additional term was part of the sales agreement if all three parties were merchants. They routinely dealt in farm goods, so they were merchants and thus the finance charge was binding. Tri-Circle, Inc. v. Brugger Corporation, 121 Idaho 950, 829 P.2d 540, 1992 Idaho App. LEXIS 29 (1992). 4. Ohio Fresh Eggs (OFE) operated an egg farm. OFE and LandTech entered into a contract in which OFE promised to sell its chicken manure to LandTech. As to quantity, the contract read: “all available tonnage per year of manure. Specific quantity to be determined by and mutually agreeable [sic] both parties.” When OFE failed to perform, LandTech sued for breach, arguing the parties had an enforceable contract under the UCC. Please rule. Answer: The UCC applied to the contract, as it was a contract for the sale of goods, namely, chicken manure. The contract was not an output contract because the quantity was subject to the agreement of the parties. Since a quantity term is essential to a contract for the sale of goods under Ohio’s UCC law, the agreement is unenforceable as a matter of law. H & C Ag Servs., LLC v. Ohio Fresh Eggs, LLC, 2015-Ohio-3714. 5. A.C. Furniture (ACF) manufactured custom furniture for national restaurant chains. A representative of Arby’s Restaurant Group emailed ACF an order for 4,500 chairs at $44 per chair, with detailed specifications of seat pads, model numbers, and Arby’s signature colors. A year later, Arby’s emailed a request for 3,300 more of the same chairs. ACF custom made 7,800 chairs to Arby’s specs, but Arby’s only purchased 1,117. ACF sued Arby’s, but the restaurant chain argued that the parties never had an enforceable contract and moved to dismiss. Who wins and why? Answer: Defendant’s Motion to Dismiss was denied, and the case returned for trial. The court ruled that plaintiff had alleged sufficient facts to implicate the “specially manufactured goods” exception to the Statute of Frauds. A.C. Furniture, Inc. v. Arby’s Ret. Grp., Inc., Case No. 4:14-cv-00029 (W.D. Va. Oct 3, 2014).

Discussion Questions Apply the following facts to the questions 1 and 2.

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 21: Introduction to Sales

The publication of the original UCC in 1952 sparked an expansion of the Statute of Frauds in the United States to cover sales of goods of $500 or more. At about the same time (in 1954), the British Parliament repealed its long-standing Statute of Frauds as applied to sales of goods. Some have argued that we should scrap UCC 2-201 on the grounds that it encourages misdealing as much as it prevents fraud. Consider the following two hypotheticals: (In the U.S.) Johnny is looking at a used Chevy Tahoe. He knows that the $7,000 price is a good one, but he wants to go online and see if he can find an even better deal. In the 20 minutes he has been with the car’s current owner, the owner has received three phone calls about the car. Johnny wants to make sure that no one else buys the car while he is thinking the deal over, so he makes a verbal agreement to buy the car and shakes the seller’s hand. He knows that, because of the Statute of Frauds, and the fact that that nothing is in writing, he does not yet have any enforceable obligation to buy the car. (In the U.K.) Nigel sells used Peugeots in Liverpool. When he senses interest from customers, he aggressively badgers them until they verbally commit to buy. If the customers later get cold feet and try to back out of the deal, he holds them to the verbal contracts. Because there is no longer a UCCstyle statute of frauds in Britain, the buyers are stuck. 1. Rate the degree to which you believe Johnny and Nigel acted wrongfully. Did one behave more wrongfully than the other? If so, which one, and why? Answer: Answers will vary. 2. Do you think that the UCC Statute of Frauds as it currently exists is more likely to prevent fraud, or is it more likely to encourage misunderstandings and deception? Why? Overall, is it sensible to require that purchases of big-ticket items be in writing before they are final? Answer: Answers will vary. 3. The UCC was written by a group of scholars and adopted by elected state legislators. But many contracts that do not involve a sale of goods are still governed by old common law principles that have been created by judges over a period of centuries. Who makes for better lawmakers––judges or legislators? Do you prefer the way in which common law principles or UCC rules were created? Answer: Answers will vary. 4. Gene and Martha Jannusch owned a food truck business. They verbally agreed to sell it to Lindsey and Louann Naffziger for $150,000. The Naffzigers paid an initial $10,000 deposit and took possession of all the concession equipment, including the truck, trailer, and cooking equipment. The remaining balance was to be paid when the buyers secured a loan. When the Naffzigers backed out of the deal, the Jannuschs sued. The buyers argued that there was never a contract because (1) the UCC did not apply to the sale of a food truck business and (2) the contract was missing essential terms. Rule. Answer: Answers will vary. This case appears in this manual but not in the text. 5. This chapter revisits the idea of unconscionability. Courts will sometimes refuse to enforce deals that are, as UCC 2-302 states it, “shocking and fundamentally unfair”. Consider the following two cases. In each, an electronics store sells an HDTV with a fair market value of $600 for $1,500.

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 22: Ownership, Risk, and Warranties

a. Sale #1 is made to Ann. She has a terrible credit score and is willing to pay $1,500 because the store offers to finance the television and she has no other available credit. b. Sale #2 is made to Franklin J. Moneypenny, a very wealthy investment banker, on Christmas Eve. He knows the price is much too high, but he is in a big hurry to finish his last-minute shopping. In both cases, the consumers paid 2.5 times the fair value of the television. In your opinion, is either transaction unconscionable? If so, why? If not, why not? Answer: Answers will vary.

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 22: Ownership, Risk, and Warranties

Table of Contents Multiple Choice Questions ....................................................................................................................................... 88 Case Questions ............................................................................................................................................................. 89 Discussion Questions.................................................................................................................................................. 91

Multiple Choice Questions 1. CPA QUESTION On Monday, Wolfe paid Aston Co., a furniture retailer, $500 for a table. On Thursday, Aston notified Wolfe that the table was ready to be picked up. On Saturday, while Aston was still in possession of the table, it was destroyed in a fire. Who bears the loss of the table? A. Wolfe because Wolfe had title to the table at the time of loss B. Aston unless Wolfe is a merchant C. Wolfe unless Aston breached the contract D. Aston because Wolfe had not yet taken possession of the table Answer: D. CPA Examination, November 1989, #49. 2. Aiysha signs a contract with Farmer Charlie on February 1. Under the deal, she will pay $25,000 for Charlie’s entire pumpkin crop on October 1. Charlie plants pumpkin seeds on March 1, and they begin to sprout on April 1. When are the pumpkins identified? A. February 1 B. March 1 C. April 1 D. October 1 Answer: B 3. Sam obtains a Patek Philipe watch from Greg by fraud. It has a retail price of $10,000. He sells it to Melissa for $9,000. She believes he owns the watch. Melissa ____ a bona fide purchaser. Sam disappears. If Greg discovers that she has the watch and demands that it be returned, Melissa ____ have to give the watch to Greg. A. is; will

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 22: Ownership, Risk, and Warranties

B. is; will not C. is not; will D. is not; will not Answer: B 4. CPA QUESTION Vick bought a used boat from Ocean Marina that disclaimed “any and all warranties.” Ocean was unaware the boat had been stolen from Kidd. Vick surrendered it to Kidd when confronted with proof of the theft. Vick sued Ocean. Who prevails? A. Vick, because the implied warranty of title has been breached B. Vick because a merchant cannot disclaim implied warranties C. Ocean because of the disclaimer of warranties D. Ocean because Vick surrendered the boat to Kidd Answer: A. CPA Examination, May 1994, #43. 5. CPA QUESTION Which of the following conditions must be met for an implied warranty of fitness for a particular purpose to arise? I. The warranty must be in writing II. The seller must know that the buyer was relying on the seller in selecting the goods. A. I only B. II only C. Both I and II D. Neither I nor II Answer: B. CPA Examination, May 1992, #55. 6. CPA QUESTION Under the Uniform Commercial Code (UCC) sales article, an action for breach of the implied warranty of merchantability by a party who sustains personal injuries may be successful against the seller of the product only when: A. the seller is a merchant of the product involved. B. an action based on negligence can also be successfully maintained. C. the injured party is in privity of contract with the seller. D. an action based on strict liability in tort can also be successfully maintained. Answer: A. CPA Examination, May 1992, #57.

Case Questions 1. Franklin Miller operated Miller Seed Co. in Pea Ridge, Arkansas. He bought, processed, and sold fescue seed, which is used for growing pasture and fodder grass. Farmers brought seed to Miller who would normally clean, bag, and store it. In some cases, the farmers authorized Miller to sell the seed, in some cases not. Miller mixed together the seed that was for sale with the seed in storage so that a customer could not see any difference between them. Miller defaulted on a $380,000 loan from the First State Bank of Purdy. First State attempted to seize all of the seed in the store. Tony Havelka, a farmer, protested that his 490,000 pounds of seed was merely in storage and not subject to First State’s claim. Who is entitled to the seed? Answer: First State gets it. UCC §2-326(3) creates a presumption in favor of creditors. When goods are delivered to be sold, the goods are subject to the creditors’ claims unless the owner (Havelka) takes one of the statutory steps to protect himself, such as posting a sign indicating that he owns © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 22: Ownership, Risk, and Warranties

the merchandise. He did not do that here. The only issue is whether Havelka delivered the seed to sell. The court held that because Havelka and other farmers had used Miller to sell seed in the past, which the bank knew, and because the stored seed was indistinguishable from the seed for sale, the purpose of §2-326 would be accomplished by protecting the creditor. The bank had no way of knowing that some of the goods that Miller appeared to own really belonged to others. First State Bank of Purdy v. Miller, 119 Bankr. 660, 1990 U.S. Dist. LEXIS 12407, (W.D. Ark. 1990). 2. John C. Clark, using an alias, rented a Lexus from Alamo Rent-A-Car in San Diego, California. Clark never returned the car to Alamo and obtained a California “quick title” using forged signatures. He then advertised in the Las Vegas Review Journal newspaper and sold the car to Terry and Vyonne Mendenhall for $34,000 in cash. The Mendenhalls made improvements to the car, had it insured, smog and safety-tested, registered, licensed, and titled in the state of Utah. When Alamo reported the car stolen, the Nevada Department of Motor Vehicles seized the auto and returned it to Alamo. The Mendenhalls sued Alamo. The trial court concluded that the Mendenhalls had purchased the car for value and without notice that it was stolen and were bona fide purchasers entitled to the Lexus. Alamo appealed. Please rule. Answer: Clark was a thief. He obtained no title and could pass on no valid title to any purchaser. “The lower court seemed to equate Clark’s fraudulently obtained but facially valid California “quick title” with voidable title capable of transferring ownership. The law does not support this conclusion.” Alamo was permitted to keep the auto; however, because the Mendenhalls had acted in good faith, the court held that they were entitled to the value of the improvements they had made. Alamo Rent-A-Car, Inc. v. Mendenhall, 937 P.2d 69 (Nev. 1997). 3. Universal Consolidated Cos. contracted with China Metallurgical Import and Export Corp. (CMIEC) to provide CMIEC with new and used equipment for a cold rolling steel mill. Universal then contracted with Pittsburgh Industrial Furnace Co. (Pifcom) to engineer and build much of the equipment. The contract required Pifcom to deliver the finished equipment to a trucking company, which would then transport it to Universal. Pifcom delivered the goods to the trucking company as scheduled. But before all of the goods reached Universal, CMIEC notified Universal it was canceling the deal. Universal, in turn, notified Pifcom to stop work, but all goods had been delivered to the shipper and ultimately reached Universal. Pifcom claimed that it retained title to the goods, but Universal claimed that title had passed to it. Who is right? Answer: Universal is right. UCC §2401 provides that when goods are being moved, title passes to the buyer when the seller completes whatever transportation it is obligated to do. Pifcom completed its work by delivering to the trucking company, at which time title passed. Pittsburgh Industrial Furnace Co. v. Universal Consolidated Companies, Inc., 789 F. Supp. 184, 1991 U.S. Dist. LEXIS 19936 (W.D. Pa. 1991). 4. You Be the Judge: WRITING PROBLEM Construction Helicopters paid Heli-Dyne Systems $315,000 for three helicopters that were in Argentina. Two were ready to fly, and one was disassembled for routine maintenance. The contract said nothing about risk of loss (the parties could have saved a lot of money by reading this chapter). Heli-Dyne arranged for an Argentine company to oversee their loading on board the freight ship Lynx. The two helicopters and 25 crates containing the disassembled craft were properly loaded, but when the ship arrived in Miami, only seven of the crates appeared. Heli-Dyne refused to supply more parts, and Construction sued. Who bears the loss? Argument for Construction: Construction had no control over the goods until they reached

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 22: Ownership, Risk, and Warranties

Miami. Although we do not know exactly what happened to the crates, we know the one party that had nothing to do with the loss: Construction. The company should not pay for damage it never caused. Argument for Heli-Dyne: Because the contract failed to specify risk of loss, it is a shipment contract. In such an agreement, risk of loss passes to the buyer when the seller delivers the goods to a carrier. Heli-Dyne delivered the goods and has no further responsibility. Answer: Construction Helicopters, Inc. v. Heli-Dyne Systems, Inc., 875 F.2d 862, 1989 U.S. App. LEXIS 7273 (U.S. Ct. App. 6th Cir., 1989). 5. When Sony released its PlayStation 3 (PS3), it represented that the gaming system: (1) connected to the PlayStation Network, (2) had the ability to run other operating systems, and (3) was expected to last for over ten years. But the product’s terms of service provided that future updates might disable some functions. Four years later, Sony’s software update forced users to choose between features (1) and (2) listed above. Disgruntled gamers sued, claiming that Sony made an express warranty that the PS3 would work as promised for ten years, but took away a fundamental product feature after only four years. Was Sony’s representation an enforceable express warranty? Answer: For Sony. The court concluded that Sony’s statements together did not amount to an express warranty about the life of the product features. According to the court, promising the PS3 would have a ten-year life span only meant the console itself would work for ten years, not that all of its features would still be available. Anthony Ventura, et al. v. Sony Computer Entertainment America, Inc., et al, 2014 U.S. App. LEXIS 187, 2014 WL 331217 (2014). [Note: This case appears as a Bonus case in this IM chapter.]

Discussion Questions 1. ETHICS Myrna and James Brown ordered a $35,000 motor home from R.V. Kingdom, Inc. The manufacturer delivered the vehicle to R.V. Kingdom, with title in the dealer’s name. The Browns agreed to accept the motor home, but they soon regretted spending the money and asked R.V. Kingdom to resell it. The motor home stayed on R.V. Kingdom’s lot for quite a few months, but when the Browns decided to come get it, they learned that R.V. Kingdom had illegally used the vehicle as collateral for a loan and that a bank had repossessed it. The Browns filed a claim with their insurance company, State Farm. The insurer agreed that the vehicle had been stolen and agreed that the Browns’ policy covered newly acquired vehicles. But the company refused to pay, claiming that the Browns had not taken title or possession to the goods and therefore had no insurable interest. The Browns sued. Please rule on their case. Let us also look at the ethics of the case by creating a contrasting hypothetical. Suppose that among the insurance company’s thousands of customers was Arvee, a recreational vehicle dealership similar to the one in the real case. Imagine that Arvee had taken in an automobile for resale from a customer named Parker and kept the vehicle on its lot. If Parker’s auto were stolen, what argument would the insurance company be making? How would the company define insurable interest in that case? Answer: Answers will vary. 2. Imagine that your laptop gets a virus, and you take it to a local computer repair shop. The shop sells your computer to Heidi. Under the entrustment rules in the UCC, Heidi is a buyer in the ordinary course of business. And so, even if you find Heidi and demand that she return your laptop, she gets to keep it. Is this fair? Does the law give too much protection to purchasers in this situation and not enough to victims?

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 23: Performance and Remedies

Answer: Answers will vary. 3. Arun manufactures and sells T-shirts. As a seller, would he be better off if his contracts indicated “FOB (place of shipment)” or “FOB (place of destination)”? Explain your answer. Answer: Answers will vary. 4. A seller can disclaim all implied warranties by stating that goods are sold “as is” (or by using other, more specific language). Is this fair? The UCC’s implied warranties seem reasonable––that goods are fit for their normal purposes, for example. Should it be so easy for sellers to escape their obligations? Answer: Answers will vary. 5. After learning more about implied warranties and disclaimers, would you ever buy an item sold “as is”? Imagine a car salesman who offers you a car for $8,000, but who also says that he can knock the price down to $6,500 if you will buy the car “as is”. If you live in a state that does not give consumers special protections, which deal would be more appealing? Answer: Answers will vary.

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 23: Performance and Remedies

Table of Contents Multiple Choice Questions ....................................................................................................................................... 92 Case Questions ............................................................................................................................................................. 94 Discussion Questions.................................................................................................................................................. 95

Multiple Choice Questions 1. CPA QUESTION Cara Fabricating Co. and Taso Corp. agreed orally that Taso would custom manufacture a compressor for Cara at a price of $120,000. After Taso completed the work at a cost of $90,000, Cara notified Taso that the compressor was no longer needed. Taso is holding the compressor and has requested payment from Cara. Taso has been unable to resell the compressor for any price. Taso incurred storage fees of $2,000. If Cara refuses to pay Taso and Taso sues Cara, the most Taso will be entitled to recover is: A. $92,000. B. $105,000. C. $120,000. D. $122,000. Answer: D. CPA Examination, November 1993, #57. 2. CPA QUESTION On February 15, Mazur Corp. contracted to sell 1,000 bushels of wheat to Good Bread, Inc., at $6 per bushel with delivery to be made on June 23. On June 1, Good advised Mazur

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 23: Performance and Remedies

that it would not accept or pay for the wheat. On June 2, Mazur sold the wheat to another customer at the market price of $5 per bushel. Mazur had advised Good that it intended to resell the wheat. Which of the following statements is correct? A. Mazur can successfully sue Good for the difference between the resale price and the contract price. B. Mazur can resell the wheat only after June 23. C. Good can retract its anticipatory breach at any time before June 23. D. Good can successfully sue Mazur for specific performance. Answer: A. CPA Examination, May 1992, #56. 3. Under the Uniform Commercial Code (UCC), to tender delivery, a seller must ____. A. make the goods available at a reasonable time B. keep the goods available for a reasonable period C. deliver to the buyer any documents that it needs to take possession D. All of the above E. None of the above Answer: D 4. Blackburn FC orders 10,000 soccer jerseys from Alpha Co. to sell in its stadium store. They are to be delivered on July 10. When they arrive early on July 2, Blackburn is disappointed because the collars, which are supposed to be white, are blue. Blackburn notifies Alpha of the error. Alpha says that it wants a chance to “make it right”. If Alpha delivers another shipment of 10,000 conforming jerseys on July 10, Blackburn ____. A. absolutely must accept the new shipment B. must accept the new shipment if Alpha offers a reasonable discount C. must accept the new shipment if it has suffered no measureable losses D. may accept the new shipment, but has the option to reject it Answer: A 5. Assume that a year has passed, and Blackburn FC once again orders 10,000 soccer jerseys from Alpha to be delivered on July 10. This time, non-conforming jerseys are delivered on July 10. Alpha thoroughly inspected the shirts before shipping and had no reason to spot the error. When Blackburn notifies Alpha of the problem, Alpha says that it intends to cure the defect. If Blackburn cannot show that it will suffer any serious harm, does the UCC require Blackburn to give Alpha a chance to cure this time? A. No, because the contract’s deadline has passed. B. Yes, it must give Alpha until July 17 to cure. C. Yes, it must give Alpha until July 20 to cure. D. Yes, it must give Alpha a reasonable amount of time to cure. Answer: D

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 23: Performance and Remedies

Case Questions 1. Mastercraft Boat manufactured boats and often used instrument panels and electrical systems assembled and/or manufactured by Ace Industries. Typically, Ace would order electrical instruments and other parts and assemble them to specifications that Mastercraft provided. Mastercraft decided to work with a different assembler, M & G Electronics, so it terminated its relationship with Ace. Mastercraft then requested that Ace deliver all of the remaining instruments and other parts that it had purchased for use in Mastercraft boats. Ace delivered the inventory to Mastercraft, which inspected it and kept some of the items, but returned others to Ace, stating that the shipment had been unauthorized. Later, Mastercraft requested that Ace deliver the remaining parts (which Mastercraft had sent back to Ace) to M & G, which Ace did. Mastercraft then refused to pay for these parts, claiming that they were non-conforming. Is Ace entitled to its money for the parts? Answer: Yes, Ace is entitled to its money because inspection sometimes creates acceptance. Mastercraft inspected the goods, kept some, and returned others, without stating that they were non-conforming. Mastercraft later ordered Ace to forward the goods to M & G. An inspection without a reasonably prompt rejection is generally an acceptance. Mastercraft’s instruction to ship the goods to M & G also establishes acceptance, since such a request indicates that Mastercraft owns them. Ace Industries, Inc. v Mastercraft Boat Co., 1995 Tenn. App. LEXIS 286 (Tenn. Ct. App. 1995). 2. The AM/PM Franchise association was a group of 150 owners of ARCO Mini-Market franchises in Pennsylvania and New York. Each owner had an agreement to operate a gas station and minimarket, obtaining all gasoline, food, and other products, from ARCO. The association sued, claiming that ARCO had experimented with its formula for unleaded gasoline, using oxinol, and that the poorquality gas had caused serious engine problems and a steep drop in customers. The association demanded (1) lost profits for gasoline sales, (2) lost profits for food and other items, and (3) loss of goodwill. The trial court dismissed the case, ruling that the plaintiff’s claims were too speculative, and the association appealed. Please rule. Answer: Reversed. The association’s members can potentially recover consequential damages for lost profits. The losses could represent lost sales of gasoline, lost sales of other items in the minimarts, and lost goodwill. Gasoline is a legitimate lost profit because, under the agreement with ARCO, the owners could not cover by purchasing gasoline elsewhere. It is reasonable to assume that if gasoline sales dropped, there was a ripple effect on mini-mart sales. Finally, as long as the plaintiffs can provide a reasonable basis from which the jury can calculate goodwill damages, they may pursue that issue as well. 3.

You Be the Judge: WRITING PROBLEM Clark Oil agreed to sell Amerada Hess several hundred thousand barrels of oil at $24 each by January 31, with the sulfur content not to exceed 1 percent. On January 26, Clark tendered oil from various ships. Most of the oil met specifications, but a small amount contained excess sulfur. Hess rejected all of the oil. Clark recirculated the oil, meaning that it blended the high-sulfur oil with the rest, and notified Amerada that it could deliver 100 percent of the oil, as specified, by January 31. Hess did not respond. On January 30, Clark offered to replace the oil with an entirely new shipment, due to arrive February 1. Hess rejected the offer. On February 6, Clark retendered the original oil, all of which met contract terms, and Hess rejected it. Clark sold the oil elsewhere for $17.75 per barrel and filed suit. Is Clark entitled to damages? Argument for Clark: A seller is entitled to cure any defects. Clark did so in good faith and offered all of the oil by the contract deadline. Clark went even further, offering an entirely new

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 23: Performance and Remedies

shipment of oil. Hess acted in bad faith, seeking to obtain cheaper oil. Clark is entitled to the difference between the contract price and its resale price. Argument for Hess: Hess was entitled to conforming goods, and Clark failed to deliver. Under the perfect tender rule, that is the end of the discussion. Hess had the right to reject non-conforming goods, and it promptly did so. Hess chose not to deal further with Clark because it had lost confidence in Clark’s ability to perform. Answer: The court granted Clark’s motion for summary judgment. Clark’s statement that it would reblend the oil was a legally sufficient offer to cure. Hess responded by offering to pay less, which was a counteroffer, that is, a rejection of the offer to cure. That entitled Clark to summary judgment under UCC section 2-508(1). The company is also entitled to summary judgment under section 2508(2) because a seller is allowed a reasonable time to cure following expiration of the contract if it reasonably believed that the original goods conformed. Clark’s belief that the goods conformed was reasonable because its tests indicated as much. Clark Oil Trading Co. v. Amerada Hess Trading Co., 1993 U.S. Dist. LEXIS 10801, U.S. Dist. Ct., So. Dist. N.Y. 1993. 4. Under the terms of a long-term supply contract, Linde supplied United Aluminum Corporation (UAC) with nitrogen at $0.23 per unit. Upon expiration, that contract gave UAC the sole option to renew the agreement for five additional years at the same price. When UAC exercised the option, Linde refused, arguing that the price of nitrogen had risen by 38 percent over the life of the contract. UAC sued, seeking to enforce the $0.23 price. Linde claimed commercial impracticability. Will a court force Linde to abide by the terms of the original deal? Answer: The court dismissed Linde’s impracticability claim because the rise in nitrogen prices was not based on an unforeseen or supervening event. United Aluminum Corporation v. Linde, Inc. 2009 U.S. DIST. LEXIS 74259. (United States District Court for the District of Connecticut, 2009). 5. Having heard that it was a profitable new business, smith decided to breed emus. They are flightless birds that reproduce rapidly and provide high-quality meat. For $4,000, Penbridge Farms sold Smith “a proven breeder pair,” guaranteeing that the lovebirds had already bred together. When the birds failed to mate, Smith discovered that they were both male. Penbridge refused to return Smith’s money. Smith sued, asking the court for direct, as well as incidental and consequential damages. The evidence suggested that Smith stood to make $100,000 from one season’s chicks. To what kind of damages is Smith entitled? Will he recover lost profits? Answer: Yes, Smith recovers lost profits. The UCC provides the following circumstances for the recovery of consequential damages resulting from the breach of the seller: Any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by “cover” or otherwise. *UCC §2715(2).] Plaintiffs produced evidence at trial documenting potential lost profits. Smith v. Penbridge Associate, Inc., 440 Pa.Super.410, 655 A.2d 1015 (1995).

Discussion Questions 1. Laura and Bruce Trethewey hired Basement Waterproofing Nationwide, Inc. (BWNI) to waterproof the walls in their basement for a fee of $2,500. BWNI’s contract stated: “BWNI will service any seepage in the areas waterproofed at no additional cost to the customer. All labor and materials will be at the company’s expense. Liability for any damage shall be limited to the total price paid for this contract.” The material that BWNI used to waterproof the Tretheweys’ walls swelled and caused large cracks to open in the walls. Water poured into the basement, and the Tretheweys ultimately

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 24: Secured Transactions

spent $38,000 to repair the damage. They sued, claiming negligence and breach of warranty, but BWNI claimed its liability was limited to $2,500. Please rule. Answer: The court ruled that regardless of whether the liability limitation was interpreted as a liquidated damage clause or a limitation of consequential damages, the Trethewey’s won. As a liquidated damages clause, the court held, the parties had intended it to cover cases in which the waterproofing did not work as intended, not cases where BWNI did its work negligently. It does not apply. As a limitation of consequential damages it is unconscionable. No reasonable person would agree to a $2,500 limit to damage done to his house, and since the Trethewey’s were consumers they would not be expected to have BWNI’s sophistication. The court held that there was no limit to the amount of damages the Trethewey’s could recover. Because the average homeowner is less likely than a corporation to understand such remedy limitations, courts generally reject these clauses in consumer contracts. Trethewey v. Basement Waterproofing Nationwide, Inc., 1994 Del. Super. LEXIS 504 (Del. Super. Ct. 1994). 2. ETHICS Based on the facts in question 1, comment on BWNI’s ethics. BWNI wanted to protect itself against unlimited damage claims. Is this a legitimate way to do it? If you think BWNI did behave ethically, what advice would you have for consumers who hire home improvement companies? If you believe the company did not behave ethically, imagine that you are a BWNI executive, charged with drafting a standard contract for customers. How would you protect your company’s interests while still acting in a way you consider moral? Answer: The answers will vary. 3. Consider the UCC’s exceptions to the Perfect Tender Rule: usage of trade, course of dealing, and course of performance. Do these all seem reasonable, or are they too lenient on sellers who deliver non-conforming goods? Answer: The answers will vary. 4. Are the UCC’s rules related to cure sensible? If a seller ships goods that are not what you ordered, should you (in many circumstances) be required to give them a chance to make it right? Answer: The answers will vary. 5. European consumer laws are much more protective than the UCC. In the European Union, buyers have an unqualified 14-day right of return for all goods––no questions asked. If a seller fails to inform the buyer of this right, the return window is extended for one year. Some commentators have suggested that the EU system is too consumer-friendly and the American system is too merchant-friendly. Which one do you prefer? Is there a happy medium? If so, what would it look like? Answer: Answers will vary.

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 24: Secured Transactions

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 24: Secured Transactions

Table of Contents Multiple Choice Questions ....................................................................................................................................... 97 Case Questions ............................................................................................................................................................. 98 Discussion Questions.................................................................................................................................................. 99

Multiple Choice Questions 1. CPA QUESTION Under the Uniform Commercial Code (UCC) Article 9, which of the following actions will best perfect a security interest in a negotiable instrument against any other party? A. Filing a security agreement B. Taking possession of the instrument C. Perfecting by attachment D. Obtaining a duly executed financing statement Answer: B. CPA Examination, May 1994, #50. 2. Jim’s birth certificate lists him as “James Brown Smith”; his driver’s license identifies him as “Jim Smith”; his business card reads “J.B. Smith”; and his friends call him Jimbo. How should the financing statement list this debtor’s name? A. James Smith B. J.B. Smith C. Jim Smith D. James Brown Smith Answer: C. The 2013 revisions require the financing statement to list the same name as the debtor’s driver’s license. The statement should read “Jim Smith.” 3. CPA QUESTION Under the UCC Secured Transactions Article, perfection of a security interest by a creditor provides added protection against other parties in the event the debtor does not pay its debts. Which of the following parties is not affected by perfection of a security interest? A. Other prospective creditors of the debtor B. The trustee in a bankruptcy case C. A buyer in the ordinary course of business D. A subsequent personal injury judgment creditor Answer: C. CPA Examination, May 1994, #51. 4. CPA QUESTION Mars, Inc., manufactures and sells VCRs on credit directly to wholesalers, retailers, and consumers. Mars can perfect its security interest in the VCRs it sells without having to file a financing statement or take possession of the VCRs if the sale is made to which of the following? A. Retailers

B. Wholesalers that sell to distributors for resale C. Consumers D. Wholesalers that sell to buyers in ordinary course of business Answer: C. CPA Examination, May 1993, #47.

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 24: Secured Transactions

5. Alpha perfects its security interest by properly filing a financing statement on January 1, 2010. Alpha files a continuation statement on September 1, 2014. It files another continuation statement on September 1, 2018. When will Alpha’s financing statement expire? (a) January 1, 2015 (b) September 1, 2019 (c) September 1, 2023 (d) Never Answer: C

Case Questions 1. Eugene Ables ran an excavation company. He borrowed $500,000 from the Highland Park State Bank. Ables signed a note promising to repay the money and an agreement giving Highland a security interest in all of his equipment, including after-acquired equipment. Several years later, Ables agreed with Patricia Myers to purchase a Bantam Backhoe from her for $16,000, which he would repay at the rate of $100 per month, while he used the machine. Ables later defaulted on his note to Highland, and the bank attempted to take the backhoe. Myers and Ables contended that the bank had no right to take the backhoe. Was the backhoe covered by Highland’s security interest? Did Ables have sufficient rights in the backhoe for the bank’s security interest to attach? Answer: Yes to both questions. The bank had a valid security interest in all of Able’s equipment, including after-acquired equipment. After-acquired clauses are valid. The only question is whether the bank’s security interest could attach to the backhoe. Attachment requires that the debtor has rights in the collateral. But this does not mean that the debtor must own the goods. Here, Ablest had the lawful use and possession of the backhoe, based on his purchase agreement with Myers. He thus had rights in the backhoe, and as soon as he took possession of it, the bank’s security interest attached. The bank gets the backhoe. United States v. Allies, 739 F. Supp. 1439, 1990 U.S. Dist. LEWIS 7064 (D. Kan. 1990).

2. A boat manufacturer incorporated under the name “Glasco, Inc.,” but operated its business solely under the name “Elite Boats, Division of Glasco, Inc.” When Citizens Bank agreed to finance Glasco’s marine engines, it filed a UCC-1 financing statement listing the debtor as “Elite Boats, Division of Glasco, Inc.” Glasco later filed for bankruptcy. Since the financing statement only listed Glasco’s trade name, it did not come up on the bankruptcy trustee’s search. The trustee sold the engines to a third party. The bank sued the trustee for the proceeds of the sale, arguing the financing statement was adequate. What result? Answer: The bank was correct. Because the financing statement was filed under the only trade name used by the debtor, it was not seriously misleading to potential future creditors, and the financing statement was adequate. In the Matter of Glasco, Inc. d/b/a Elite Boat Co., Bankrupt. Earl T. Brushwood, Trustee, v. Citizens Bank of Perry, a Banking Corporation, 642 F.2d 793, 31 UCC Rep. Serv. 16 (1981). 3. Sears sold a lawn tractor to Cosmo Fiscante for $1,481. Fiscante paid with his personal credit card. Sears kept a valid security interest in the lawn mower but did not perfect. Fiscante had the machine delivered to his business, Trackers Raceway Park, the only place he ever used the machine. When Fiscante was unable to meet his obligations, various creditors attempted to seize the lawn mower. Sears argued that because it had a purchase money security interest (PMSI) in the lawn mower, its interest had perfected automatically. Is Sears correct?

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 24: Secured Transactions

Answer: No. A PMSI in consumer goods perfects automatically. A consumer good is one that is used primarily for personal, family, or household purposes. Many lawn mowers are consumer goods, but this one was not, and Sears’s security interest was not perfected. IN RE Cosmo Nick Fiscante, 141 Bankr. 303, 1992 Bankr. LEXIS 907 (W.D. Pa. 1992). 4. The state of Kentucky filed a tax lien against Panbowl Energy, claiming unpaid taxes. Six months later, Panbowl bought a powerful drill from Whayne Supply, making a down payment of $11,500 and signing a security agreement for the remaining debt of $220,000. Whayne perfected the next day. Panbowl defaulted. Whayne sold the drill for $58,000, leaving a deficiency of just over $100,000. The state filed suit, seeking the $58,000 proceeds. The trial court gave summary judgment to the state, and Whayne appealed. Who gets the $58,000? Answer: It went to Whayne’s world. Taking the money from the taxpayer’s creditor, Whayne rather than the taxpayer Panbowl resulted in a windfall to the state. Whayne has a perfected PMSI in the equipment and superiority over all other security interests in the equipment, including prior filed security interests. Whayne Supply Company, Inc. v. Commonwealth of Kentucky Revenue Cabinet, 925 S.W.2d 185; 1996 Ky. LEXIS 64; 30 U.C.C. Rep. Serv. 2d (Callaghan) 948. 5. Cooke borrowed money from Haddon and gave as collateral four cases of champagne and a promissory note. When Cooke failed to pay the debt, Haddon obtained a judgment for the outstanding balance. Cooke promptly paid and demanded return of the collateral. But Haddon had consumed part of the champagne. Cooke sued Haddon for the value of the champagne. Who wins and why? Answer: Cooke wins. The jury awarded him the value of the wine consumed. As the holder of the collateral, Haddon was bound not to use the goods or in any way to dispose of them, a duty which he breached. Cooke v. Haddon, 3 F&F 229. 176 ER 103 (1862). (Cases Decided at Nisi Prius and at the Crown Side on Circuit)

Discussion Questions 1. Collateral may change categories depending on its holder and how it is being used at the time of default. Classify a refrigerator in the following circumstances: A. when sold by an appliance store B. when used by a restaurateur in his business C. when installed in a homeowner’s kitchen Answer: (a) Inventory and a good (b) Equipment and a fixture (c) Consumer good and a fixture 2.

ETHICS The Dannemans bought a Kodak copier worth over $40,000. Kodak arranged financing by GECC and assigned its rights to that company. Although the Dannemans thought they had purchased the copier on credit, the papers described the deal as a lease. The Dannemans had constant problems with the machine and stopped making payments. GECC repossessed the machine and, without notifying the Dannemans, sold it back to Kodak for $12,500, leaving a deficiency of $39,927. GECC sued the Dannemans for that amount. The Dannemans argued that the deal was not a lease but a sale on credit. Why does it matter whether the parties had a sale or a lease? Is GECC entitled to its money? Finally, comment on the ethics. Why did the Dannemans not understand the papers they had signed? Who is responsible for that? Are you satisfied with the ethical conduct of the Dannemans? Kodak? GECC?

Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 25: Creating a Negotiable Instrument

Answer: If the transaction is actually a sale with a security interest, Article 9 governs––and that is precisely what the court held. The court granted the Danneman’s motion for summary judgment. The agreement, though called a lease, was actually a financing arrangement with a security interest. The “lessor” retained no real burdens of ownership. Further, GECC made a sweetheart sale back to the manufacturer, leaving the Danneman’s with a substantial deficiency. GECC failed to comply with the requirements of Article 9 and was not entitled to any money. As to the ethics, one could argue that the Danneman’s are responsible for signing, but in reality, no one other than a lawyer would recognize the document for what it was. The document was drafted by Kodak, which knew or should have known what kind of a transaction it was. The sweetheart sale does not look good in the light of day, and many would find the court’s holding legally and ethically right. G.E. Capital Corp. v. Dannemann Assoc, Inc., 1995 Del. Super. LEXIS 131 (Super. Ct. Dela. 1995). 3. After a federal judge refused to dismiss criminal charges against him, Michael Reed took revenge by electronically filing a UCC financing statement listing the judge, the prosecuting attorney, and former Secretary of the Treasury Timothy Geithner as $3.4 million debtors. Reed himself was listed as the secured party. The lien became part of the public record. When Reed was later prosecuted for violating a statute intended to prevent harassment of public officials, he argued that he was innocent because the financing statement listed no real or personal property as collateral––and would never have succeeded in perfecting a claim. What should the judge rule? Answer: Based on US v. Reed, 668 F.3d 978 (8th Cir. 2012). The judge ruled that Reed caused the financial harassment intended. Although the filing would not have succeeded in perfecting a priority claim to any property as a matter of commercial law, that was not a defense. 4. After reading this chapter, will your behavior as a consumer change? Are there any types of transactions that you might be more inclined to avoid? Answer: Answers will vary. 5. After reading this chapter, will your future behavior as a businessperson change? What specific steps will you be most careful to take to protect your interests? Answer: Answers will vary.

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 25: Creating a Negotiable Instrument

Table of Contents Multiple Choice Questions ..................................................................................................................................... 100 Case Questions ........................................................................................................................................................... 102 Discussion Questions................................................................................................................................................ 103

Multiple Choice Questions 31. Which of the following statements are true? a. A draft is always a check. b. A check is always a draft.

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Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 25: Creating a Negotiable Instrument

c. A note must involve at least three people. d. All of these are true. Answer: B 32. Which of the following standards are required for negotiability? a. b. c. d.

The instrument must be signed by the payee. The instrument must be payable on demand. The instrument must contain a promise or order to pay. The instrument must be dated.

Answer: D 33. Marla is not a holder in due course if she takes an instrument _______________. a. believing that the underlying contract was honest, although it turned out to be dishonest b. that is a consumer credit contract c. that appeared commercially reasonable when made but it turned out to be dishonest d. All of these Answer: B 34. CPA QUESTION In order to negotiate bearer paper, one must _______________. a. indorse the paper b. indorse and deliver the paper with consideration c. deliver the paper d. deliver and indorse the paper Answer: C 35. CPA QUESTION Bond fraudulently induced Teal to make a note payable to Wilk, to whom Bond was indebted. Bond delivered the note to Wilk. Wilk negotiated the instrument to Monk, who purchased it with knowledge of the fraud and after it was overdue. If Wilk qualifies as a holder in due course, which of the following statements is correct? a. Monk has the standing of a holder in due course through Wilk. b. Teal can successfully assert the defense of fraud in the inducement against Monk. c. Monk personally qualifies as a holder in due course. d. Teal can successfully assert the defense of fraud in the inducement against Wilk. Answer: A 36. Donna gives a promissory note to C. J. Which of the following errors would make the note nonnegotiable? a. The instrument was written on a dirty sock. b. The instrument promised to pay 15,000 euros. c. The note stated that Donna owed C. J. ―$1,500: One thousand and five dollars.‖ d. Donna signed the note without reading it. e. The due date was specified as ―three months after Donna graduates from college.‖ Answer: E

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Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 25: Creating a Negotiable Instrument

Case Questions 1.

Kay signed a promissory note for $220,000 that was payable to Investments, Inc. The company then indorsed the note over to its lawyers to pay past and future legal fees. Were the lawyers holders in due course? Answer: Words take precedence over numbers, so it is for $382. Handwritten terms prevail over typed, so it is payable August 3, 2013.

Shelby wrote this check to Dana. When is it payable, and for how much?

Answer: It is payable on August 3, 2009 (because handwritten terms prevail over typewritten terms) for $382 (because words control figures.) 3.

Ian was CEO of a company. He stole money from the company by writing a series of checks made out to ―Cash,‖ which he deposited in his own personal account at bank. (Please do not try this at home.) Of course, he then spent the money. The company sued the bank to get the money back. Was the bank a holder in due course? Answer: The court ruled that the bank was a holder in due course because it did not know of

Ian’s wrongdoing. McConnico v. Third Nat’l Bank, 499 S.W.2d 874 (Tenn. 1973). 4.

Able was a partner in the law firm of Able, Baker & Charley. He wrote nine checks on the firm‘s checking account payable to ―Bank of the United States.‖ The law firm was not a customer of the bank, but Able was. He deposited these checks into his personal account at the bank and, of course, spent the money. The law firm sued the bank to get its money back. Was the bank liable to the law firm? Was it a holder in due course of the checks? Answer: The court in a similar case ruled that the bank was not a holder in due course because it should have been suspicious that a partner was depositing checks made out to the bank into his personal account, especially since the law firm was not a bank customer. It was liable to the law firm. Roofing Company wrote a check to Dan for his work on a house. Dan cashed the check at Check Cashing, which deposited the check into its account at bank. Roofing Company then discovered that Dan had not actually completed the work on the house so it placed a stop payment on the check it had issued to Dan. Because of the stop payment order, bank refused to pay Check Cashing, which then sued Roofing Company for the amount of the check. Was Check Cashing a holder in due course? Was it entitled to be paid? Answer: The court found that the Check Cashing was a holder in due course because it took the check for value, in good faith, and without any notice that it was overdue or had been dishonored. Check Cashing was entitled to be paid. Hurst Enters., LLC v. Crawford, 40 Kan.App.2d 1018 (Kan Ct.App. 2008).

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Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 25: Creating a Negotiable Instrument

Discussion Questions 1.

Catherine suffered serious physical injuries in an automobile accident and became acutely depressed as a result. One morning, she received a check for $17,400 in settlement of her claims arising out of the accident. She indorsed the check and placed it on the kitchen table. She then called Robert, her longtime roommate, to tell him the check had arrived. That afternoon, she jumped from the roof of her apartment building, killing herself. The police found the check and a note from her, stating that she was giving it to Robert. Had Catherine negotiated the check to Robert? Answer: The court held that Wagner had negotiated the check to Scherer. By indorsing the check and leaving it on the table, she had completed constructive delivery. Scherer v. Hyland, 380 A.2d 698, 1977 N.J. LEXIS 267 (N.J. 1977).

ETHICS In desperate financial trouble and fearful of losing his house, Abbott asked his friend Taylor for help. Taylor had been an officer of the bank, so she put Abbott in touch with some of her former colleagues there. When a $300,000 loan was ready for closing, Taylor informed Abbott that she expected a commission of $15,000. Taylor threatened to block the loan if her demands were not met. Abbott was desperate, so he agreed to give Taylor $4,000 in cash and a promissory note for $11,000. On what grounds might Abbott claim that the note is invalid? Would this be a valid defense? Even if Taylor was in the right legally, was she in the right ethically? Answer: Answers will vary.

Kendall raised hogs. The Grain Company would provide him with hogs and grain and, in return, he would sign a promissory note in an amount equal to the value of these items. Once the pigs were grown, Kendall would sell them and repay the loan. One time, an officer of the Grain Company asked Kendall to sign not only his own name but also his wife‘s name to the promissory note. Kendall did so, but put his initials, KH, after her name to indicate that he was the one who had signed the note. Grain Company sold this note to bank. It turned out that the Grain Company did not actually own the hogs it had given Kendall and the true owner took them away. Bank sued Kendall for payment on the promissory note. Are Kendall and/or his wife liable on the note? Answer: The court ruled that Kendall was not liable because the bank had not taken the note in good faith and, thus, was not a holder in due course. When the bank got the note, it could see Kendall‘s initials. Thus it knew that Kendall‘s wife had not signed the note and, therefore, the transaction was not honest in fact. Arcanum Nat'l Bank v. Hessler, 69 Ohio St. 2d 549 (Ohio 1982).

On June 30, John signed a demand promissory note for $2,000 to the Camelot Country Club. The note stated that it was being given in payment for a membership in the country club, but, in fact, the club was insolvent, its memberships had no value, and John was already a member. He was also the club‘s golf pro. John signed the note at the request of the club‘s manager to enable the club to borrow money from the National Bank. The Bank of Dallas purchased the note on July 14 and immediately made demand. John alleged the note was overdue, and therefore the bank could not be a holder in due course. Do you agree? What is the moral of this story? Answer: A demand note is overdue ―more than a reasonable length of time after its issue.‖ The court held that two weeks is within a reasonable time. Therefore, the bank is a holder in due course. Gill v. Commonwealth Natl. Bank of Dallas, 504 S.W.2d 521 (Tex. Civ. App. 1973).

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Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 26: Liability for Negotiable Instruments

On October 12, James Camp agreed to provide services to Shawn Sheth by October 15. In payment, Sheth gave Camp a check for $1,300 that was postdated October 15. On October 13, Camp sold the check to Buckeye Check Cashing for $1,261.31. On October 14, fearing that Camp would violate the contract, Sheth stopped payment on the check. Also, on October 14, Buckeye deposited the check with its bank, believing that the check would reach Sheth‘s bank on October 15. Buckeye was unaware of the stop payment order. Sheth‘s bank refused to pay the check. Buckeye filed suit against Sheth. Was Buckeye a holder in due course? Must Sheth pay Buckeye? Answer: The court ruled that Buckeye was not a holder in due course. It passed the subjective ―honesty in fact‖ test because it is clear that Buckeye accepted the check from Camp in good faith. However, it did not pass the objective prong of the good faith test because Buckeye did not conduct itself in a commercially reasonable manner. The presentation of a postdated check should put a Check Cashing Company on notice that the check might not be good. Therefore, some attempt at verification should be made before cashing the check. Such a failure to act does not constitute taking an instrument in good faith under the current objective test of ―reasonable commercial standards.‖] Buckeye Check Cashing, Inc. v. Camp, 159 Ohio App. 3d 784 (App. Ct, Ohio 2005).

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 26: Liability for Negotiable Instruments

Table of Contents Multiple Choice Questions ..................................................................................................................................... 100 Case Questions ........................................................................................................................................................... 102 Discussion Questions................................................................................................................................................ 103

Multiple Choice Questions 37. CPA QUESTION A check has the following indorsements on the back: Paul Frank Without recourse George Hopkins Payment guaranteed Ann Quarry Collection guaranteed Rachel Ott Which of the following conditions occurring subsequent to the indorsements would discharge all of the indorsers? a. Lack of notice of dishonor b. Late presentment c. Insolvency of the maker d. Certification of the check Answer: D

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Solution and Answer Guide: Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 26: Liability for Negotiable Instruments

38. CPA QUESTION Which of the following actions does not discharge a prior party to a commercial instrument? a. Good-faith payment or satisfaction of the instrument b. Cancellation of that prior party‘s indorsement c. The holder‘s oral renunciation of that prior party‘s liability d. The holder‘s intentional destruction of the instrument Answer: C 39. What is the difference between a co-maker and an accommodation party? a. A co-maker is liable both to the holder and the other co-maker, while an accommodation party is liable only to the holder. b. A co-maker is liable to subsequent indorsers, while an accommodation party is not. c.

A co-maker is liable only to the other co-maker, while the accommodation party is liable to the holder.

d. A co-maker is not liable once a bank certifies a check, while an accommodation party is still liable even after certification. Answer: A 40. Karim writes a check to Lew but Karim’s bank accidently refuses to pay the check, despite the fact that Karim’s account has sufficient funds. As a result, Lew bounces many checks from his own account and has to pay substantial fees to his bank. Which of the following statements is true? a. Lew can recover damages from both Karim and Karim‘s bank. b. Lew can recover damages only from Karim. c. Lew can recover damages only from Karim‘s bank. d. Lew cannot recover any damages. Answer: D 41. Nan forges Mina‘s name on a check to buy a television set from Costmart. The store deposits that check into its account at bank, but bank does not credit Costmart‘s account for the amount of the check. From whom can Costmart recover? a. Nan b. Mina c. Bank d. All of the above Answer: A

Case Questions 6.

One of Doris‘s job responsibilities at Winkie, Inc., was preparing company checks for the president, Willie, to sign. Using Winkie‘s check-signing machine, Doris forged $150,000 of checks on her employer‘s account. Willie did not (1) look at the sequence of check numbers, (2) examine the monthly account statements, or (3) reconcile company records with bank statements. Winkie‘s bank, as a matter of policy, did not check indorsements on checks with a face value of less than $1,000. By accident, it paid a forged check that had not even been indorsed. Is the bank liable to Winkie, Inc., for the forged checks?

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Answer: The court found for the bank on the grounds that the owner of the company had been negligent in not reviewing his bank statements. If he had done so, he would have discovered forgeries early in the game and limited his losses. Winkie, Inc. v. Heritage Bank of Whitefish Bay, 299 N.W.2d 829 (S.Ct. Wis. 1981). 7.

Before Parris‘s lawsuit against Railroad had settled, he left town and closed out his account with bank. Railroad then issued a check to him which somehow came to be in Eddy‘s possession. Eddy indorsed the check ―Railroad Eddy‖ and deposited it in his own account at bank. Parris sued bank, alleging that it was liable to him for having paid the check over an unauthorized indorsement. Is bank liable to Parris? On what theory? Answer: An unauthorized indorsement is the same as a forged indorsement. The court held that the bank was liable for the conversion of Pariss‘s check. Phariss v. Eddy, 478 N.W.2d 848, 1991 Iowa App. LEXIS 459 (Iowa Ct. App. 1991).

Merlyn borrowed money from Finance Co. to buy equipment for his farm. He promised Finance that he would accept payment for his crops only with checks that named him and Finance as copayees. This way, Merlyn could not cash the checks without Finance‘s indorsement. Merlyn sold corn to Farmer‘s Co-op, which paid by check made out to ―Merlyn, Finance Co.‖ When Merlyn deposited this check, the comma between Merlyn and Finance appeared as ―or.‖ Only Merlyn had indorsed the check. When Finance sued bank for having paid this check, bank in turn filed suit against Merlyn, demanding indemnification for Finance‘s claims. What claim did bank make against Merlyn? Answer: The court held that Merlyn was liable to the bank because he had violated his presentment warranties when he altered and then deposited the check.

David had five bank accounts spread over four banks. Each morning, he directed his assistant, Maureen, to call all of the banks and obtain balance information. He would then direct her to write checks transferring funds in each account to another account. Is there any problem with this practice? Answer: Yes. This conduct is check-kiting, which is illegal. 10. Regions Bank refused to lend money to ZLM, Inc., unless its owner, Stewart, signed the note as an accommodation party. He did, and, sadly, ZLM did not repay the loan. But because the note was due on February 16, which that year happened to be Mardi Gras Day (a major festival in Louisiana), the bank waited until the next day to declare the note in default. Stewart alleged that he was not liable on the note because the extension had discharged his liability. Do you agree? Answer: The court held that Stewart was liable for the debt. The ―extension‖ did not operate to relive Stewart of liability, since the note he signed made him liable regardless of the ―time, manner or place of payment . . .‖ Regions Bank v. David Stewart, Civil Action 10-0145-M, U.S. D.C., Southern Dist. Ala, Southern Division (2010).

Discussion Questions 6.

Recall the Quimby case. This type of fraud is increasingly common. What could Quimby have done to avoid this problem? Answer: When dealing with strangers, only accept cashier‘s checks. In this case, Quimby obtained a cashier‘s check himself, but by then it was too late because the check Quimby had used to pay for the cashier‘s check was invalid. He should have insisted that ―Szabo‖ send him a cashier‘s

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check—then the bank would have been liable. If you are dealing with smaller sums, use PayPal or some equivalent service, which will make good on bad payments. 7.

Mary wrote a check on her account at First Bank for $23,000 payable to the order of Eagle Construction Company. Sylvia, who was an Eagle employee, deposited Mary‘s check in her personal account at Second Bank, without first having someone indorse it. When the check was presented for payment, First Bank paid. Only later did it realize that the check had no indorsement. Meanwhile, Sylvia has stolen the funds and disappeared. Who is liable for the missing funds—First Bank or Second Bank? Answer: The court ruled that Second Bank was liable because it had violated its presentment warranties by presenting a check that had not been indorsed. United Carolina Bank v. First Union Nat’l Bank, 109 N.C. App. 201 (N>C> Ct.App. 1993).

ETHICS When Steven was killed in an automobile accident, he left his wife, Debra, a life insurance policy for $60,000. She decided to move from Bunkie to Sulphur, Louisiana. Debra executed a document authorizing her mother-in-law, Helen, to sign checks on Debra‘s account at the bank. Debra also signed several blank checks and gave them to Helen with instructions to use them to pay off the remaining debt on Debra‘s trailer. When Helen received the life insurance checks, she deposited them in Debra‘s account. So far, so good. But then she immediately withdrew $50,000 from the account by using one of the blank checks Debra had left her. She did not use these funds to pay off the trailer debt. When Debra discovered the theft, she sued the bank for having paid an unauthorized check. How would you rule in this case? Debra has suffered a grievous loss—her husband died tragically in an automobile accident. She trusted her mother-in-law and counted on her help. Should the bank show compassion? If the bank made good on the forged checks, how great would be the injury to the bank‘s shareholders, compared with the harm to Debra if she loses this entire sum? What would Kant and Mill say? Answer: The court held that Debra had been negligent in leaving blank checks with her mother-in-law and therefore the bank was not liable. Ortego v. Ortego, 471 So.2d 1106 (La. 1985).

Banks are liable for forged checks except in the case of the three rules (Impostor Rule, Fictitious Payee Rule, and the Employee Indorsement Rule). Do you think this is the proper allocation of liability? Why, in this era of automated check machines, should banks be liable for forged checks? Alternatively, could you argue that the three rules provide too much protection to banks? Answer: Answers will vary.

10. Many accommodation parties and guarantors do not understand their liability when they sign an instrument. (As the saying goes, ―Nothing is more dangerous than a fool with a pen.‖) Should the UCC require that some sort of disclosure be made to an accommodation party or guarantor

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before they sign, or that their obligations be clearly spelled out? What language would you require for an accommodation or guaranty to be valid? Answer: Answers will vary.

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 27: Accountants’ Liability

Table of Contents Multiple Choice Questions ..................................................................................................................................... 108 Case Questions ........................................................................................................................................................... 109 Discussion Questions................................................................................................................................................ 110

Multiple Choice Questions 42. CPA QUESTION A Certified Public Accountant (CPA‘s) duty of due care to a client most likely will be breached when a CPA: a. gives a client an oral instead of a written report. b. gives a client incorrect advice based on an honest error of judgment. c. fails to give tax advice that saves the client money. d. fails to follow generally accepted auditing standards (GAAS). Answer: D 43. CPA QUESTION One of the elements necessary to hold a CPA liable to a client for conducting an audit negligently is that the CPA: a. acted with scienter or guilty knowledge. b. was a fiduciary of the client. c. failed to exercise due care. d. executed an engagement letter. Answer: C 44. One of the elements necessary to hold a CPA liable under §10(b) is that the CPA: a. acted with scienter or guilty knowledge. b. was a fiduciary of the client. c. failed to exercise due care. d. executed an engagement letter. Answer: A 45. An accountant has a fiduciary duty: a. to a client when conducting an audit. b. to an investor who buys stock in a company the accountant has audited. c. to any third party that the accountant knows will be relying on an audit. d. only for services that go beyond routine accounting work. Answer: D

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46. Accountants who commit fraud in the preparation of financial statements are liable to any third party who uses those statements if: a. that person is a foreseeable user. b. the accountant knows that person‘s identity. c. it is foreseeable that that person will receive the financial statements. d. that person is in the same class as someone who the accountant knew would rely on the statements. Answer: A

Case Questions 11. After reviewing Color-Dyne‘s audited financial statements, the plaintiffs provided materials to the company on credit. These financial statements showed that Color-Dyne owned $2 million in inventory. The audit failed to reveal, however, that various banks held secured interests in this inventory. The accountant did not know that the company intended to give the financial statements to plaintiffs or any other creditors. Color-Dyne went bankrupt. Is the accountant liable to plaintiffs under the Restatement doctrine? Answer: The accountant was not liable. 356 S.E.2d 198 (Ga. 1987). 12. The British Broadcasting Corp. (BBC) broadcast a television program alleging that Terry Venables, a former professional soccer coach, had fraudulently obtained a £1 million loan by misrepresenting the value of his company. Venables had been a sportscaster for the BBC but had switched to a competing network. The source of the BBC‘s story was ―confidential working papers‖ from Venables‘s accountant. According to the accountant, the papers had been stolen. Who owns these working papers? Does the accountant have the right to disclose the content of working papers? Answer: Although, in theory, the accountant owns the working papers, he may not disclose confidential client information without the client‘s permission. Ian Burrell and Adrian Levy, ―Venables to Sue BBC Chief Over ‗Stolen‘ Papers,‖ Sunday Times, July 16, 1995, Home News section. 13. A partnership of doctors in Billings, Montana, sought to build a large office building. When it decided to finance this project using industrial revenue bonds under a complex provision of the Internal Revenue Code, it hired Peat Marwick to do the required financial work. The deal was all set to close when it was discovered that the accountants had made an error in structuring the deal. As a result, the partnership was forced to pay a significantly higher rate of interest. When the partnership sued Peat for breach of contract, the accounting firm asked the court to dismiss the claim on the grounds that the client could only sue for the tort of negligence, not for breach of contract. Peat argued that it had performed its duties under the contract. The statute of limitations had expired for a tort case, but not for a contract case. Should the doctors‘ case be dismissed? Answer: The jury found that Peat Marwick had breached its express or implied contract. The district court held that the allegations of the claims in this case could be stated either in tort or in contract, and the appeals court confirmed. Billings Clinic v. Peat Marwick Main, 797 P.2d 899 (Mont. 1990).

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14. James T. Adams was a partner at Deloitte—a partner with a gambling issue. He ended up borrowing tens of thousands of dollars from a casino—a casino that he was in charge of auditing. Does he face any penalties? If so, what? Answer: Yes, Adams violated the auditor independence rules because he had a business relationship with an audit client. He was also guilty of improper professional conduct. The case was resolved by an Offer of Settlement in which Adams promised to cease and desist from committing any further violations. His privilege of appearing or practicing before the Securities and Exchange Commission (SEC) was suspended for two years, after which he could apply for reinstatement. In the Matter of James T. Adams, CPA, Admin Proceeding File No. 3-15876 SEC. 15. An accounting team‘s worst nightmare might be to wake up one morning and discover that a company for which it had repeatedly issued clean opinions did not really exist. In fact, the company had been stolen a few years earlier—its operations and related revenues all transferred away. Shareholders sued the auditors under §10(b) but the court granted the accountants‘ request for summary judgment. Why? Answer: The court held there was no scienter because the plaintiffs had not alleged that the auditors had actual knowledge of the fraud but rather that they conducted an inadequate audit and missed red flags. That was not sufficient to establish scienter. In re Puda Coal Secs., Inc., 30 F.Supp.3d 230 (S.D.N.YH. 2014).

Discussion Questions 11. Are the Sarbanes-Oxley Act of 2002 (SOX) rules on consulting services sufficiently strict? Should auditing firms be prohibited from performing any consulting services for companies that they audit? Answer: Answers will vary. 12. Which of the three negligence doctrines—Ultramares, Foreseeable, or Restatement—is the most reasonable and appropriate? Answer: Answers will vary. 13. Accountants do not have a fiduciary duty to their clients when performing accounting services. Why not? Answer: Answers will vary. 14. Under the 1934 Act, accountants are only liable if they act with scienter. Make an argument that they should be liable for negligence. What do you think is the right standard? Answer: Answers will vary. 15. ETHICS Wayne and Arlene Selden invested in Competition Aircraft, a fraudulent company that pretended to sell airplanes. Accountant William Burnett had recommended the investment to several of his clients, who told the Seldens. They were not clients of his. After the company went bankrupt, the Seldens sought to recover from Burnett. The court adopted the Restatement doctrine. Is Burnett liable? Whether or not Burnett faces legal liability, was it a good idea for him to recommend investments to his clients? Does it create any potential conflicts of interest? Answer: Burnett was not liable because he did not intend that the Seldens rely on his advice. Selden v. Burnett, 754 P.2d 256, 1988 Alaska LEXIS 47 (Alaska 1988).

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Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 28: Agency Law

Table of Contents Multiple Choice Questions ..................................................................................................................................... 100 Case Questions ........................................................................................................................................................... 102 Discussion Questions................................................................................................................................................ 103

Multiple Choice Questions 47. At Business University, semester enrollment begins at midnight on April 1. Jasper asked his roommate, Alonso, to register him for an important required course as a favor. Alonso agreed to do so but then overslept. As a result, Jasper could not enroll in the required course he needed to graduate and had to stay in school for an additional semester. Is Alonso liable to Jasper? a. No because an agency agreement is invalid unless the agent receives payment. b. No because Alonso was not grossly negligent. c. No because the agreement was not in writing. d. Yes because Alonso was negligent. Answer: B 48. Finn learns that, despite his stellar record, he is being paid less than other salespeople at Barry Co., so he decides to start his own company. During his last month on the Barry payroll, he tells all of his clients about his new business. He also tells them that Barry is a great company, but his fees will be lower. After he opens the doors of his new business, most of his former clients move with him. Is Finn liable to Barry? a. No because he has not been disloyal to Barry—he praised the company. b. No because Barry was underpaying him. c. No because his clients have the right to hire whichever company they choose. d. Yes, Finn has violated his duty of loyalty to Barry. Answer: D 49. Kurt asked his car mechanic, Quinn, for help in buying a used car. Quinn recommends a Ford Focus that she has been taking care of its whole life. Quinn was working for the seller. Which of the following statements is true? a. Quinn must pay Kurt the amount of money she received from the Ford‘s prior owner. b. After buying the car, Kurt finds out that it needs $1,000 in repairs. He can recover that amount from Quinn, but only if Quinn knew about the needed repairs before Kurt bought the car. c. Kurt cannot recover anything because Quinn had no obligation to reveal her relationship with the car‘s seller. d. Kurt cannot recover anything because he had not paid Quinn for her help. Answer: B 50. Figgins is the dean of a college. He appointed Sue as acting dean while he was out of the country and posted an announcement on the college website announcing that she was authorized to act

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in his place. He also told Sue privately that she did not have the right to make admissions decisions. While Figgins was gone, Sue overruled the admissions committee to admit the child of a wealthy alumnus. Does the child have the right to attend this college? a. No because Sue was not authorized to admit him. b. No because Figgins did not ratify Sue‘s decision. c. Yes because Figgins was a fully disclosed principal. d. Yes because Sue had apparent authority. Answer: D 51. CPA QUESTION A principal will not be liable to a third party for a tort committed by an agent: a. unless the principal instructed the agent to commit the tort. b. unless the tort was committed within the scope of the agency relationship. c. if the agency agreement limits the principal‘s liability for the agent‘s tort. d. if the tort is also regarded as a criminal act. Answer: B 52. CPA QUESTION Cox engaged Datz as her agent. It was mutually agreed that Datz would not disclose that he was acting as Cox‘s agent. Instead, he was to deal with prospective customers as if he were a principal acting on his own behalf. This he did and made several contracts for Cox. Assuming Cox, Datz, or the customer seeks to avoid liability on one of the contracts involved, which of the following statements is correct? a. Cox must ratify the Datz contracts to be held liable. b. Datz has no liability once he discloses that Cox was the real principal. c. The third party can avoid liability because he believed he was dealing with Datz as a principal. d. The third party may choose to hold either Datz or Cox liable. Answer: D 53. In deciding whether workers are employees or independent contractors, courts have considered: a. the impact of their decision on the national economy. b. the impact of their decision on tax revenues. c. the amount of control that an employer exercises over its workers. d. whether workers in these companies are earning at least the minimum wage. Answer: C

Case Questions 16. An elementary school custodian hit a child who wrote graffiti on the wall. Is the school district liable for this intentional tort by its employee? Answer: Yes, because the custodian thought they were serving the purpose of their employer. 17. What if the custodian hit one of the schoolchildren for calling them a name? Is the school district liable? Answer: No, because the custodian was not serving the purpose of their employer. 18. One afternoon while visiting friends, tennis star Vitas Gerulaitis fell asleep in their pool house. A mechanic had improperly installed the swimming pool heater, which leaked carbon monoxide fumes into the house where he slept, killing him. His mother filed suit against the owners of the estate. On what theory would they be liable?

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Answer: Principals are liable for the torts of their independent contractors only if they have been negligent in hiring the contractors. Presumably, Gerulaitis‘s mother will try to prove that the owners were negligent in hiring the mechanic who installed the heater. 19. Fernando worked for Affinity, which made furniture deliveries for Sears. Fernando signed a contract stating that he was an independent contractor. He was paid $23 per delivery. He typically worked five to seven days a week, but Affinity would call him each day to tell him whether or not he would be working the following day. Fernando was not required to, but he did, lease his truck from Affinity. The company handled upkeep on the truck. Affinity required all drivers to buy their mobile telephones and their uniforms from the company. It also established personal grooming requirements. Was Fernando an employee or independent contractor? Answer: Fernando was an employee. 20. Betsy has a two-year contract as a producer at Jackson Movie Studios. She produces a remake of the movie Footloose. Unfortunately, it bombs, and Jackson is so furious that he fires her on the weekend the movie opens. Does he have the power to do this? Answer: Jackson does not have the power to fire her unless the contract gives the studio the power to do so. If there is a clause defining these expectations unambiguously, or tying her continued performance to some unambiguous benchmark of success, then the studio would have the power to fire her.

Discussion Questions 16. ETHICS Mercedes has just begun work at Photobook.com. What a great place to work! Although the salary is not high, the company has fabulous perks. The dining room provides great food from 7 a.m. to midnight, five days a week. There is also a free laundry and dry-cleaning service. Mercedes‘s social life has never been better. She invites her friends over for Photobook meals and has their laundry done for free. And because her job requires her to be online all the time, she has plenty of opportunity to stay in touch with her friends by messaging, tweeting, and checking Facebook updates. She is, however, shocked that one of her colleagues takes paper from the office for his children to use at home. Are these employees behaving ethically? Are they meeting their obligations as agents? Answer: Answers will vary. 17. Kevin was the manager of a radio station, WABC. A competing station hired him away. In his last month on the job at WABC, he notified two key on-air personalities that if they were to leave the station, he would not hold them to their noncompete agreements. What can WABC do? Answer: Kevin has violated his duty of loyalty and would be liable to WABC. However, he had apparent authority to release the two on-air personalities, so WABC is bound by that decision. 18. Jesse worked as a buyer for the Vegetable Co. Rachel offered to sell Jesse ten tons of tomatoes for the account of Vegetable. Jesse accepted the offer. Later, Jesse discovered that Rachel was an agent for Sylvester Co. Who is liable on this contract? Answer: Because Greenery was a fully disclosed principal, Greenery is liable but Jesse is not. Rachel, on the other hand, is an undisclosed principal, which means that both Sylvester and Rachel are liable.

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19. The Pharmaceutical Association holds an annual convention. At the convention, Brittany, who was president of the association, told Luke that Research Corp. had a promising new cancer vaccine. Luke was so excited that he chartered a plane to fly to Research‘s headquarters. On the way, the plane crashed and Luke was killed. Is the Pharmaceutical Association liable for Luke‘s death? Answer: No, the Pharmaceutical Association had no control over the plane flight. Thus, there is no agency relationship and no liability 20. A year ago, Hot Air Systems installed a new heating system in Dolly‘s house. A month ago, Chuck called Dolly and told her he worked for Hot Air and it was time to perform the yearly inspection. After his inspection, Chuck said it was lucky he had called because her system needed urgent repairs. He then charged her $500 for the repairs. Later, Dolly discovered there had been nothing wrong with her system and Chuck had never worked for Hot Air. Is the company liable for Chuck‘s wrongdoing? Answer: No, if the company had nothing to do with Chuck‘s conduct. If the firm did anything to lend him apparent authority, that would be different, but he seems to have been a freelancer.

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 29: Employment and Labor Law

Table of Contents Multiple Choice Questions ..................................................................................................................................... 108 Case Questions ........................................................................................................................................................... 109 Discussion Questions................................................................................................................................................ 110

Multiple Choice Questions 54. When Brook went to work at an advertising agency, his employment contract stated that he was ―at will and could be terminated at any time.‖ After 28 months with the company, he was fired without explanation. Which of the following statements is true? a. The company must give him an explanation for his termination. b. Because he had a contract, he was not an employee at will. c. He could only be fired for a good reason. d. He could be fired for any reason. e. He could be fired for any reason except a bad reason. Answer: E 55. CPA QUESTION An unemployed CPA generally would receive unemployment compensation benefits if the CPA _______________. a. was fired as a result of the employer‘s business reversals b. refused to accept a job as an accountant while receiving extended benefits c. was fired for embezzling from a client d. left work voluntarily without good cause Answer: A

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56. During a job interview with Venetia, Jack reveals that he and his wife are expecting twins. Venetia asks him if he is planning to take a leave once the babies are born. When Jack admits that he would like to take a month off work, he can see her face fall. She ultimately decides not to hire him because of the twins. Which of the following statements are true? I. Venetia has violated the Family and Medical Leave Act (FMLA). II. Venetia has violated Consolidated Omnibus Budget Reconciliation Acts (COBRA). III. Venetia‘s company is liable under the False Claims Act. a. All of these b. None of these c. I and II d. I e. I and III Answer: D 57. Which of the following statements is true? I. In about half the states, employees have the right to bring guns into their workplace. II. In about half the states, employees have the right to bring guns into their workplace parking lot. a. Both of these b. None of these c. I d. II Answer: D 58. Alpha Company‘s workers go on strike. The company hires replacement workers so that it can continue to operate its business. When the strike ends, Alpha must rehire the original workers if the strike was over _______________. I. wages II. a unfair labor practice (ULP) a. Both of these b. None of these c. I d. II Answer: D

Case Questions 21. You Be the Judge: WRITING PROBLEM Apex gave Marcie an employment handbook stating that (1) she was an at-will employee, (2) the handbook did not create any contractual rights, and (3) employees who were fired had the right to a termination hearing. The company fired Marcie, claiming that she had falsified delivery records. She said that Apex was retaliating against her because she had complained of sexual harassment. Apex refused her request for a termination hearing. Did the employee handbook create a contract guaranteeing Marcie a hearing? Argument for Apex: The handbook could not have been clearer—it did not create a contract. Marcie is an employee at will and is not entitled to a hearing.

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Argument for Marcie: Apex intended that employees would rely on the handbook. The company used promises of a hearing to attract and retain good employees. Marcie was entitled to a hearing. Answer: The Supreme Court of Texas ruled that there was no implied contract. Marcie was not entitled to a hearing. 22. Triec, Inc., is a small electrical contracting company in Springfield, Ohio, owned by its executives, Yeazell, Jones, and Heaton. After the International Brotherhood of Electrical Workers union began an organizing drive, 6 of the 11 employees in the bargaining unit signed authorization cards. The company declined to recognize the union, which petitioned the National Labor Relations Board (NLRB) to schedule an election. The company then granted several new benefits for all workers, including higher wages, and paid vacations. When the election was held, only 2 of the 11 bargaining unit members voted for the union. Did the company violate the NLRA? Answer: Yes, the company violated the NLRA by extending benefits during an organizing campaign, shortly before the election. An employer may not interfere or punish any worker, nor may it grant benefits in an effort to defeat the union. The timing here suggested anti-union motivation. Because the company committed certain other anti-union acts, the NLRB found its conduct extreme enough to justify a bargaining order, and the court of appeals affirmed. NLRB v. th Triec, Inc., 1991 U.S. App. LEXIS 25709 (6 Cir. 1991). 23. Marceline is sent home from school with the flu. The pediatrician says that she will be fine in about a week and in the meantime just needs bed rest and plenty of fluids. Is Marceline‘s father entitled to leave under the FMLA to care for her? Answer: No. There appears to be no continuing treatment by a health care provider that would qualify the absence for FMLA leave. Source: http://www.dol.gov/whd/opinion/FMLA/prior2002/FMLA-87.htm 24. Catherine Wagenseller was a nurse at Scottsdale Memorial Hospital and an employee at will. While on a camping trip with other nurses, Wagenseller refused to join in a parody of the song ―Moon River,‖ which concluded with members of the group ―mooning‖ the audience. Her supervisor seemed upset by her refusal. Prior to the trip, Wagenseller had received consistently favorable performance evaluations. Six months after the outing, Wagenseller was fired. She contends it was because she had not mooned. Is it legal for the hospital to fire Wagenseller for this reason? Answer: The Arizona Supreme Court ruled that the hospital had violated public policy by firing Wagenseller for refusing to break the law (indecent exposure). Wagenseller v. Scottsdale Memorial Hosp., 147 Ariz. 370 (Ariz. 1985). 25. Noelle was the principal of a charter school and an employee at will. The head administrator imposed a rule requiring cafeteria workers to stamp the hands of children who did not have sufficient funds in their lunch accounts. Some of these children were entitled to free lunches, others needed to ask their parents to replenish their accounts. Noelle directed the cafeteria workers to stop this humiliating practice. The administrator fired her. Does Noelle have a valid claim for wrongful termination? Answer: Is Noelle refusing to violate the law, performing a legal duty, exercising a legal right or supporting basic societal values? Is it a violation of public policy to fire her? This case has not yet been resolved.

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Discussion Questions 21. Debra Agis worked as a waitress in a Ground Round restaurant. The manager informed the waitresses that ―there was some stealing going on.‖ Until he found out who was doing it, he intended to fire a waitress each day, in alphabetical order, starting with the letter ―A.‖ Dionne then fired Agis. Does she have a valid claim against her employer? Answer: Answers will vary. 22. Walmart employees were not unionized. A group of outside organizers called ―Our Walmart‖ created an app that Walmart employees could use to communicate with one another and obtain legal and other workplace advice. Walmart told its managers to warn workers that the app was not made by Walmart and might be used to steal their personal information. Would that behavior on the part of managers be legal? Answer: This case has not been litigated. Walmart cannot interfere with employees‘ efforts to discuss working conditions. Is that their interest and goal here? 23. ETHICS As the manager of BigBox Store, you are afraid that, if your workers unionize, you will not be able to compete against stores with a non-union workforce. You would very much like to fire Geraldo, the employee who is leading the unionization effort. Of course, you know this action would be a violation of the NLRA. But you also know that, if you were found to have violated the law (after years of litigation), you would simply be required to reinstate Geraldo, pay him some back wages, and post a notice promising never to do it again. (After all that time, Geraldo probably would not even want his BigBox job back.) In the meantime, all the other employees would be so scared, they would not support the union. This strategy is cost effective, but is it the right thing to do? What would Mill and Kant say? Answer: Answers will vary. 24. Despite its detailed dress code for employees, Starbucks stores permitted workers to wear multiple pins and buttons, some of which, but not all, were related to its employee-reward and product-promotion programs. When a union tried to organize employees, management prohibited workers from wearing more than one pro-union pin at a time. (One employee had tried to wear eight union buttons.) Is this rule a ULP? Answer: Although the NLRB ruled that this prohibition was an ULP, the Second Circuit overruled the Board, on the grounds that management had a legitimate interest in protecting the company‘s image. NLRB v. Starbucks Corp., 679 F.3d 70 (2d Cir. 2012). 25. You Be the Judge: WRITING PROBLEM Nationwide Insurance Co. circulated a memorandum asking all employees to lobby in favor of a bill that had been introduced in the Pennsylvania House of Representatives. By limiting the damages that an injured motorist could recover from a person who caused an accident, this bill promised to save Nationwide significant money. Not only did John Novosel refuse to lobby, but he privately criticized the bill for harming consumers. Nationwide was definitely not on his side—it fired him. Novosel filed suit, alleging that his discharge had violated public policy by infringing his right to free speech. Did Nationwide violate public policy by firing Novosel? Argument for Novosel: The U.S. Constitution and the Pennsylvania Constitution both guarantee the right to free speech. Nationwide has violated an important public policy by firing Novosel for expressing his opinions.

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Argument for Nationwide: For all the high-flown talk about the Constitution, what we have here is an employee who refused to carry out company policy. If the employee wins in this case, where will it all end? What if an employee for a tobacco company refuses to market cigarettes because he does not approve of smoking? How can businesses operate without loyalty from their employees? Answer: The court held for Novosel. This case extends one step beyond Wagenseller: The court protected Novosel even though he was not being asked to violate the law.

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 30: Employment Discrimination

Table of Contents Multiple Choice Questions ..................................................................................................................................... 108 Case Questions ........................................................................................................................................................... 109 Discussion Questions................................................................................................................................................ 110

Multiple Choice Questions 59. Gregg Young, the CEO of BJY Inc., insisted on calling Mamdouh El-Hakem ―Manny‖ or ―Hank‖ even when El-Hakem asked him not to. El-Hakem was of Arab heritage. Young argued that a ―Western‖ name would increase El-Hakem‘s chances for success and would be more acceptable to BJY‘s clientele. Which of the following statements are true? I. Young violated Title VII by discriminating against El-Hakem on the basis of his national origin. II. Young violated Title VII by creating a hostile work environment. III. Young did not violate Title VII because Manny is just a nickname. No harm was intended and, indeed, no harm resulted. IV. Young did not violate Title VII because customers did prefer a Western name. a. I and II b. III c. IV d. I e. II Answer: A 60. The CEO of BankTwo realized that not one single officer of the bank was female or a member of a minority group. He announced that henceforth, the bank would only hire people in these two groups until they comprised at least 30 percent of the officers. Is this plan legal? a. Yes, voluntary affirmative action plans are always legal. b. No, only courts can authorize affirmative action plans. c. No, Title VII prohibits affirmative action plans. d. No, the plan is too unfair to white men, who have no chance of being hired for a long time. Answer: D

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61. When Allain University was looking for a diversity officer, it decided it would only hire a person of color. Is this decision legal? a. Yes, color is a bona fide occupational qualification (BFOQ) for this position. b. No, color is never a BFOQ, but race could be. c. No, neither race nor color can be a BFOQ. d. No, race and color can be a BFOQ, but are not in this situation. A person does not have to be a member of a minority group to promote diversity. Answer: C 62. For 30 years, Ralph has built architectural models at Archway Architects. The firm replaces him with Charlotte, who is 24 and willing to work for much less than Ralph. The firm never offered to let him stay for less pay. When he left, one of the partners told him, ―Frankly, it‘s not a bad thing to have a cute young person working with the clients.‖ Which of the following statements is true? a. Archway is liable because it had an obligation to offer Ralph the lower salary. b. Archway violated the law by replacing an older worker with a younger one just to save money. c. Archway is liable because age was a factor in Ralph‘s firing. d. Archway is not liable because age was not the deciding factor in Ralph‘s firing. Answer: D 63. During chemotherapy for bone cancer, Mateo, a delivery man, is exhausted, nauseated, and weak. He has asked permission to come in later, work a shorter day, and limit his lifting to 10 pounds. Delivery people typically carry packages of up to 70 pounds. Does Mateo‘s employer, Vulcan, have the right to fire him? a. No, Vulcan must create a new position so that the employee can do something else. b. No, Vulcan must transfer the employee to another position, but only if one is c. vacant and he is able to perform it. d. Yes, Vulcan can fire Pete because none of his major life activities has been affected. e. Yes, Vulcan can fire Pete because he cannot perform the essential functions of his job. f. Yes, Vulcan can fire Pete because he is not disabled—once the chemotherapy treatments end, he will feel fine again. Answer: B

Case Questions 26. In the 2008 recession, Roger (age 52) lost his job as a comptroller. Desperate for work after a year of unemployment, he began to apply for any accounting job at any company. But no one would hire him because he was ―overqualified and overexperienced.‖ He repeatedly explained that he was eager to fill the job that was available. Have these companies that refused to hire Roger violated the Age Discrimination in Employment Act (ADEA)? Answer: In a similar case, the court ruled that, while qualifications and experience are correlated with age, mere correlation is not enough to constitute a violation of the ADEA. Moreover, saying that someone is ―overqualified‖ is not the type of negative stereotype that the ADEA was intended to combat. 27. FedEx refused to promote José Rodriguez to a supervisor‘s position because of his foreign accent and ―how he speaks.‖ Is FedEx in violation of the law?

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Answer: The Sixth Circuit Court of Appeals ruled that this behavior could be illegal discrimination based on national origin because ―accent and national origin are inextricably intertwined.‖ The employer would have to show that the accent and speech characteristics would prevent the employee from performing the job. 28. Pam Huber worked at Walmart filling grocery orders and earning $13 an hour. While on the job, she suffered a permanent injury to her right arm and hand. Both she and Walmart agreed that she was disabled under the Americans with Disabilities Act (ADA). As a reasonable accommodation, she asked for a job as a router, which was then vacant. Although she was qualified for that job, she was not the most qualified. Walmart filled the job with the most qualified person. It offered Huber a position as a janitor at $6.20 per hour. Did Walmart violate the ADA? Answer: The court ruled that WalMart was not in violation of the ADA. An employer is not required to provide an accommodation that is a perfect substitute or ideal from the employee‘s perspective, just one that is reasonable. Huber was treated as all other candidates were treated— no better and no worse. Huber v WalMart 486 F.3d 480. 29. After the terrorist attacks of 9/11, the United States tightened its visa requirements. In the process, baseball teams discovered that 300 foreign-born professional players had lied about their age. (A talented 16-year-old is much more valuable than a 23-year-old with the same skills.) In some cases, the players had used birth certificates that belonged to other (younger) people. To prevent this fraud, baseball teams began asking prospects for DNA tests on them and their families to make sure they were not lying about their identity. Is this testing legal? Answer: There have not been any cases yet, but commentators speculate that the testing would violate the Genetic Information Nondiscrimination Act. It seems clear the teams would be in violation if they used the information to predict whether a player is susceptible to disease. 30. Many employers run targeted recruitment ads on Facebook that appear only in the feeds of people under 40. Is that practice legal? Answer: Employment lawyers argue that these ads are illegal because they discriminate against people over 40. The companies say that the ads are part of a recruitment process that reaches all age groups and that Facebook is not the most efficient method for contacting older workers. This issue is under litigation. 31. Atlas operated warehouses that stored food for grocery stores. Imagine the upset when a mystery employee began leaving their feces in a warehouse. To solve the mystery of the devious defecator, Atlas required cheek swabs from two of its workers so that it could compare their DNA with that of the feces. Was Atlas liable to the workers? Answer: A court held that Atlas had violated GINA, which prohibits employers from requesting genetic information from its workers. It doesn‘t matter that the DNA did not match. Lowe v. Atlas Logistics Group Retail Servs, Atlanta, LLC, 102 F.Supp 3d 1360 (N.D. Ga. 2015).

Discussion Questions 26. You are the hiring manager for a bus company. One of the applicants for a job as a bus driver seems perfectly qualified and he is a minority. You would like to hire him, but a background check reveals that he was convicted of second-degree murder 40 years before, when he was 15. Should you hire him? Answer: Answers will vary.

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27. Generally, the BFOQ defense does not apply to customer preference. But recently, some clients have been pressuring their law firms to staff their cases with female and minority lawyers. If a firm does so, would the BFOQ defense be valid? Should it be? Answer: In essence, this would be a voluntary affirmative action plan, which is legal if it does not have too adverse an impact on white male workers. 28. A high-end boutique in Phoenix would hire only women to work in sales because fittings and alterations took place in the dressing room or immediately outside. The customers were buying expensive clothes and demanded a male-free dressing area. Has the store violated Title VII? What would its defense be? Answer: Customer preference is a BFOQ only in cases like this where gender privacy is an issue. If there was no sales position that a male could fill due to customer privacy issues, then Lillie Rubin has not violated Title VII. If there are sales positions available that do not involve doing fittings and alterations, then Lillie Rubin has violated Title VII. 29. Lisa T. Jackson, who was white, worked at Uncle Bubba‘s Seafood and Oyster House. She filed suit under Title VII, alleging that the restaurant discriminated against black employees. They had to enter through the restaurant‘s rear entrance and could not use the customer bathrooms. Neither of these prohibitions applied to white staff. Jackson‘s boss also repeatedly told racist jokes. Jackson stated that this behavior caused her great difficulty in managing the staff and also immense emotional distress because she had biracial nieces. In addition, one of her bosses asked her how she ―looked so white,‖ given that her father was of Sicilian descent. Can Jackson recover under Title VII? Answer: No. Although earlier cases would have permitted such a suit, the court noted that the Supreme Court had revisited the issue of standing under Title VII claims, and reevaluated its prior reasoning. Following the new decisions, the district court in this case held that plaintiff was not an ―aggrieved party‖ under Title VII because her interests were not those arguably sought to be protected by the statute. At best, Plaintiff is an accidental victim of the alleged racial discrimination. Workplace harmony is not an interest sought to be protected by Title VII. Jackson v. Deen, 959 F.Supp.2d 1346 (S.C. Ga. 2013). 30. Peter Oiler was a truck driver who delivered groceries to Winn-Dixie stores. He revealed to his boss that in his free time he liked to dress as a woman, even though he was happily married to a woman. Oiler had been diagnosed with transvestic fetishism with gender dysphoria and a gender identity disorder. Winn-Dixie fired him for fear that, if customers found out, they would go elsewhere to buy their groceries. Does Oiler have a claim against Winn-Dixie? Answer: The answer depends on the Supreme Court decision in Harris v. EEOC. When this case was decided in 2002, the court ruled that Title VII did not protect sexual orientation and sexual identity.

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 31: Starting a Business: LLCs and Other Options

Table of Contents Multiple Choice Questions ..................................................................................................................................... 100

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Case Questions ........................................................................................................................................................... 102 Discussion Questions................................................................................................................................................ 103

Multiple Choice Questions 64. A sole proprietorship _______________. a. must file a tax return b. requires no formal steps for its creation c. must register with the secretary of state d. may sell stock e. provides limited liability to the owner Answer: B 65. CPA QUESTION Assuming all other requirements are met, a corporation may elect to be treated as an S corporation under the Internal Revenue Code if it has _______________. a. b. c. d.

both common and preferred stockholders a partnership as a stockholder 100 or fewer stockholders the consent of a majority of the stockholders

Answer: C 66. A limited liability company _______________. a. is regulated by a well-established body of law b. pays taxes on its income c. cannot have members that are corporations d. is a form of organization favored by venture capitalists e. can have an oral operating agreement Answer: D 67. CPA QUESTION A joint venture is a(n) _______________. a. association limited to no more than two persons in business for profit b. enterprise of numerous co-owners in a nonprofit undertaking c. corporate enterprise for a single undertaking of limited duration d. association of persons engaged as co-owners in a single undertaking for profit Answer: D 68. A limited liability partnership _______________. a. protects partners from liability for their own misdeeds b. protects the partners from liability for the debts of the partnership c. must pay taxes on its income d. has a general partner who is liable for the debts of the organization Answer: B

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Case Questions 32. Alan Dershowitz, a law professor famous for his prominent clients, joined with other lawyers to

open a kosher delicatessen, Maven’s Court. Dershowitz met with greater success at the bar than in the kitchen—the deli failed after barely a year in business. One supplier sued for overdue bills. What form of organization would have been the best choice for Maven’s Court? Answer: A sole proprietorship would not have worked because there was more than one owner. A partnership would have been a disaster because of unlimited liability. They could have met all the requirements of an S corporation or an LLC. Result: In this situation, most entrepreneurs would choose an LLC because it would be easier than forming an S corp and registering with the IRS. However, they really should have a good operating agreement. 33. Ned and Sarah formed an LLC to buy and renovate apartment buildings. They did not sign an operating agreement but they orally agreed that they would dissolve the LLC if they could not get along. The two owners argued repeatedly and Ned refused to meet with Sarah, although he was willing to take her phone calls. Ned continued to work on the renovation that was then underway. Sarah asked a court to dissolve the LLC. Under state law, an LLC without an operating agreement could only be dissolved if (1) the management of the entity is unwilling to reasonably promote the stated purpose of the entity or (2) continuing the entity is financially unfeasible. What result in Sarah‘s lawsuit? What is the moral of this story? Answer: Although there is no written operating agreement, an oral agreement is enforceable in some states, unless it violates the Statute of Frauds. If it is possible that the apartment buildings could be renovated in one year, then the Statute of Frauds would not apply and the oral operating agreement would be enforceable. But if it was not enforceable, the court is unlikely to dissolve the LLC under the provisions of the state law. In a similar case, a court did not. The moral of the story is to have a good operating agreement! Who wants to litigate all these issues? 34. According to the company‘s website, ―d.light is a global leader in delivering affordable solarpowered solutions designed for the two billion people in the developing world without access to reliable energy.‖ It is a for-profit enterprise. What form of organization makes the most sense for this business. Why? Answer: d.light should organize as a social enterprise, because it seeks to make a positive impact on the world, providing an environmentally safe product, and contributing to social needs, while it still seeks to earn a profit. 35. Huma and Zuma want to start Spring High, a business that would take high school students on educational trips during spring break. Eventually, they hope to seek venture capital money and expand the business nationally. What form of organization should they choose? Answer: At the moment, they could qualify as a close corporation because they only have two shareholders. As long as neither of them is a nonresident alien, Spring High could also be an S corporation. Although Spring High could be an LLC, it is not a form favored by venture capitalists. Result: Spring High should not be an LLC because that would discourage venture capital investment. What type of corporation should they choose? There is little downside to being a close corporation. Indeed, in some states, they would qualify for close corporation status without having to do anything. Whether or not to be an S corporation and have income flow through to their personal returns depends on their individual tax situation. If not an S corp, then they could form a C corporation.

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36. If you were to look online for a description of a professional corporation, you might find websites stressing that, in a PC, shareholders are still responsible for their own wrongdoing. For example: ―In some states, these professionals can form a corporation, but with the distinction that each professional is still liable for his or her own wrongful professional actions.‖ Why is this statement at best unnecessary and at worst misleading? Answer: Because in every organization, the professional is responsible for his or her own wrongful acts.

Discussion Questions 31. Leonard, an attorney, was negligent when he represented Anthony. In settlement of Anthony‘s malpractice claim, Leonard signed a promissory note for $10,400 on behalf of his law firm, an LLC. When the law firm did not pay, Anthony filed suit against Leonard personally for payment of the note. Is a member personally liable for the debt of an LLC that was caused by his own negligence? Answer: No. The promissory note was in the name of the LLC and only it is liable. 32. Think of a business concept that would be appropriate for each of the following: a sole proprietorship, a corporation, and an LLC. Answer: Answers will vary. 33. As you will see in Chapter 33, Facebook began life as a corporation, not an LLC. Why did the founder, Mark Zuckerberg, make that decision? Answer: The venture capitalists who invested preferred a corporation. He expected to take the company public, which would be easier for a corporation. 34. Corporations developed to encourage investors to contribute the capital needed to create largescale manufacturing enterprises. But LLCs are often start-ups or other small businesses. Why do their members deserve limited liability? Is it fair that LLCs do not pay income taxes? Answer: Limited liability and favorable tax treatment encourage entrepreneurs to start businesses, which creates jobs and aids the economy. 35. The Sackler family owned Perdue Pharma, which manufactured Oxycontin, a powerful narcotic pain reliever. The Commonwealth of Massachusetts sued Perdue alleging that, to increase profitability, the company had deliberately misled doctors and the public about the dangers of the drug. As a result of this misrepresentation, thousands of Massachusetts residents suffered, overdosed, or died. Massachusetts also sued members of the Sackler family who worked for the company. (Collectively, the family is worth $4 billion.) Richard Sackler, for instance, had sent emails encouraging (even ordering) company employees to mislead doctors and patients. If these allegations prove to be true, will the Sackler family lose anything more than their stock in Perdue? Answer: As in the Ridgaway case, people are liable for their own wrongdoing when acting as an employee even if they are also a shareholder. Family members could be liable. 36. ETHICS The Sackler family are generous philanthropists and, as a result, their name is on many buildings at universities and museums. Now, as the prior question indicates, their name is sullied by the family‘s connection with Perdue Pharma. Should nonprofits accept gifts from them? Keep their names on buildings? Answer: When the Sacklers entered into agreements with universities and museums to give money in return for naming a building, the contracts did not provide conditions under which the name could be removed. Do the non-profits have an obligation to comply with the terms of these contracts?

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Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 32: Partnerships

Table of Contents Multiple Choice Questions ..................................................................................................................................... 108 Case Questions ........................................................................................................................................................... 109 Discussion Questions................................................................................................................................................ 110

Multiple Choice Questions 69. CPA QUESTION Which of the following is not necessary to create a partnership? a. Execution of a written partnership agreement b. Agreement to share ownership of the partnership c. Intention of conducting a business for profit d. Intention of creating a relationship recognized as a partnership Answer: A 70. If a partner dissociates, he is entitled to _______________. a. force the termination of the partnership b. receive indemnification from liability for present partnership debt c. receive indemnification from damages he caused the partnership d. receive his share of the value of the partnership assets Answer: B 71. CPA QUESTION Cobb, Inc., a partner in TLC Partnership, assigns its partnership interest to Bean, who is not made a partner. After the assignment, Bean asserts the right to (1) participate in the management of TLC and (2) Cobb‘s share of TLC‘s partnership profits. Bean is correct as to which of these rights? a. 1 only b. 2 only c. 1 and 2 d. Neither 1 nor 2 Answer: B 72. CPA QUESTION Ted Fein, a partner in the ABC Partnership, wishes to withdraw from the partnership and sell his interest to Gold. All of the other partners in ABC have agreed to admit Gold as a partner and to hold Fein harmless for the past, present, and future liabilities of ABC. A provision in the original partnership agreement states that the partnership will continue upon the death or withdrawal of one or more of the partners. As a result of Fein‘s withdrawal and Gold‘s admission to the partnership, Gold_______________. a. is personally liable for partnership liabilities arising before and after his admission b. as a partner c. has the right to participate in the management of ABC

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d. acquired only the right to receive Fein‘s share of the profits of ABC e. must contribute cash or property to ABC in order to be admitted with the same rights as the other partners Answer: B 73. Blackriver Partnership is in the process of winding up. It has three partners: Jason, Kiera, and Lancelot. The partnership has assets of $90,000, but debts of $60,000, including $30,000 it owes to Jason. Who gets what? a. Each partner receives $10,000. b. Each partner receives $30,000. c. Jason receives $30,000 and the other two get $10,000 each. d. Jason receives $40,000 and the other two get $10,000 each. Answer: D

Case Questions 37. ETHICS Arthur, John, and George formed a partnership to drill and maintain cesspools for two years. After less than two months, John and George sent a letter to Arthur, informing him that they were dissolving the partnership. Arthur sued the two other men, asking the court to declare that the partnership still existed and he had the right to continue in the business. Do John and George have the power to dissolve a term partnership before the end of the term? Aside from the legal issue, is it fair to Arthur for the court to allow his two partners to walk away from their partnership? He had counted on a two-year commitment; they gave only two months. Answer: The court refused to re-create the partnership. It held that the defendants could terminate the partnership any time they wanted, even in violation of the partnership agreement, but they would be ordered to pay damages for breaching the agreement. Engelbrecht v. McCullough, 80 Ariz. 77, 292 P.2d 845 (1956). 38. You Be the Judge: WRITING PROBLEM Herbert, an artist, entered into an agreement with Randy for the reproduction and distribution of his paintings. Herbert was to receive 50 percent of the gross sales revenues. Randy was responsible for all losses and for management of the business. Before leaving on a trip to Israel, where he feared he might be in some danger, Randy signed a partnership agreement with Herbert stating that they jointly owned the business. Shortly after Randy returned from the trip, the two men terminated their business relationship, and Herbert revoked his authorization for the sale of prints. When Randy continued selling the prints, Herbert filed suit. Randy argued that the two had formed a partnership and that he was authorized to sell assets of the partnership. Were Herbert and Randy partners? Argument for Herbert: A partnership agreement does not create a partnership. Randy alone managed the business. Herbert shared only revenues, not profits or losses. Argument for Randy: Herbert and Randy both provided services to the business: Randy paid for the printing, and Herbert did the artwork. These two men signed a partnership agreement, and they obviously intended to be partners. Answer: The court found that no partnership existed. Their signed agreement was similar to the one in Green––more a will than a real partnership agreement. The court concluded that, ―neither

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the parties‘ acts nor their intent point to the existence of a partnership.‖ Shuptrine v. Brown 709 F.2d. 39. When Michael Eagan married James Gory‘s daughter Jennifer, the two men started a business flipping houses. Eagan found the houses and supervised their renovation. Gory provided the funds, purchased the houses in his name, and made all major decisions. He gave Eagan 50 percent of the net profits but did not make Eagan responsible for any losses. After Eagan and Jennifer divorced, Gory sold two houses that he had purchased with Eagan‘s help, but he did not share any of the profits. Eagan sued, claiming they had a partnership and he was entitled to 50 percent of the profit. Did the two men have a partnership? Answer: No. Judgment for Gory. Eagan was never responsible for any losses, which is a significant factor. Eagan v. Gory, 2010 WL 1220961 (U.S.Ct.App.3d Cir, 2010). 40. Pedro and Juan have a business selling ties with fraternity insignia. Pedro finds out that an online shirt business is for sale. It sounds like a great idea—customers send in their measurements and get back a custom-made shirt at a price no higher than an off-the-rack shirt at the local department store. Does Pedro have to let Juan in on the great opportunity? Answer: Yes, if it relates to the partnership business, which this does. 41. Four friends pooled their money to buy a small airplane because they enjoyed flying. Sometimes they flew separately, other times they went on vacation trips together. Abbi, who was one of the owners, heard that a boat was missing out on the Gulf of Mexico. She took a neighbor‘s son Sam along with her in the plane to help search for the boat. After Abbi carelessly took off in bad weather, the plane crashed and both Abbi and Sam were killed. Sam‘s father sued the other three owners, alleging that they were partners who were liable for Abbi‘s negligence. Is there a partnership? If there was a partnership, were the partners liable? Answer: In a similar case, the court ruled that there was no partnership because ownership of the plane was not a profit-making enterprise. If there was a partnership, the partners would be liable if the trip was in the ordinary course of the partnership‘s business.

Discussion Questions 37. Mike Love and Brian Wilson were members of the Beach Boys. In the 1960s, they wrote songs together. The copyrights for these songs were later sold to Rondor, which paid the two men royalties when the songs were played. In 2004, Wilson re-recorded some of these songs on a CD called Good Vibrations. This CD was distributed in the United Kingdom by the newspaper The Mail on Sunday. Love sued Wilson, arguing that the two men had a partnership and Wilson had violated the partnership agreement by re-recording the songs without Love‘s permission. Did Mike Love and Brian Wilson have a partnership? Answer: In Love v. The Mail on Sunday, 2007 U.S. Dist. LEXIS 41678, the court ruled that there was no partnership. The songs were owned by Rondor not the partnership. The two men did not have an explicit partnership agreement, either written or oral. They never filed a partnership tax return. They may have had a partnership in the colloquial sense of the word, but not in the legal sense. They were simply songwriting collaborators. 38. Dutch, Bill, and Heidi were equal partners in a lawn-care business. Bill and Heidi wanted to borrow money from the bank to buy more trucks and expand the business. Dutch was dead set against the idea. When the matter came to a vote, Bill and Heidi voted in favor, Dutch against. Dutch was

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so annoyed that he told the bank not to lend the money and, further, that he would not be responsible for repaying the loan. The bank loaned the money, the business failed, and the bank sued all three partners. Is Dutch liable on the loan? Answer: Yes. Bill and Heidi‘s vote was binding on the partnership and on all of the partners. Dutch would not have been liable if he had dissolved the partnership by withdrawing before the loan was made. 39. Carrie and Laura started a business together to sell bridesmaid dresses online. Carrie spent months preparing the financials and meeting with potential investors while Laura designed dresses and found suppliers. Once Carrie was finished with the financials and had identified some potential investors, Laura announced that she preferred to work with Scott, and Carrie was out of the business. What rights does Carrie have? Answer: A partner can only be expelled if the partnership agreement permits. Here, there is no agreement, hence Laura has no right to expel Carrie. However, Carrie probably does not want to litigate. This is a true case. The moral of the story is that Carrie should have had a partnership agreement before she invested so much time. Or she should have chosen her partner more carefully. 40. Lucan and Alison agreed to practice law together. Their stationery said, ―The Lucan and Alison Partnership‖ and they told everyone they were partners. They signed a partnership agreement providing that Lucan would receive a ―guaranteed annual draw of $100,000.‖ The rest of the profits went to Alison. Are they partners? Answer: No, they are not sharing profits. Lucan is a salaried employee. 41. Is there any good reason to be in a partnership? If so, for what sort of business would it make sense? Answer: It is an easy and cheap form of organization, but the liability is an important issue— perhaps a short-term project with someone you trust and without much money or potential liability at stake. However, if there are any significant assets at stake, it is a good idea to have a written agreement.

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 33: Life and Death of a Corporation

Table of Contents Multiple Choice Questions ..................................................................................................................................... 108 Case Questions ........................................................................................................................................................... 109 Discussion Questions................................................................................................................................................ 110

Multiple Choice Questions 74. CPA QUESTION Generally, a corporation‘s articles of incorporation must include all of the following except the:

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a. b. c. d.

name of the corporation‘s registered agent. name of each incorporator. number of authorized shares. quorum requirements.

Answer: D 75. CPA QUESTION Destiny Manufacturing, Inc., is incorporated under the laws of Nevada. Its principal place of business is in California, and it has permanent sales offices in several other states. Under the circumstances, which of the following is correct? a. California may validly demand that Destiny incorporate under the laws of the state of California. b. Destiny must obtain a certificate of authority to transact business in California and the other states in which it does business. c. Destiny is a foreign corporation in California, but not in the other states. d. California may prevent Destiny from operating as a corporation if the laws of California differ regarding organization and conduct of the corporation‘s internal affairs. Answer: B 76. CPA QUESTION A corporate stockholder is entitled to which of the following rights? a. Elect officers b. Receive annual dividends c. Approve dissolution d. Prevent corporate borrowing Answer: C 77. Participating preferred stockholders: a. only receive payment after other preferred shareholders have been paid. b. only receive payment after common shareholders have been paid. c. are treated like both a preferred shareholder and a common shareholder. d. receive all their payments before all other shareholders. Answer: C 78. Which of the following statements is/are true? I. Shareholders can amend the bylaws. II. Directors can amend the bylaws. III. Both shareholders and directors must approve any amendment to the bylaws. a. I and II b. III c.

d. II Answer: A

Case Questions 42. Michael incorporated Erin Homes, Inc., to manufacture mobile homes. He issued himself a stock certificate for 100 shares for which he made no payment. He and his wife served as officers and

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directors of the organization, but during the eight years of its existence, the corporation held only one meeting. Erin always had its own checking account, and all proceeds from the sales of mobile homes were deposited there. It filed federal income tax returns each year using its own federal identification number. John and Thelma purchased a mobile home from Erin, but the company never delivered it to them. John and Thelma sued Erin Homes and Michael, individually. Should the court pierce the corporate veil and hold Michael personally liable? Answer: The appeals court pierced the corporate veil and held the shareholder liable because the corporation had grossly inadequate capitalization, had disregarded corporate formalities, and the shareholder was also actively participating in the operation of the business. Laya v. Erin Homes, Inc., 177 W. Va. 343, 352 S.E.2d 93 (1986). 43. Dickens, Inc., is a bookstore incorporated in Nevada. From its warehouse in Montana, it ships books to all 50 states. The company‘s owner lives in New York, and its web designer lives in California. Where is Dickens a domestic corporation? Where must it qualify to do business? Answer: It is a domestic corporation in Nevada. It must qualify to do business in Montana because it has a permanent presence there. If the web designer in California is a full-time employee, it would also have to register there. 44. Suppose that a bank loaned money to Facebook at a time when both the bank and Mark Zuckerberg believed that the business had been incorporated, but they were wrong. It had not been. Could Zuckerberg refuse to pay back the loan on the grounds that it was invalid because it had been made to an entity that did not exist? Answer: No, Zuckerberg would still have had to repay the loan. Both parties believed that the corporation had been formed, so it was a de facto corporation. A party that contracts believing the corporation exists, though it does not, cannot later try to take advantage of the fact that it did not exist at the time of contracting. 45. Auto sold used luxury vehicles. Steven owned 90 percent of Auto while his son, Joshua, was a 10 percent owner. Steven controlled Auto‘s finances. While Steven generally maintained appropriate, separate corporate records, the address listed on Auto‘s bank account was his personal address, not Auto‘s place of business. Steven initially capitalized Auto with a few thousand dollars, but afterward was not sure of the exact amount because he contributed funds as needed. He also claimed to have loaned $900,000 to Auto, but there was no documentation. He deposited and withdrew money from Auto‘s bank account at his sole discretion. Joshua worked one year at Auto, for a salary of $474,850, at a time when the company had many debts. A group of customers who never received the cars they had paid for, filed suit against Auto, Steven, and Joshua. Who is liable? Answer: Steven is liable, but not Joshua. Steven dominated the corporation and controlled the finances. Azte, Inc. v. Auto Collection, Inc., 124 AD3d 811, (2d Dept 2015). [This case appears on page 21 of this IM chapter.] 46. As Shawe v. Elting teaches us, a good shareholder agreement can prevent years of turmoil and litigation. If you were going to start a business, what provisions would you include in a shareholder agreement to avoid the type of all-out war that engulfed them? Answer: 1. Designating independent directors, or an external arbitrator, to make decisions 2. Establishing a process by which one party can sell their shares

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3. If nothing else works, a process whereby either party can force the liquidation or sale of the business

Discussion Questions 42. Facebook‘s charter has an exculpatory clause, which protects directors from liability unless they act in bad faith or they intentionally engage in wrongdoing. Is that a reasonable standard? Answer: Answers will vary. 43. Some companies have created multiple classes of common stock that enable the founders to control their company long after it goes public. Should corporate laws permit this? If the founders want to control a company, why shouldn‘t they own enough regular stock to do so? Answer: Answers will vary. 44. When Facebook went public, its disclosure document read: As a board member and officer, Mr. Zuckerberg owes a fiduciary duty to our stockholders and must act in good faith in a manner he reasonably believes to be in the best interests of our stockholders. As a stockholder, even a controlling stockholder, Mr. Zuckerberg is entitled to vote his shares in his own interests, which may not always be in the interests of our stockholders. Should corporate laws permit Zuckerberg to control the company without imposing a duty to act in the best interests of the other shareholders? Answer: Answers will vary. 45. ETHICS In the Bigmar case, the court clearly believed that the directors had lied on the witness stand. Should the directors have been charged with perjury? Did they do the right thing when they lied on the stand to protect their company from the evil Ms. May? What would Mill and Kant have said? Answer: Answers will vary. 46. Does a tenure voting system make sense? What are the pros and cons? Answer: Answers will vary.

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 34: Management Duties

Table of Contents Multiple Choice Questions ..................................................................................................................................... 108 Case Questions ........................................................................................................................................................... 109 Discussion Questions................................................................................................................................................ 110

Multiple Choice Questions 79. If a manager engages in self-dealing, which of the following answers will not protect her from a finding that she violated the business judgment rule? a. A special committee of the disinterested members of the board approved the transaction.

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b. The transaction was of minor importance to the company. c. The disinterested shareholders approved the transaction. d. The transaction was entirely fair to the corporation. Answer: B 80. The duty of care _______________. a. is not a requirement of the business judgment rule b. protects directors who make an uninformed decision if it was entirely fair to the company c. protects a decision that has a rational business purpose, even if the activity was illegal d. will not protect directors who make a decision that harms the company Answer: B 81. Under the Williams Act, _______________. a. if shareholders offer more stock than the bidder wants, it must purchase shares pro rata b. target companies must reveal the names of any shareholders who acquire more than 5 percent of its stock c. a bidder must file a disclosure statement at least 24 hours before the tender offer begins d. once a shareholder has accepted a tender offer, she cannot withdraw it Answer: A 82. When Attack made an offer to acquire the stock of Fish, the Fish board welcomed the offer. Not so when Francis Co. also indicated an interest in Fish. In its negotiations with Francis, the Fish board of directors failed to reveal that Microsoft had offered to pay $450 million for Fish‘s patent portfolio. Francis made an offer that was slightly lower than Attack‘s. Which of the following statements is true? a. The Fish board has the right to sell the company to whomever it wants. b. The Fish board must appoint a special committee of disinterested directors to assess both offers. c. The Fish board has no obligation to Francis because its offer was lower than Attack‘s. d. The Fish board had an obligation to tell Francis about the Microsoft offer because, if Francis had known, it might have made a higher offer. Answer: D 83. Oil Co. was a controlling shareholder of Pogo, a company that drilled for oil and gas in the Gulf of Mexico. When some additional leases became available, Oil Co. purchased all of them for itself. How could Oil Co. avoid liability? I. By first offering the leases to Pogo‘s board of directors II. By first offering the leases to Pogo‘s other shareholders III. By proving that Pogo could not afford to pay for the additional leases a. I b. II c. III d. Both I and II e. I, II, and III Answer: C

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Case Questions 47. You Be the Judge: WRITING PROBLEM Asher and Stephen owned and worked for a corporation named ―Ampersand‖ that produced plays. Stephen decided to write Philly’s Beat, focusing on the history of rock and roll in Philadelphia. As the play went into production, however, the two men quarreled. Stephen resigned from Ampersand and formed another corporation to produce the play. Did the opportunity to produce Philly’s Beat belong to Ampersand? Argument for Stephen: Ampersand was formed for the purpose of producing plays, not writing them. When Stephen wrote Philly’s Beat, he was not competing against Ampersand. Furthermore, Ampersand could not afford to produce the play even if it had had the opportunity. Argument for Asher: Ampersand was in the business of producing plays, and it wanted Philly’s Beat. Ampersand was perfectly able to afford the cost of production—until Stephen resigned. Answer: Producing ―Philly‘s Beat‖ was clearly within the scope of Ampersand‘s business. Although it was not clear if Ampersand could have raised enough money to produce the play, any doubt should be resolved in favor of Ampersand. Stahl was ordered to disgorge any profits from the play. Ampersand Productions, Inc. v. Stahl (Feb. 20, 1986), No. 85-435 (Dt. Ct., E.D. Pa.). 48. Rodney Platt was the vice chairman of the board of Mylan. He was also one of the owners of an office park that Mylan leased, making him Mylan‘s landlord. How could Mylan comply with the business judgment rule in connection with this transaction? Answer: Under the business judgment rule, either the disinterested members of the board of directors or the disinterested shareholders would have to approve the transaction. If they did not, then a court would have to determine whether the transaction was entirely fair. 49. Congressional Airlines was highly profitable operating flights between Washington, D.C., and New York City. The directors approved a plan to offer flights from Washington to Boston. This decision turned out to be a major mistake, and the airline ultimately went bankrupt. Under what circumstances would shareholders be successful in bringing suit against the directors? Answer: Even if the plan was bad, it met the standard of having a ―rational business purpose.‖ Only if there had been self-dealing on the part of the board, or if they had made an uninformed decision would shareholders have a chance of being successful in their suit. 50. Careless Inc. ran HIV/AIDS treatment clinics. Some of its employees violated federal law by paying kickbacks to doctors who referred patients to Careless facilities. The Careless employee in charge of preventing this kind of behavior failed to see some obvious problems. The board had never asked about the company‘s monitoring process. Was the board of directors liable for this employee‘s wrongdoing? Answer: In a similar case, the court said that, under the duty of care, the board cannot be expected to know what every employee does, but it should have asked about the company‘s overall monitoring process. 51. Wallace, Inc. adopted a poison pill. Five years later, Moore Corp. offered to buy all Wallace‘s stock for $56 a share, which was 27 percent over the existing market price. However, the offer was contingent upon the Wallace board eliminating the poison pill. Wallace consulted with its investment banker, which advised the company that the offer was inadequate but did not indicate what the shares were really worth. Moore then raised its offer price to $60 per share, and again the bankers opined that the offer was inadequate. Both the board and its banker believed that Wallace‘s recently adopted corporate strategy would lead to an increased stock price. Indeed, the company‘s recent financial results had been better than expected. Despite these improved results,

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more than 73 percent of Wallace shareholders offered their shares to Moore. When Wallace refused to remove the poison pill, Moore filed suit. Was the board‘s refusal to remove the poison pill a violation of the business judgment rule? Answer: The court ruled for Wallace, on the grounds that the board had a good faith belief that the offer was inadequate. The board was in a better position to assess the offer than shareholders. In the end, though, the shareholders were right. Eight years later, Wallace agreed to merge with Moore at a price that was $5 per share less than originally offered. In the interim, the stock market had gone up by 20 percent.

Discussion Questions 47. Some companies adopt a classified board of directors as an antitakeover defense. How does a classified board affect cumulative voting? Answer: A shareholder of a company that has a classified board must control the votes of more stock to elect a director than the shareholder of a company without a classified board. The formula for cumulative voting is:

Number of shares to elect one director 

Number of shares outstandin g 1 Number of directors being elected  1

To review this formula, see Chapter 33, Life and Death of a Corporation. Under cumulative voting, if a company had 15 directors and 165,000,000 shares outstanding, without a classified board, a shareholder would have to control

x

165,000,000 +1 15  1

= 10,312,501 shares to elect a director. With a classified board, only five directors would be up for election, in which case the shareholder would have to control

x

165,000,000 +1 51

= 27,500,001 shares to elect a director. 48. The United States is the only developed country that allows boards to adopt poison pills. Are they a good idea? Do they protect shareholders? Or do they entrench management? Should any investor be allowed to purchase the stock of any willing seller without having to jump through the poison pill hoop? Answer: Answers will vary. 49. Under Delaware law, corporations have the right to decide that the corporate opportunity doctrine does not apply to its managers. Thousands of companies have done so. Why would a company do that? Should it? Does such a decision help or hurt shareholders? Answer: Answers will vary. 50. ETHICS Ronald O. Perelman, chairman of the board and CEO of Pantry Pride, met with his counterpart at Revlon, Michel C. Bergerac, to discuss a friendly acquisition of Revlon by Pantry Pride. Revlon rebuffed Pantry Pride‘s overtures, perhaps in part because Bergerac did not like Perelman. The Revlon board of directors agreed to sell the company to Forstmann Little & Co. at a price of $56 per share. Pantry Pride announced that it would engage in fractional bidding to top any Forstmann offer by a slightly higher one. To discourage Pantry Pride, the Revlon board granted Forstmann the right to purchase Revlon‘s Vision Care and National Health Laboratories divisions at a price some $100–$175 million below their value. Was the board within its rights in selling off these two divisions? Do the shareholders of Revlon have the right to prevent a sale of

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the company to Forstmann at a price lower than Pantry Pride offered? Is it ethical for a board to base a takeover decision on personal animosity? What are a board‘s ethical obligations to shareholders? Answer: The court prohibited the low—price sale of two divisions because the sale could not rationally be related to any benefit to the stockholders. Further, it held that when the break—up of the company became inevitable, the Revlon board had a duty to maximize the company‘s sale price. The board could not accept the lower offer. Revlon, Inc. v. MacAndrews & Forbes Holdings, 506 A.2d 173 (Del. 1986). 51. An appraiser valued a subsidiary of Signal Co. at between $230 million and $260 million. Six months later, Burmah Oil offered to buy the subsidiary at $480 million, giving Signal only three days to respond. The board of directors accepted the offer without obtaining an updated valuation of the subsidiary or determining if other companies would offer a higher price. Members of the board were sophisticated, with a great deal of experience in the oil industry. A Signal Co. shareholder sued the board for having violated the duty of care. Is the Signal board protected by the business judgment rule? Answer: Answers will vary. 52. James owned Despatch Industries. When his son, Wade, and son-in-law, Alan, started working for the company, they both signed identical employment contracts, which provided for a severance payment if they left the company. After Wade and James had a falling-out, Wade resigned. The Despatch board agreed to make severance payments of $1.3 million to both Wade and Alan, although Alan continued to work for the company and receive a salary. There were no disinterested directors or shareholders. Did the company have the right to make these payments? Answer: Since there were no disinterested directors or shareholders, the court held it would only uphold the payments if they were ―entirely fair.‖ The payment to Wade was fair because it was required under his contract. But the payment to Alan was not—he was not entitled to a severance payment while he still worked for the company.

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 35: Shareholder Rights

Table of Contents Multiple Choice Questions ..................................................................................................................................... 108 Case Questions ........................................................................................................................................................... 109 Discussion Questions................................................................................................................................................ 110

Multiple Choice Questions 84. A majority of shareholders at Weed, Inc., wanted to reinstate the former CEO of the company and sell off an unprofitable division. Do shareholders have the right to make these two decisions? a. Yes to both. b. No to both.

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The shareholders have the right to sell off an unprofitable division but not to reinstate the president. d. The shareholders have the right to reinstate the president but not to sell off an unprofitable division. Answer: B 85. Companies are required to _______________. I. disclose the relationship between financial performance and executive compensation II. appoint a lead director to run the meetings of the independent directors III. establish a clawback policy IV. have an independent chair of the board a. All of these b. II and III c. I, II, and III d. Just III Answer: C 86. A company is allowed to hold its annual meeting online _______________. a. if a majority of its shareholders approve b. if it also holds a live meeting for shareholders who want to attend in person c. if it simulcasts a video of the meeting d. without shareholder approval Answer: D 87. By law, a candidate for the board of a publicly traded company must receive a _______________. a. majority of the votes cast b. majority vote of the shares outstanding c. plurality of the votes cast d. plurality of the shares outstanding Answer: C 88. If directors and officers cause harm to their company, _______________. a. shareholders have the right to file suit against them and recover damages b. shareholders have the right to file suit against them and recover damages only if the board permits the suit c. shareholders have the right to file suit against them and recover damages only if the board permits the suit or a court deems the demand futile d. shareholders do not have the right to file suit against them Answer: C

Case Questions 52. Pfizer Inc., paid $2.3 billion to settle civil and criminal charges alleging that it had illegally marketed 13 of its most important drugs. This settlement made history, but not in a good way. It was both the largest criminal fine and the largest settlement of civil healthcare fraud charges ever paid. Shareholders filed a derivative suit against the Pfizer board and top executives. Defendants

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responded with a motion to dismiss on the grounds that shareholders had not made demand on the board. Was demand necessary? Answer: The court excused demand because the complaint alleged ―misconduct of such pervasiveness and magnitude, undertaken in the face of the board‘s own express formal undertakings to directly monitor and prevent such misconduct, that the inference of deliberate disregard by each and every member of the board [was] entirely reasonable.‖ In short, the board was so careless in exercising its responsibilities that demand would be futile. 53. William H. Sullivan, Jr., purchased all the voting shares of the New England Patriots Football Club, Inc. (the Old Patriots). He organized a new corporation called the New Patriots Football Club, Inc. The boards of directors of the two companies agreed to merge. After the merger, the nonvoting stock in the Old Patriots was to be exchanged for cash. Do minority shareholders of the Old Patriots have the right to prevent the merger? If so, under what theory? Answer: Massachusetts Supreme Judicial Court held that ―the defendants bear the burden of proving, first, that the merger was for a legitimate business purpose, and second, that, considering the totality of the circumstances it was fair to the minority.‖ Since the defendants could not meet that burden, the court declared the merger to be illegal. Ordinarily, the court would have rescinded the merger, but by then it was nearly 10 years old. Instead, the Supreme Judicial Court remanded the case to the trial court to determine appropriate monetary damages. Coggins v. New England Patriots, 397 Mass. 525, 492 N.E.2d 1112 (1986). 54. DeVry Inc. runs for-profit schools. Its shareholders submitted a proposal that would require the company to ―annually report to shareholders on the expected ability of students at Companyowned institutions to repay their student loans.‖ Must DeVry include this proposal in its proxy material for its annual meeting? Answer: The Securities and Exchange Commission (SEC) ruled that DeVry could exclude this proposal because it relates to the company‘s ordinary business operations. In particular, the proposal relates to the quality of its educational products and proposals that concern product quality are generally excludable. 55. You Be the Judge: WRITING PROBLEM Two shareholders of Bruce Co., Harry and Yolanda Gilbert, were fighting management for control of the company. They asked for permission to inspect Bruce‘s stockholder list so that they could either solicit support for their slate of directors at the upcoming stockholder meeting, attempt to buy additional stock from other stockholders, or both. Bruce‘s board refused to allow the Gilberts to see the shareholder list on the grounds that the Gilberts owned another corporation that competed with Bruce. Do the Gilberts have the right to see Bruce‘s shareholder list? Argument for the Gilberts: If shareholders of a company have a proper purpose, they are entitled to inspect shareholder lists. Soliciting votes and buying stock are both proper purposes. Argument for Bruce: The Gilberts are simply offering a pretext. They could use this information to compete against the company. No shareholder has the right to cause harm. Answer: If the admitted purpose of inspection is one directly related to the Gilberts‘ status as stockholders and is not an unlawful or improper purpose, then the Gilberts have the right to see the shareholder list. Inspection of the stock ledger to solicit proxies at the stockholder meeting and the intention to purchase additional shares are obviously proper. That the Gilberts‘ corporation is a competitor of Bruce does not of itself defeat the stockholders‘ statutory right of inspection. E. L. Bruce Co. v. State ex rel. Gilbert, 51 Del. 252, 144 A.2d 533 (1958).

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56. ETHICS After a recent annual meeting, Cisco Systems reported the results of the votes on both management and shareholder proposals. The company reported the results of its own proposals as a simple ratio of those in favor divided by the total number of votes cast. But for shareholder proposals, it reported the percentage as a ratio of those in favor divided by all outstanding shares. As a result, it reported the favorable vote for one shareholder proposal as 19 percent when, in fact, 34 percent of the votes cast supported this proposal. Is Cisco behaving ethically? What would Kant and Mill say? What ethics traps might the company face? Answer: Answers will vary. 57. When Comcast decided to hold a virtual annual shareholders meeting, an investor submitted a proposal that would have required the company to hold a hybrid meeting—that is, both in person and online. Must Comcast allow a vote on this proposal at its annual meeting? Answer: No, though their virtual meetings are unpopular with shareholders.

Discussion Questions 53. Corporate executives are not the only people to earn fabulous salaries. Some athletes earn even more than CEOs. What is the difference between athletes and executives (besides a hook shot)? Answer: Athletes‘ salaries are negotiated at arm‘s length with the team owner who will actually be paying the bill. Rather than spending other people‘s money, the owner is using his own. Also, an athlete‘s performance is transparent and easy to measure. 54. For several years, CSK Auto fraudulently reported inflated earnings. During this period, Maynard Jenkins was CEO. He was not involved in the fraud, however, and was never charged with a crime. Nonetheless, the SEC sought to clawback some of his earnings during this period. Is Jenkins financially responsible for fraud that occurred on his watch, even though he did not participate? Should he be liable? Answer: The SEC brought an action against Jenkins, seeking a clawback of $4 million. Jenkins motion to dismiss the action was denied, after which the case was settled for $2.8 million. Was this a message to CEOs to better monitor those who work under them? Answers will vary. 55. Shareholders at Citigroup offered a shareholder proposal that would require the bank to hold back a substantial percentage of its top executives‘ pay for ten years. This sum could then be used to pay any fines or other liability arising out of illegal activities that take place on the executives‘ watch. They would forfeit their pay even if they did not personally engage in any wrongdoing. Under SEC rules, is Citigroup required to include this proposal in its proxy material? If passed, must the company implement it? Is the proposal a good idea? Answer: Answers will vary. 56. In a recent year, three individuals accounted for 70 percent of all shareholder proposals at Fortune 250 companies. Fewer than 10 percent of those proposals passed. These individuals typically own only a few hundred shares of each company. If, as firms estimate, the cost of including each proposal is $87,000, then the total expense, just from these three people, is over $6 million. In some cases, the shareholders submit the same proposals year after year. Should the rule on shareholder proposals be amended? If so, how? Answer: Answers will vary. 57. Would the following initiatives improve corporate governance? Can you think of others that would?

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A. Require the board of directors to implement shareholder proposals that receive a majority vote B. Require proxy access C. Prohibit boards from seating directors who fail to receive a majority vote of shares cast D. Base compensation on net returns on invested capital E. Make say-on-pay votes binding Answer: Answers will vary.

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 36: Bankruptcy

Table of Contents Multiple Choice Questions ..................................................................................................................................... 139 Case Questions ........................................................................................................................................................... 140 Discussion Questions................................................................................................................................................ 142

Multiple Choice Questions 89. CPA QUESTION A voluntary petition filed under the liquidation provisions of Chapter 7 of the federal Bankruptcy Code _______________. a. is not available to a corporation unless it has previously filed a petition under the reorganization provisions of Chapter 11 of the Code b. automatically stays collection actions against the debtor except by secured creditors c. will be dismissed unless the debtor has 12 or more unsecured creditors whose claims total at least $5,000 d. does not require the debtor to show that the debtor‘s liabilities exceed the fair market value of assets Answer: D 90. CPA QUESTION Decal Corp. incurred substantial operating losses for the past three years. Unable to meet its current obligations, Decal filed a petition of reorganization under Chapter 11 of the federal Bankruptcy Code. Which of the following statements is correct? a. A creditors‘ committee, if appointed, will consist of unsecured creditors. b. The court must appoint a trustee to manage Decal‘s affairs. c. Decal may continue in business only with the approval of a trustee. d. The creditors‘ committee must select a trustee to manage Decal‘s affairs. Answer: A 91. CPA QUESTION Unger owes a total of $50,000 to eight unsecured creditors and one fully secured creditor. Quincy is one of the unsecured creditors and is owed $6,000. Quincy has filed a petition against Unger under the liquidation provisions of Chapter 7 of the federal Bankruptcy Code. Unger has been unable to pay debts as they become due. Unger‘s liabilities exceed Unger‘s assets. Unger has filed papers opposing the bankruptcy petition. Which of the following statements regarding Quincy‘s petition is correct?

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a. It will be dismissed because the secured creditor failed to join in the filing of the petition. b. It will be dismissed because three unsecured creditors must join in the filing of the petition. c. It will be granted because Unger‘s liabilities exceed Unger‘s assets. d. It will be granted because Unger is unable to pay Unger‘s debts as they become due. Answer: D 92. Dale is in bankruptcy proceedings under Chapter 13. Which of the following statements is true? a. His debtors must have filed an involuntary petition. b. His unsecured creditors will be worse off than if he had filed under Chapter 7. c. All of his debts are discharged as soon as the court approves his plan. d. His creditors have an opportunity to voice objections to his plan. Answer: D 93. Grass Co. is in bankruptcy proceedings under Chapter 7. Who will serve as trustee? I. The debtor in possession II. A person appointed by the U.S. Trustee III. The head of the creditors committee IV. The U.S. Trustee V. A person elected by the creditors. a. b. c. d. e.

All of these individuals are eligible; the judge decides which one will serve. III only Either II or V I only IV only

Answer: C 94. The Public Service Loan Forgiveness Program a. applies to everyone who works in public-service jobs. b. applies only to people who are in income-based repayment programs. c. applies to debtors who make payments to the best of their ability. d. allows forgiveness of any student loans. Answer: B

Case Questions 58. Mary Price went for a consultation about a surgical procedure to remove abdominal fat. When Robert Britton met with her, he wore a name tag that identified him as a doctor, and was addressed as ―doctor‖ by the nurse. Britton then examined Price, touching her stomach and showing her where the incision would be made. Britton was not a doctor; he was the office manager. Although a doctor actually performed the surgery on Price, Britton was present. The doctor left a tube in Price‘s body at the site of the incision. The area became infected, requiring corrective surgery. A jury awarded Price $275,000 in damages in a suit against Britton. He subsequently filed a Chapter 7 bankruptcy petition. Is this judgment dischargeable in bankruptcy court? Answer: Under Chapter 7, fraud claims are not dischargeable. IN RE Britton, 950 F.2d 602, 1991 U.S. App. LEXIS 28487 (9th Cir. 1991).

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59. You Be the Judge: WRITING PROBLEM To finance her education at DeVry Institute of Technology, Lydia borrowed $20,000 from a private lender. After graduation, she could not find a job in her field, so she went to work as a clerk at an annual salary of $12,500. Lydia and her daughter lived with her parents free of charge. After setting aside $50 a month in savings and paying bills that included $233 for a new car and $50 for jewelry, her disposable income was $125 per month. Lydia asked the bankruptcy court to discharge her debt. Would paying this debt impose an undue hardship on her? Argument for Lydia: Although she saves money by living with her parents, she would still have to spend every single penny of her disposable income for nearly 15 years to pay back her $20,000 debt. That would be an undue hardship. Argument for the Creditor: Paying back this debt would not constitute undue hardship because Lydia could easily reduce her expenses. She should not be buying new cars and jewelry. Nor does she have the right to save money when she has outstanding debt. Answer: The court refused to discharge Lydia‘s debts. It reasoned that anyone who can afford to buy jewelry and a new car, while saving money, can also afford to pay her educational loans. If there was hardship, it was clearly caused by her extravagant purchases. IN RE D’Ettore, 106 Bankr. 715 (Bankr. M.D. Fla. 1989). 60. Dr. Ibrahim Khan caused an automobile accident in which a fellow physician, Dolly Yusufji, became a quadriplegic. Khan signed a contract to support her for life. When he refused to make payments under the contract, she sued him and obtained a judgment for $1,205,400. Khan filed a Chapter 11 petition. At the time of the bankruptcy hearing, five years after the accident, Khan had not paid Yusufji anything. She was dependent on a motorized wheelchair; he drove a Rolls-Royce. Is Khan‘s debt dischargeable under Chapter 11? Answer: The court would not permit this debt to be discharged because Dr. Khan was not acting in good faith. IN RE M. Ibrahim Khan, P.S.C., 34 Bankr. 574 (Bankr. W.D. Ky. 1983). 61. After filing for bankruptcy, Yvonne Brown sought permission of the court to reaffirm a $6,000 debt to her credit union. The debt was unsecured, and she was under no obligation to pay it. The credit union had published the following notice in its newsletter: If you are thinking about filing bankruptcy, THINK about the long-term implications. This action, filing bankruptcy, closes the door on TOMORROW. Having no credit means no ability to purchase cars, houses, credit cards. Look into the future—no loans for the education of your children. Should the court approve Brown‘s reaffirmation? Answer: The court refused to approve the reaffirmation because the credit union’s threats

constituted duress. [Source: In re Brown, 95 Bankr. 35; 1989 Bankr. LEXIS 543 (Bankr. Ct, E.D. Va., 1989)] 62. ETHICS On November 5, Hawes, Inc., a small subcontractor, opened an account with Basic Corp., a supplier of construction materials. Hawes promised to pay its bills within 30 days of purchase. Although Hawes purchased a substantial quantity of goods on credit from Basic, it made few payments on the accounts until the following March, when it paid Basic over $21,000. On May 14, Hawes filed a voluntary petition under Chapter 7. Why did Hawes pay Basic in March? Does the

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bankruptcy trustee have a right to recover this payment? Is it fair to Hawes‘s other creditors if Basic is allowed to keep the $21,000 payment? Answer: The bankruptcy court ruled that this payment was a voidable preference. It was not made in the ordinary course. Although Hawes was supposed to pay its bills within 30 days, it had in fact made no payments for four months and then promptly made a large one just before it th filed for bankruptcy. In re Fred Hawes Org., Inc., 957F.2d 239, 1992 U.S. App. LEXIS 2300 (6 Cir. 1990). 63. Terry and Kerry filed for divorce. Terry then filed for bankruptcy. What impact would the bankruptcy filing have on the divorce? Answer: It will stay any decision on the division of property.

Discussion Questions 58. Look on the internet for your state‘s rules on exempt property. Compared with other states and the federal government, is your state generous or stingy with exemptions? In considering a new bankruptcy statute, Congress struggled mightily over whether or not to permit state exemptions at all. Is it fair for exemptions to vary by state? Why should someone in one state fare better than their neighbor across the state line? How much should the exemption be? Answer: Answers will vary. 59. Some states permit debtors an unlimited exemption on their homes. Is it fair for bankrupts to be allowed to keep multimillion-dollar homes while their creditors remain unpaid? But other states allow as little as $5,000. Should bankrupts be thrown out on the street? What amount is fair? Answer: Answers will vary. 60. What about the rules regarding repeated bankruptcy filings? (See the chart in Exam Review.) Are these rules too onerous, too lenient, or just right? Answer: Answers will vary. 61. A bankrupt who owns a house has the option of either paying the mortgage or losing their home. The court cannot reduce the amount owed; its choice is to discharge the entire debt or leave it whole. Congress considered a bill that would permit a bankruptcy judge to adjust the terms of mortgages to aid debtors in holding onto their houses. Proponents argued that this change in the law would reduce foreclosures and stabilize the national housing market. Opponents said that it was not fair to reward homeowners for being irresponsible. How would you have voted on this bill? Answer: Answers will vary. (Ultimately, the Senate did not pass the bill.) 62. In the Grisham case, the debtor had virtually no income but owed about $200,000 in debts that could not be discharged. What kind of fresh start is that? Should limits be placed on the total debt that cannot be discharged? Is the list of nondischargeable debts appropriate? Answer: Answers will vary.

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 37: Securities Regulation

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Table of Contents Multiple Choice Questions ..................................................................................................................................... 143 Case Questions ........................................................................................................................................................... 144 Discussion Questions................................................................................................................................................ 145

Multiple Choice Questions 95. CPA QUESTION When a common stock offering requires registration under the Securities Act of 1933, _______________. a. the registration statement is automatically effective when filed with the Securities and Exchange Commission (SEC) b. the issuer would act unlawfully if it were to sell the common stock without providing the investor with a prospectus c. the SEC will determine the investment value of the common stock before approving the offering d. the issuer may make sales ten days after filing the registration statement Answer: B 96. CPA QUESTION Pace Corp. previously issued 300,000 shares of its common stock. The shares are now actively traded on a national securities exchange. The original offering was exempt from registration under the Securities Act of 1933. Pace has $2.5 million in assets and 425 unaccredited shareholders. With regard to the Securities Exchange Act of 1934, Pace is _______________. a. required to file a registration statement because its assets exceed $2 million in value b. required to file a registration statement even though it has fewer than 500 unaccredited shareholders c. not required to file a registration statement because the original offering of its stock was exempt from registration d. not required to file a registration statement unless insiders own at least 5 percent of its outstanding shares of stock Answer: B 97. Lily would like to raise money for her video game start-up by selling shares. If she decides to raise money through crowdfunding, she _______________. a. can only sell to accredited investors b. can sell up to $5 million in stock during each 12-month period c. can sell through any website d. must file a report with the SEC Answer: D 98. If a publicly traded company wishes to issue more public stock: I. The company will undertake an IPO II. The investors must receive a copy of the registration statement III. The investors must receive a copy of the prospectus IV. The underwriters are not liable for any errors in the registration statement if they undertook a due diligence investigation. a. All of these

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b. III and IV are correct c. II, III, and IV are correct d. I, II, and IV are correct Answer: B 99. Three months ago, Noah bought stock under Rule 506 in TreesNFlowers, Inc. He has lost interest in the company and would like to sell the stock. Which of the following statements is true? a. He can sell the stock now, so long as he sells it to an accredited investor. b. He can sell the stock now, so long as the company grants permission. c. He must hold on to the stock for at least nine more months. d. He could sell the stock now, but only if the company has gone public in the meantime. Answer: D

Case Questions 64. Fluor, an engineering and construction company, was awarded a $1 billion project to build a coal gasification plant in South Africa. Fluor signed an agreement with a South African client that prohibited them both from announcing the agreement until March 10. Accordingly, Fluor denied all rumors that a major transaction was pending. Between March 3 and March 6, the State Teachers Retirement Board pension fund sold 288,257 shares of Fluor stock. After the contract was announced, the stock price went up. Did Fluor violate Rule 10b-5? Answer: Fluor was not in violation because the company lacked scienter. Fluor had no intent to defraud investors; it was simply making a good faith effort to comply with the terms of its contract. State Teachers Retirement Board v. Fluor Corp., 654 F.2d 843 (2d Cir. 1981). 65. Do you love ice cream? Here is an opportunity for you! For only $800, you can buy a cow from Berkshire Ice Cream. The company gets milk from the cow, and you get to share in the profits from the sale of the ice cream. Just last month, Berkshire mailed $32,000 worth of checks to investors, who are expecting a 20 percent annual rate of return. Are there any problems with this plan? Answer: This ice cream company is selling a security and must comply with both state and federal securities laws. Ellen Lahr, ―Investor Milks Profits of Ice Cream Firm,‖ Boston Globe, July 30, 1995, p. 38. 66. ETHICS Suppose that, while waiting in line at the grocery store, you overhear a stranger saying that the FDA is going to approve a new drug tomorrow—one that will be a huge success for Alpha Pharmaceuticals. Is it legal for you to buy stock in Alpha? Is it ethical? What would Kant and Mill say? Answer: Answers will vary. 67. ETHICS David Sokol worked at Berkshire Hathaway for legendary investor Warren Buffett, who is renowned not only for his investment skills but also for his ethics. Bankers suggested to both Sokol and the CEO of Lubrizol that the company might be a good buy for Berkshire. Sokol then found out that the CEO of Lubrizol planned to approach Berkshire about a possible acquisition. Sokol purchased $10 million worth of Lubrizol stock before recommending Lubrizol to Buffett. Sokol mentioned to Buffett ―in passing‖ that he owned shares of Lubrizol. Buffett did not ask any questions about the timing or amount of Sokol‘s purchases. Sokol made a $3 million profit when Berkshire acquired Lubrizol. Did Sokol violate insider trading laws? Did he behave ethically? What are Buffett‘s ethical obligations?

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Answer: Was the information Sokol had material? Buffett defended the purchase by saying that Sokol had no way of knowing how Buffett would react to the purchase suggestion. Indeed, Buffett was originally skeptical. But Sokol was a top deputy often believed to be most likely to succeed Buffett as CEO. Sokol quit after the announcement of the purchase, but both he and Buffett said his departure was unrelated to Lubrizol. 68. At an Alcoholics Anonymous meeting, a man told his mentor, Timothy McGee, that he had started drinking again because he was so stressed out about his company being acquired. McGee bought stock in that company. Has McGee done anything wrong legally? Ethically? Answer: Yes, McGee was convicted of securities fraud based on insider trading, and sentenced him to six months imprisonment with two years of supervised release, and ordered to pay a $100,000 fine and a $200 special assessment. The SEC also brought a civil enforcement action against him imposing further sanctions in a settlement. 69. An employee in the credit card division of the Last National Bank could tell by looking at credit

card statements what restaurant chains were doing well. Then the stock of those companies would often go up. The employee began trading on this information, which he learned as part of his job. At the same time, Last National Bank sold data from its credit card statements to a hedge fund that also traded on information it could mine from these data. Has anyone violated the law? Answer: The employee is guilty of misappropriation because he obtained this information at work. But the hedge fund is not in violation because it is doing its research with permission.

Discussion Questions 63. Omnicare was a company that sold medication to nursing homes. When it made these sales, it often received rebates from drug companies. In its registration statement under the 1933 Act, the company stated that the rebates were legal. Ultimately, however, some states sued drug companies for making these payments, alleging that they were really illegal bribes. The drug companies then stopped making the payments. Investors sued Omnicare on the grounds that its statement in the registration statement was false and material. Was Omnicare liable under the 1933 Act? Answer: The Supreme Court resolved a split between the circuit courts regarding opinion statement liability, ruling that statements of opinion are not actionable under §11, unless the speaker either subjectively believes the opinion to be untrue or the statement of opinion includes a statement regarding an underlying fact that is untrue. A statement of a genuinely held opinion, regardless of whether it can ultimately be proved wrong, is not an ―untrue statement of material fact‖ under §11. However, the court also considered whether the registration statement ―omitted to state factors necessary ―to make the legal compliance ―not misleading,‖ and remanded the case for a determination of that issue. Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S.Ct 1318 (2015). 64. Federal security laws assume that, as long as the issuer provides adequate disclosure, investors are knowledgeable enough to assess the quality of a stock. Many states take a different approach—they refuse to permit the sale of securities that they deem to be of poor quality. Should securities laws protect investors in this way? Answer: Answers will vary. 65. As we learned in Chapter 35, Kenneth Chenault reportedly left Facebook‘s board after

disagreements with Mark Zuckerberg over important issues such as how to handle disinformation on its site. Does this event create any legal requirements for Facebook?

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Answer: Facebook did file a Form 8-K with the SEC reporting that Chenault would not stand for re-election ―in order to pursue other opportunities.‖ 66. The SEC believes that anyone in possession of material, nonpublic information about a company should be required to disclose it before trading on the stock of that enterprise, no matter how they acquired the information. Instead, the courts have developed a more complex set of rules. Do you agree with the SEC or the courts on this issue? Answer: Answers will vary. 67. Is regulation crowdfunding a good idea? Does it provide enough protection to investors? Answer: Answers will vary.

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 38: Antitrust

Table of Contents Multiple Choice Questions ..................................................................................................................................... 143 Case Questions ........................................................................................................................................................... 144 Discussion Questions................................................................................................................................................ 145

Multiple Choice Questions 100. a. b. c. d.

Are horizontal price-fixing and vertical price-fixing per se violations of the Sherman Act? Yes; Yes Yes; No No; Yes No; No

Answer: B 101. If Sterling Steel (SS) refused to buy concrete from Carat Concrete (CC) unless CC bought steel from SS, would that arrangement be a violation of antitrust laws? a. Yes, a per se violation. b. It used to be a violation but is no longer. c. Yes, if it has an anticompetitive impact. d. Yes, if SS has a monopoly. Answer: C 102. Reserve Supply Corp., a cooperative of 379 lumber dealers, charged that Owens-Corning Fiberglass Corp. violated the Robinson-Patman Act by selling at lower prices to Reserve‘s competitors. It presented proof that these prices had harmed competition. Owens-Corning admitted that it had granted lower prices to a number of Reserve‘s competitors to meet, but not beat, the prices of other insulation manufacturers. Is Owens-Corning in violation of the RPA? a. Yes, because the RPA requires that manufacturers charge all customers the same price. b. Yes, because any difference in price is a per se violation of the RPA.

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c. Yes, because these price variations harmed competition. d. No, because a manufacturer is not liable under the RPA if it charges lower prices to meet competition. Answer: D 103. All the first-run movie theaters in Silicon Valley charge the same prices for tickets. If one cinema raises its prices, so do the others. What is this type of activity called, and is it a violation of the antitrust laws? a. Refusal to deal; it is a rule of reason violation. b. Conscious parallelism; it is not a violation in itself. c. Price-fixing; it is a per se violation. d. Resale price maintenance; it is a rule of reason violation. Answer: B 104. a. b. c. d.

A horizontal merger is automatically illegal if _______________. the resulting company controls at least 90 percent of the market the resulting company controls at least 50 percent of the market the resulting company has the ability to exclude competitors All of these

Answer: C

Case Questions 70. After acquiring the Schick brand name and electric shaver assets, North American Phillips controlled 55 percent of the electric shaver industry in the United States. Remington, a competitor, claimed that the acquisition of such a large market share was a violation of the law because the increased competition from Phillips would decrease Remington‘s profits. Does Remington have a valid claim? Answer: The court held that a 55 percent market share creates a presumption of antitrust illegality. It reasoned, however, that a decrease in Remington's profits did not constitute an antitrust injury. The law seeks to prevent injury from reduced competition, not from increased competition. As long as the market is highly competitive, the court was unwilling to intervene. It dismissed Remington's claim. This decision uses classic Chicago School analysis. Note the emphasis on protecting competition not competitors. Remington Products, Inc. v. North American Phillips Corp., 755 F. Supp. 52, 1991 U.S. Dist. LEXIS 494 (D. Conn. 1991). 71. It used to be that disposable contact lenses cost $169 a year. But then each of the five major manufacturers independently told retailers to charge at least $270 a year. Is this legal? Answer: Costco sued Johnson & Johnson over this pricing policy, alleging antitrust violations., but later dropped the suit after Johnson & Johnson announced it was discontinuing its unilateral pricing policy. Costco Wholesale Corp., v. Johnson & Johnson Vision Care Inc., Case No. 3:15-cv00941, U.S. Dist. Ct., Northern Dist. Of California. 72. Businesses in Silicon Valley often struggle to recruit enough engineers and, as a result, salaries are highly competitive. Adobe, Apple, Google, Intel, Intuit, Pixar, Lucasfilm, and eBay entered into various agreements with each other not to recruit the other‘s employees. Is this legal?

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Answer: After the Department of Justice (DOJ) filed suit against the firms alleging ―facially anticompetitive‖ agreements, the parties entered into a settlement, and the anti-poaching agreements were terminated. 73. You Be the Judge: WRITING PROBLEM American Academic Suppliers (AAS) and Beckley-Cardy (B-C) both sold educational supplies to schools. When B-C‘s sales began to plummet, it responded by reducing its catalog prices. It also offered an additional discount in states in which AAS was making substantial gains. What claim might AAS make against B-C? Is it likely to prevail in court? Argument for AAS: B-C has committed predatory pricing. The company is selling below cost for the purpose of driving us out of business. Argument for B-C: Even if we were to drive AAS out of business, we do not have enough market power to recoup our losses. Answer: AAS charged B-C with predatory pricing. The court, however, found for B-C because the company lacked monopoly power and because there was no showing of harm to consumers. The price cutting did not drive AAS from the market. In fact, AAS continued to grow, without reducing its own prices. American Academic Suppliers v. Beckley-Cardy, 922 F.2d 1317, 1991 U.S. App. LEXIS 630 (7th Cir. 1991). 74. In Boston, 50 restaurants threatened to stop accepting the American Express credit card if the company refused to reduce the commission it charged on each purchase. Visa International, one of America Express‘s rivals, offered to pay the group‘s legal expenses. American Express then lowered its commission for all restaurants except for those with a volume lower than $1 million a year. Have either the restaurants, Visa, or American Express potentially violated the antitrust laws? Answer: Answers will vary.

Discussion Questions 68. ETHICS To conceive a child, some infertile couples need an egg from a fertile woman. In this market, eggs from smart, pretty women are the most valuable. However, the American Society for Reproductive Medicine recommended that clinics cap any payments to donors at $10,000 per cycle. It was concerned that high prices might coerce women into donating, despite some risks to their health, or lead donors to conceal health issues that would make them ineligible to donate. Are these price limits legal? Ethical? Answer: A class action suit on behalf of women who donated eggs was brought against the American Society for Reproductive Medicine, alleging violations of the Sherman Act. When the class was certified, the suit was settled, and the price limits removed. Kamakahi v. American Society for Reproductive Medicine, et al, Case No. 11-cv-01781-JCS (2015). 69. If you go to Amazon.com you will see some items for which there is no price, just the note, ―To see our price, add this item to your cart.‖ Amazon does that for fear that, after the Leegin case, manufacturers will refuse to supply items that Amazon sells below the established retail price. Manufacturers worry that if they do not set some floor to their prices, other retailers will drop the products altogether. Amazon argues that the consumer is best served by a free market that permits them to set whatever prices they want. What is your view on RPM? Answer: Answers will vary. 70. ETHICS Clarice, a young woman with a mental disability, brought a malpractice suit against a doctor at the Medical Center. As a result, the Medical Center refused to treat her on a nonemergency basis. Clarice then went to another local clinic, which was later acquired by the

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Medical Center. Because the new clinic also refused to treat her, Clarice had to seek medical treatment in another town 40 miles away. Has the Medical Center violated the antitrust laws? Was it ethical to deny treatment to a patient? What Life Principles are at issue? Answer: Clarice brought suit alleging that Medical Center had monopolized medical care in violation of §1 of the Sherman Act. The court denied the Medical Center‘s motion for summary judgment. The case then went to trial to determine the relevant market and the defendant‘s power in that market. 71. Antitrust regulators tend to focus on protecting consumers, and particularly on reducing consumer prices. Look at the five cases in this chapter. Are the courts‘ decisions likely to cause consumer prices to go up or down? Do you agree with the courts‘ decisions? Answer: Answers will vary. 72. Is it appropriate for U.S. antitrust laws to apply overseas? Should businesspeople who never set foot in the United States be liable for activities they conducted in their own countries? Answer: Answers will vary.

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 39: Consumer Protection

Table of Contents Multiple Choice Questions ..................................................................................................................................... 100 Case Questions ........................................................................................................................................................... 102 Discussion Questions................................................................................................................................................ 103

Multiple Choice Questions 105. Dell sold computers online that were supposed to be loaded with a particular software. But, because the software was not yet available, Dell sent customers a coupon for the software ―when available.‖ What did Dell do wrong? I. Failed to offer buyers the opportunity to cancel their orders II. Did not automatically cancel the orders III. Did not ship the software within 30 days a. I and II b. I, II, and III c. I and III d. II and III Answer: B 106.

If you receive a product in the mail that you did not order, _______________. a. b. c. d.

you must pay for it or return it you must pay for it only if you use it you must throw it away it is a gift to you

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you must return it, but the company must reimburse you for postage

Answer: D 107. a. b. c. d. e.

Zach sells Cutco Knives door to door. Which of the following statements is false? The buyer has three days to cancel the order. Zach must tell the buyer of their rights. Zach must give the buyer a written notice of their rights. The seller can cancel orally or in writing. If the seller cancels, Zach must return their money within ten days.

Answer: D 108. Depending on state law, if a lender violates the usury laws, the borrower could possibly be allowed to keep _______________. I. the interest that exceeds the usury limit II. all the interest III. all of the loan and the interest a. All of these b. Only I c. Only II d. Only III e. None of these Answer: A 109. Companies must obtain permission from a consumer before charging for overdrafts on _______________. a. debit cards b. credit cards c. neither d. both Answer: D 110. On the first of every month, your rent is automatically deducted from your bank account. You are moving out and want to make sure the payments stop. What should you do? I. Tell the bank at least three days before the first of the month. II. Write the bank at least three days before the first of the month. III. Have the landlord sign a form, which you then mail or deliver to the bank at least three days before the first of the month. a. I b. II c. III d. Either I or II Answer: D

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Case Questions 75. A company offered credit cards to consumers with low credit scores. These cards had a $300 limit, a $75 sign-up fee, a $6 per month participation fee, and a $5 monthly fee for paper billing. Despite the fees, 98,000 people signed up. Is there anything wrong with that? Answer: Answers will vary. 76. Synchrony (formerly known as GE Capital) offered a special deal providing that if credit card holders paid part of what they owed, it would write off the rest and the customer would never have to pay it. The company did not offer this deal to people who lived in Puerto Rico or were native Spanish-speakers. Is there anything wrong with that? Answer: The Consumer Financial Protection Bureau (CFPB) ordered Synchrony to pay $225 million in consumer relief for deceptive and discriminatory credit card practices. 77. This post appeared on Instagram: khloekardashian Ever since I started taking two @sugarbearhair a day, my hair has been fuller and stronger than ever!! Even with all the heat and bleaching I do to it! #sugarbearhair Is there anything wrong with that? Answer: Khloe Kardashian did not disclose that he was paid to endorse the product. The Federal Trade Commission (FTC) gave her a week to amend her posting. 78. There you are on FindMeLove.com. You joined for free, but you have to upgrade to a paid version if you want to see full-size photos or send personalized messages. So far, you are fine with the free version. But then, a really attractive guy messages you and wants to chat. To respond, you have to upgrade. Once you do, you never hear from him again. Only later do you realize that his profile had a little ―VC‖ in the upper corner. That meant he was a ―virtual cupid,‖ that is, not a real person. Is there anything wrong with that? Answer: Answers will vary. 79. Suppose that, when you apply for a job at Workleigh Inc., the interviewer asks you to sign a

document releasing Workleigh from any claims for any information the company may seek about you when arriving at an employment decision. The employer is seeking protection from liability under a statute discussed in this chapter. Which one? Answer: The employer may have been trying to avoid liability under the Fair Credit Reporting Act which prohibits a potential employer from requesting a consumer report on a job applicant without the applicant‘s permission.

Discussion Questions 73. Many people need a car to get to work, take care of their families, live their lives. But obtaining an auto loan can be difficult for those with a bad credit rating. Some finance companies are now willing to extend credit to people who are poor risks, on one condition: the company can install tracking software on the car that has the ability to disable the ignition if the debtor misses a payment. This procedure has left drivers stranded on highways and in dangerous neighborhoods. Is this practice unfair? Do the benefits of obtaining a loan outweigh the harm caused by this violation of privacy and loss of control? Answer: Answers will vary.

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74. You Be the Judge: WRITING PROBLEM Process cheese food slices must contain at least 51 percent natural cheese. Imitation cheese slices, by contrast, contain little or no natural cheese and consist primarily of water, vegetable oil, flavoring, and ―fortifying agents.‖ Kraft, Inc., makes Kraft Singles, which are individually wrapped process cheese food slices. When Kraft began losing market share to imitation slices that were advertised as both less expensive and equally nutritious as Singles, Kraft responded with a series of advertisements informing consumers that Kraft Singles cost more than imitation slices because they are made from five ounces of milk. Kraft does use five ounces of milk in making each Kraft Single, but imitation slices contain the same amount of calcium as Kraft Singles. Are the Kraft advertisements deceptive? Argument for Kraft: This statement is completely true—Kraft does use five ounces of milk in each Kraft Single. The FTC is assuming that the only value of milk is the calcium. In fact, people might prefer having milk rather than vegetable oil, regardless of the calcium. Argument for the FTC: It is deceptive to advertise more milk if the calcium is the same after all the processing. Answer: The court agreed with the FTC that Kraft‘s ads were deceptive. Kraft, Inc. v. FTC, 970 F.2d 311, 1992 U.S. App. LEXIS 17575 (7th Cir. 1992). 75. ETHICS Should employers check an applicant‘s credit report as part of the hiring process? Each year retailers lose $30 billion a year from employee theft and $55 million because of workplace violence. Those who commit fraud are often living above their means, but there is no evidence that workers with poor credit reports are more likely to steal from their employers, be violent, or quit their jobs. And refusing to hire someone with a low credit score creates a sad catch-22: People have poor credit records because they are unemployed and because they have poor credit records they continue to be unemployed. What is the right thing for an employer to do? Answer: Answers will vary. 76. Advertisements for Listerine mouthwash claimed that it was as effective as flossing in preventing tooth plaque and gum disease. This statement was true, but only if the flossing was done incorrectly. In fact, many consumers do floss incorrectly. However, if flossing is done right, it is more effective against plaque and gum disease than Listerine. Is this advertisement deceptive? Answer: The court held that this advertisement was deceptive and did violate §5. McNeil, Inc, v. Pfizer Inc. 351 F. Supp. 2d 226; 2005 U.S. Dist. LEXIS 184 (2005). 77. ETHICS After TNT Motor Express hired Joseph Bruce Drury as a truck driver, it ordered a background check from Robert Arden & Associates. TNT provided Drury‘s Social Security number and date of birth, but not his middle name. Arden discovered that a Joseph Thomas Drury, who coincidentally had the same birth date as Joseph Bruce Drury, had served a prison sentence for drunk driving. Not knowing that it had the wrong Drury, Arden reported this information to TNT, which promptly fired Drury. When he asked why, the TNT executive refused to tell him. Did TNT violate the law? Whether or not TNT was in violation, did its executives behave ethically? Who would have been harmed or helped if TNT managers had informed Drury of the Arden report? Answer: The Fair Credit Reporting Act required TNT to ask Drury‘s permission before

requesting a consumer report. Then, before firing him, TNT was required to give him a copy of the report and a description of his rights under this statute. Drury v. TNT Holland Motor Express, Inc., 885 F. Supp. 161, 1994 U.S. Dist. LEXIS 11583 (D.Ct. 1994).

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Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 40: Environmental Law

Table of Contents Multiple Choice Questions ..................................................................................................................................... 143 Case Questions ........................................................................................................................................................... 144 Discussion Questions................................................................................................................................................ 145

Multiple Choice Questions 111. Suppose that you are the manager of a General Motors plant that is about to start producing Hummers. The Hummer requires special protective paint that, as it turns out, reacts with other chemicals during the application process to create a pollutant. What does the Clean Air Act (CAA) require of you? a. Reduce other emissions from the plant so that the total quantity of pollutants is the same b. Provide an analysis showing that the benefits outweigh the costs c. Provide the Environmental Protection Agency (EPA) with evidence that your plant meets the national ambient air quality standards d. Obtain a PSD certificate from the EPA Answer: C 112.

Which of the following statements is true? a. Only the EPA has the authority to regulate greenhouse gases (GHGs). b. Only the states have the authority to regulate GHGs. c. Both the EPA and the states have the authority to regulate GHGs. d. Neither the EPA nor the states have the authority to regulate GHGs; these gases are governed by the Paris Accord. Answer: C

113. Which of the following are a point source requiring a permit under the Clean Water Act (CWA)? I. Farm fields II. A waste treatment plant that dumps water into wells that then travel a brief distance through groundwater to the ocean III. A canal that collects water and discharges it into an intermittent stream that sometimes flows into a navigable water. a. I, II, III b. I, II c. II, III d. II Answer: D

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114. You own property on which hazardous wastes are found. You know the identity of three former owners. You are _______________. a. liable for all the costs of the cleanup because you are the current owner b. liable for one-quarter of the costs of the cleanup c. liable for the percentage of the harm that you are able to show that you actually caused d. not liable for any of the costs of the cleanup because the damage occurred before you bought the land Answer: C 115.

The Toxic Substances Control Act _______________. a. requires manufacturers to test new chemicals, or old chemicals being used in a new way, for safety before they can be used in products b. requires the EPA to test new chemicals, or old chemicals being used in a new way, before they can be used in products c. does not allow any chemicals to be used in products before the EPA certifies that they are safe d. requires the EPA, within seven years, to test all chemicals that are currently being used in products e. permits the EPA to require testing of a chemical only if there is evidence that it is dangerous Answer: D

Case Questions 1.

Tariq disposed of some of his laboratory‘s hazardous chemicals by shipping them via DHL to his home overseas. What law has Tariq violated? Answer: Tariq was convicted of transporting hazardous waste in violation of the Resource Conservation and Recovery Act (RCRA).

You Be the Judge: WRITING PROBLEM The Lordship Point Gun Club operated a trap and skeet shooting club in Stratford, Connecticut, for 70 years. During this time, customers deposited millions of pounds of lead shot on land around the club and in the Long Island Sound. Was the Gun Club in violation of the RCRA? Argument for the Gun Club: The Gun Club does not dispose of hazardous wastes, within the meaning of the RCRA. Congress meant the statute to apply only to companies in the business of manufacturing articles that produce hazardous waste. If the Gun Club happens to produce wastes, that is only incidental to the normal use of a product. Argument for the Plaintiff: Under the RCRA, lead shot is hazardous waste. The law applies to anyone who produces hazardous waste, no matter how. Answer: The court held that the Gun Club was in violation of the RCRA because it was disposing of lead shot that was clearly hazardous waste as defined by the statute. It ordered the Gun Club to clean up the site and to obtain a permit for the operation of a hazardous waste disposal site. Connecticut Coastal Fishermen’s Assoc. v. Remington Arms Co., 989 F.2d 1305, 1993 U.S. App. LEXIS 6424 (2nd Cir. 1993).

The Department of Homeland Security wished to build a large office building on its campus in Washington, DC. What environmental step must it take first?

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Answer: Homeland Security had to file an Environmental Impact Statement (EIS) under the National Environmental Policy Act. 4.

Rundy Custom Homes was building a subdivision of new houses next to a stream. During the building process, pipes on the property discharged storm water with sediment into the stream. Is this legal? What statute applies? Who would be liable? What if the EPA fails to act? Answer: No, it is not legal. The CWA applies. Rundy would be liable. If the EPA fails to act, citizens may sue under the CWA.

The Navy wanted to conduct training exercises off the coast of California for sonar submarines. Scientists were concerned that the sounds emitted by the sonar would harm marine mammals, such as whales, dolphins, and sea lions. Environmental groups filed suit, asking that the Navy prepare an EIS. The Navy argued that it should not have to do so because the submarine exercises were important for national security. Should the courts permit the Navy to proceed without an EIS? Answer: The court ruled that the Navy did not have to file an EIS. The president—the commander in chief—determined that training with sonar was essential to national security. The courts do not have enough information to overrule him on national security issues. Winter v. Natural Resources Defense Council, Inc., 555 U.S. 7(S.Ct. 2008).

Discussion Questions 78. Life is about choices—and never more so than with the environment. Being completely honest,

which of the following are you willing to do? Why?  Drive a smaller, lighter, more fuel-efficient car  Take public transportation or ride your bike to work  Vote for political candidates who are willing to impose higher taxes on polluters and pollutants  Insulate your home  Unplug appliances when not in use  Recycle your wastes  Pay higher taxes to clean up Superfund sites Answer: Answers will vary. 79. In a survey conducted by the Pew Research Center, about three-quarters of U.S. adults said ―the

country should do whatever it takes to protect the environment,‖ compared with 23 percent who said ―the country has gone too far in its efforts to protect the environment.‖ If a large majority of the population supports environmental protection, why has the EPA budget been cut by half over the past 20 years? Answer: Answers will vary. 80. ETHICS Externalities pose an enormous problem for the environment. Often, the people making decisions do not bear the full cost of their choices. And businesses tend to fight efforts to make them pay these externalities. For example, CropLife America lobbied against a bill that would support research on the effects of chemicals on children. On the other hand, Nike resigned its seat on the board of the U.S. Chamber of Commerce in response to the Chamber‘s active lobbying against legislation that would regulate GHGs. But Nike decided to remain a member of the group. What ethical obligation do American companies have to support environmental legislation that may impose higher costs? Do they have an obligation to look out for the greater

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good, or should they focus on maximizing their shareholder returns? What Life Principles would you apply? What would Kant and Mill say? Answer: Answers will vary. 81. The Supreme Court ruled that, under the CAA, the EPA may not consider cost when setting air quality standards to protect the public health. A bipartisan group of 42 of the country‘s most respected economists filed a brief arguing that, from an economic perspective, it is wrong not to consider costs. Should the EPA consider costs in all of its decisions? Or are some decisions priceless? Answer: Answers will vary. 82. Is cost-benefit analysis an effective tool in environmental disputes? How do we measure the costs and benefits? How do we know what benefits we might gain from saving endangered species, or reducing the arsenic level on a playground? Should you survey people to ask them how much it is worth? Or just think in terms of lives saved or sick days avoided? Answer: Answers will vary.

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 41: Intellectual Property

Table of Contents Multiple Choice Questions ..................................................................................................................................... 156 Case Questions ........................................................................................................................................................... 157 Discussion Questions................................................................................................................................................ 158

Multiple Choice Questions 6.

Taylor Swift wanted to trademark her song lyrics: ―And I‘ll write your name.‖ She _______________. a. can trademark it because it is a short phrase associated with her entertainment services b. can trademark it only if it is in a tangible form c. cannot trademark it because it is generic d. none of these because short phrases cannot be trademarked Answer: D

Thomas‘s English Muffins wanted to protect the method by which it makes muffins with air pockets—what it calls ―nooks and crannies.‖ What would be the best way to achieve this goal? a. Patent b. Copyright c. Trademark d. Trade secret e. This method cannot be protected. Answer: D

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VitaminWater has become such a success that other companies are also now selling similar (but not identical) flavored colored water. Some competitors bottle their drinks in a similar bell-shaped bottle with a two-toned label that has a horizontal color band. What is the best infringement claim for VitaminWater to make against these competitors? a. Patent b. Copyright c. Trademark d. Trade secret e. There is no good claim. Answer: C

Faber-Castell began manufacturing pencils in 1761. Although pencils and erasers had both existed for some time, the company did not begin putting erasers on the ends of its pencils until the 1870s. The company was sued by an inventor who had previously patented this idea. The case went to the Supreme Court. Who won the case? a. The patent holder because no one had ever put an eraser on a pencil before b. The patent holder because the PTO had approved his patent c. Faber-Castell because the pencil with an eraser was not novel d. Faber-Castell because the pencil with an eraser was not useful Answer: C

10. If you buy a book, you have the legal right to _______________. a. read it as many times as you want and then give it away b. scan it to your computer and then email it to a friend c. scan it to your computer and sell the PDF d. All of these Answer: A 11. A couple thought of a clever name for an automobile. They wanted to protect this name so that they could ultimately sell it to a car manufacturer. What would be the best method to attain this goal? a. Patent b. Copyright c. Trademark d. Trade secret e. This name cannot be protected. Answer: E

Case Questions 80. While in college, David invented a new and useful machine to make macaroni and cheese (he called it the ―Mac ‗n‘ Cheeser‖). It was like nothing on the market, but David did not apply for a patent. At that time, he offered to sell his invention to several kitchen products companies. His offers were all rejected and he never sold the invention. Years later, he decided to apply for a utility patent. Is David entitled to a utility patent? Answer: No, while the Mac n‘ Cheeser was new, useful, and nonobvious at the time it was invented, David‘s disclosure to the kitchen products companies years before renders it not novel

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now. Inventors have a grace period of one year once disclosure is made to apply for a patent. That time lapsed. Patent rejected. 81. Alice Randall wrote a novel entitled The Wind Done Gone, which retells the Civil War novel Gone with the Wind from the perspective of Scarlett O‘Hara‘s (imagined) black half-sister and slave. The novel does not use any of the names of the original, but clearly references the same characters, places, and plot lines. Randall was sued, but alleged fair use. Should she win? Answer: Answers will vary. But the appeals court expressed doubt that the infringement claim would be proven, after which, the case settled. 82. Rebecca Reyher wrote (and copyrighted) a children‘s book entitled My Mother Is the Most Beautiful Woman in the World. The story was based on a Russian folk tale told to her by her own mother. Years later, the children‘s television show Sesame Street televised a skit entitled ―The Most Beautiful Woman in the World.‖ The Sesame Street version took place in a different locale and had fewer frills, but the sequence of events in both stories was identical. Has Sesame Street infringed Reyher‘s copyright? Answer: The court held that Sesame Street had not infringed Reyher‘s copyright because Reyher could not copyright the plot of a story, only her expression of the plot. 83. Hair Corp. sells shampoo in the United States and internationally. Its international prices are 30 percent less than its domestic prices. Big Seller, Inc., is in the business of buying products internationally in bulk and reselling them in the United States Big Seller buys Hair Corp‘s shampoos in Peru and imports them to the United States to be sold at international rates. Can Hair Corp successfully sue Big Seller for copyright infringement? Answer: Answers will vary. 84. Victoria‘s Secret, a well-known lingerie company, found out that a man named Victor Moseley was running a small store in Kentucky named ―Victor‘s Little Secret.‖ Moseley‘s shop sold clocks, patches, temporary tattoos, stuffed animals, coffee mugs, leather biker wallets, Zippo lighters, diet formula, jigsaw puzzles, jewelry, candles, and adult novelties. Women‘s lingerie represented about 5 percent of its sales. Does Victoria‘s Secret have a valid intellectual property claim? Answer: Yes, it won a claim under the Trademark Dilution Act. 85. Sequenom developed a noninvasive prenatal diagnostic test to assess the risk of Down syndrome or other chromosomal abnormalities in fetuses. The test analyzes DNA from the fetus that is found in the mother‘s blood. Prior to this test, women had to undergo invasive tests that carried a slight risk of miscarriage. The PTO awarded Sequenom a patent on the test, but other diagnostic testing companies sued to invalidate the patent. Is Sequenom‘s patent valid? Answer: In 2013, a California federal court invalidated Sequenom‘s patent on the basis that it covered a natural phenomenon—the presence of DNA from the fetus in the mother‘s blood. This was based on the Myriad precedent discussed in this chapter.

Discussion Questions 83. ETHICS Virtually any television show, movie, or song can be downloaded for free on the internet. Most of this material is copyrighted and was very expensive to produce. Most of it is also available for a fee through such legitimate sites as iTunes. What is your ethical obligation? Should you pay $1.99 to download an episode of The Big Bang Theory from iTunes or take it for free from an illegal site? What is your Life Principle? Answer: Answers will vary.

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84. For much of history, the copyright term was limited to 28 years. Now, because the term is based on the life of the creator, the average copyright lasts about 150 years. What is a fair copyright term? Some commentators argue that because so much intellectual property is stolen, owners need longer protection. Do you agree with this argument? Answer: Answers will vary. 85. The America Invents Act allows inventors to expedite review of their inventions by paying a fee. This clearly favors those applicants with money. Do you agree with this practice? Why or why not? Answer: Answers will vary. 86. Should Amazon be able to patent the One-Click method of ordering? What about Facebook‘s patent on a process that ―dynamically provides a news feed about a user of a social network‖? Were these inventions really novel and nonobvious? What should the standard be for business method patents? Answer: Answers will vary. 87. In New Orleans, Mardi Gras ―Indians‖ are carnival revelers who dress up for Mardi Gras in costumes influenced by Native American ceremonial attire ―Indians‖ often spend the entire year and thousands of dollars crafting their intricate designs with feathers, beads, and other decorations. As cultural icons in New Orleans, their images are often captured by photographers, who profit from the sale of these pictures. The Indians‘ creations are not copyrightable because the law views costumes as functional, not aesthetic works. What are the Indians‘ best arguments to change the law? Should cultural works be owned? Answer: Answers will vary. 88. Music stars Beyoncé and Jay-Z named their newborn daughter Blue Ivy and then rushed to trademark the name, because they planned to use it in commerce. Their application was denied because a wedding planner in Massachusetts was already using ―Blue Ivy‖ as the name of her business. Is this the correct outcome? Should people have priority in protecting personal names? Should a small business have priority over what would surely have been a much larger, more profitable use of this name? Answer: Answers will vary, however, this ruling did stand. The couple was able to secure a trademark for the child‘s full name ―Blue Ivy Carter.‖

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 42: Real Property and Landlord–Tenant Law

Table of Contents Multiple Choice Questions ..................................................................................................................................... 100 Case Questions ........................................................................................................................................................... 102 Discussion Questions................................................................................................................................................ 103

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Multiple Choice Questions 12. Quick, Onyx, and Nash were deeded a piece of land as tenants in common. The deed provided that Quick owned one-half the property and Onyx and Nash owned one-quarter each. If Nash dies, the property will be owned as follows: a. Quick 1/2, Onyx 1/2 b. Quick 5/8, Onyx 3/8 c. Quick 1/3, Onyx 1/3, Nash‘s heirs 1/3 d. Quick 1/2, Onyx 1/4, Nash‘s heirs 1/4 Answer: D 13. Which of the following forms of tenancy will be created if a tenant stays in possession of leased premises without the landlord‘s consent, after the tenant‘s one-year written lease expires? a. Tenancy at will b. Tenancy for years c. Periodic tendency d. Tenancy at sufferance Answer: D 14. To be enforceable, a long-term residential real estate lease must _______________. a. require the tenant to obtain liability insurance b. define the tenant‘s duty to mitigate c. be in writing d. specify a due date for rent e. All of these Answer: C 15. A tenant renting an apartment under a three-year written lease that does not contain any specific restrictions may be evicted for _______________. a. counterfeiting money in the apartment b. keeping a dog in the apartment c. failing to maintain a liability insurance policy on the apartment d. making structural repairs to the apartment Answer: A 16. A tenant‘s personal property will become a fixture and belong to the landlord if its removal would _______________. a. increase the value of the personal property b. cause a material change to the personal property c. result in substantial harm to the landlord‘s property d. change the use of the landlord‘s property back to its prior use Answer: C

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Case Questions 86. In 1944, W. E. Collins conveyed land to the Church of God of Prophecy. The deed said: ―This deed is made with the full understanding that should the property fail to be used for the Church of God, it is to be null and void and property to revert to W. E. Collins or heirs.‖ In the late 1980s, the church wished to move to another property and sought a judicial ruling that it had the right to sell the land. The trial court ruled that the church owned a fee simple absolute and had the right to sell the property. Comment. Answer: The trial court was wrong. The church held a fee simple defeasible. The moment the church ceased to use the property as a church, the land reverted automatically to Collins and his heirs. Collins v. Church of God of Prophecy, 304 Ark. 37, 800 S.W.2d 418, 1990 Ark. LEXIS 566 (1990). 87. In 1966, Arketex Ceramic Corp. sold land in rural Indiana to Malcolm Aukerman. The deed described the southern boundary as the section line between sections 11 and 14 of the land. Farther south than this section line stood a dilapidated fence running east to west. Aukerman and Arketex both believed that this fence was the actual southern boundary of his new land, though in fact it lay on Arketex‘s property. Aukerman installed a new electrified fence, cleared the land on ―his‖ side of the new fence, and began to graze cattle there. In 1974, Harold Clark bought the land that bordered Aukerman‘s fence, assuming that the fence was the correct boundary. In 1989, Clark had his land surveyed and discovered that the true property line lay north of the electric fence. Aukerman filed suit, seeking a court order that he had acquired the disputed land by adverse possession. The statutory period in Indiana is 20 years. Who wins and why? Answer: Aukerman wins. He considered himself to be the owner, as had Arketex for eight years and Clark for 15 years. Aukerman maintained the land, used it for its normal purposes, and kept everyone else off. His use was open, notorious, visible, and exclusive for more than 20 years. All states permit adverse possession, with the most common public policy rationalization being that the doctrine encourages productive use of land. This reflects the chapter‘s starting point, the notion that historically land was the source of most wealth in England, and the courts did not want this most valuable asset to be wasted. Clark has paid a penalty for waiting 15 years to survey his land. Clark v. Aukerman, 654 N.E.2d 1183, 1995 Ind. App. LEXIS 1092 (Ind. App. 1995). 88. You Be the Judge: WRITING PROBLEM Frank Deluca and his son David owned the Sportsman‘s Pub on Fountain Street in Providence, Rhode Island. The Delucas applied to the city for a license to employ topless dancers in the pub. Did the city have the power to deny the Delucas‘ request? Argument for the Delucas: Our pub is perfectly legal. Further, no law in Rhode Island prohibits topless dancing. We are morally and legally entitled to present this entertainment. The city should not use some phony moralizing to deny customers what they want. Argument for Providence: This section of Providence is zoned to prohibit topless dancing, just as it is zoned to bar manufacturing. There are other parts of town where the Delucas can open one of their sleazy clubs if they want to, but we are entitled to deny a permit in this area. Answer: Yes, the city could use its zoning powers to deny the license. Earlier zoning ordinances had allowed topless dancing in the section of the city where the pub was located, but the current ordinance prohibited such dancing in that section. The city had no obligation to grant a variance for the Delucas and denied the request. Jonathan Saltzman, ―License Is Denied for Topless Dancing at Downtown Pub,‖ Providence Journal-Bulletin, July 11, 1995, p. 2C. 89. Lisa Preece rented an apartment from Turman Realty, paying a $300 security deposit. Georgia law states: ―Any landlord who fails to return any part of a security deposit which is required to be returned to a tenant pursuant to this article shall be liable to the tenant in the amount of three

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times the sum improperly withheld plus reasonable attorney‘s fees.‖ When Preece moved out, Turman did not return her security deposit, and she sued for triple damages plus attorney‘s fees, totaling $1,800. Turman offered evidence that its failure to return the deposit was inadvertent and that it had procedures reasonably designed to avoid such errors. Is Preece entitled to triple damages? Attorney‘s fees? Answer: The court held the defendant liable for $900 (treble damages) and an additional $900 in attorney‘s fees. The rationale for treble damages is that, historically, landlords often willfully refuse to refund security deposits, knowing that most tenants would not bother to sue. That was obviously unethical. By trebling the damages, state legislatures have given landlords a financial incentive to be fair. By permitting attorney‘s fees, such laws ensure that injured tenants have access to court and a remedy. Preece v. Turman Realty Co., Inc., 228 Ga. App. 609, 492 S.E.2d 342, 1997 Ga. App. LEXIS 1216 (Ga. App. 1997). 90. Angel and Linda Mendez bought a home next door to Rancho Valencia, a fancy hotel on 45 acres

of land. The house was about 600 feet from the site where the hotel held outdoor wedding receptions and parties. Even though the Rancho Valencia had installed noise-abating equipment, the Mendezes could still hear music and announcements from its sound system for about eight hours a month, mostly during the evenings. These noise levels complied with the applicable county noise ordinances. On what theory could the Mendezes sue Rancho Valencia? Will they succeed? Answer: The Mendezes sued claiming nuisance, but lost at the trial court and on appeal. The eight hours per month of noise did not violate the noise statute. Mendez v. Rancho Valencia th Resort Partners, 3 Cal.App.5 248, Court of Appeals of California, Fourth District, Division One, 2016.

Discussion Questions 89. The Estates is a suburb outside of Los Angeles. Local zoning ordinances require that lots be ―at least 1 acre in size.‖ Al owns a 1-acre lot in The Estates which has never been developed. He needs cash and wants to sell the property. Al finds a potential buyer who offers him $100,000 for the acre. But he also finds a pair of interested buyers who each offer him $75,000 for half of his acre. Al is furious that he cannot divide his acre and sell it to two buyers. ―I need that extra $50,000,‖ he rants. ―It‘s my land, and I should be able to do what I want with it!‖ Do you sympathize with Al, or do you think the zoning restriction is reasonable? Answer: Answers will vary. 90. Donny Delt and Sammy Sigma are students and roommates. They lease a house in a neighborhood near campus. Few students live on the block. The students do not have large parties, but they often have friends over at night. The friends sometimes play high-volume music in their cars and sometimes speak loudly when going to and from their cars. Also, departing latenight guests often leave beer cans and fast-food wrappers in the street. Neighbors complain about being awakened in the wee hours of the morning. They are considering filing a nuisance lawsuit against Donny and Sammy. Would such an action be reasonable? Do you think Donny and Sammy are creating a nuisance? If so, why? If not, where is the line—what amount of late-night noise does amount to a nuisance? Answer: Answers will vary. 91. ETHICS During the Great Recession, home foreclosures hit an all-time high. In many instances, banks ended up as landlords and property managers, a job for which they were ill-prepared. As a result, many homes were abandoned for long periods. Some people who knew a little bit about

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adverse possession decided to take advantage of this ancient common law doctrine: They shamelessly occupied vacant homes, claiming them as their own, changing locks, and purchasing electricity. The new residents argued that they were not hurting anyone and acting within the bounds of the law. In response, some states lengthened the time period necessary for adverse possession. Examine the squatters‘ ethics. What do you think of their behavior? Does your opinion vary if the squatters were the home‘s former owners? What if the banks were ignoring the home? What would Kant and Mill say? Answer: Answers will vary. 92. Imagine that you sign a lease and that you are to move into your new apartment on August 15. When you arrive, the previous tenant has not moved out. In fact, he has no intention of moving out. Should the landlord be in charge of getting rid of the old tenant, or should you have the obligation to evict him? Answer: Presumably, most will agree that the English rule is better for an incoming tenant, and an incoming tenant should not have the obligation to evict a previous tenant. 93. When landlords wrongfully withhold security deposits, they can often be sued for three times the amount of the security deposit. Is this reasonable? Should a landlord have to pay $3,000 for a $1,000 debt? What if you fail to pay a rent on time? Should you have to pay three times the amount of your normal rent? If your answers to these two questions are different, why is that? Answer: Answers will vary.

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 43: Personal Property and Bailment

Table of ContentsTable of Contents Multiple Choice Questions ..................................................................................................................................... 100 Case Questions ........................................................................................................................................................... 102 Discussion Questions................................................................................................................................................ 103

Multiple Choice Questions 17. Which of the following requirements must be met to create a bailment? I. Delivery of personal property to the intended bailee II. Possession by the intended bailee a. I only b. II only c. Both of these d. None of these Answer: C 18. Consider the following: I. A house (value: $250,000) II. A giant smart television in the house (value: $2,999)

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III. The land that the house sits upon (value: $30,000) IV. An old car in the house‘s garage (value: $5,001) How many of these items are personal property? a. All four of them b. Three of them c. Two of them d. One of them e. None of them Answer: C 19. Holding out an envelope, Alex says, ―Ben, I‘m giving you these opera tickets.‖ Without taking the envelope, Ben replies, ―Why would I want opera tickets? Loser.‖ Alex leaves, crestfallen. Later that day, a girl whom Ben has liked for some time says, ―I wish I were going to the opera tonight.‖ Ben scrambles, calls Alex, and says, ―Alex, my friend, I accept your gift of the opera tickets. I‘m on my way over to pick them up.‖ Does Ben have a legal right to the tickets? a. Yes because Alex intended to transfer ownership. b. Yes because offers to give gifts cannot be revoked. c. No because no consideration was given. d. No because Ben did not accept the gift when offered. Answer: D 20. Gina has season tickets to Cardinals games. One Monday, she promises to give her tickets to Friday‘s game to Ed, a friend who works across town. On Tuesday, Gina hands the tickets to Al, an administrative assistant. An hour later, when Al still has the tickets and has not given them to Ed, Gina returns. ―Sorry,‖ she says, ―but my cousins are coming to town this weekend. I‘ll need those tickets back.‖ Gina is entitled to get the tickets back if Al works for _______________. a. Gina b. Ed c. Both Gina and Ed d. None of these Answer: A 21. Craig finds a rare 1955 doubled-die penny, worth $1,500, on a city sidewalk outside a coin collectors‘ convention. The next day, Oliver posts signs that say ―Lost 1955 double-die penny. Reward offered. Call Oliver‖ all over the convention venue. Which of the following is true about Craig‘s claim to the penny? a. The penny was lost, but Craig can keep it. b. The penny was lost, but Oliver can get it back. c. The penny was lost, but the city has superior rights over Oliver and Craig. d. The penny was mislaid, so Craig can keep it. e. The penny was treasure trove, so Craig can keep it. Answer: A

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Case Questions 91. During her second year at the Juilliard School of Music in New York City, Ann Rylands had a chance to borrow for one month a rare Guadagnini violin made in 1768. She returned the violin to the owner in Philadelphia, but then she telephoned her father to ask if he would buy it for her. He borrowed money from his pension fund and paid the owner. Ann traveled to Philadelphia to pick up the violin. She had exclusive possession of the violin for the next 20 years, using it in her professional career. Unfortunately, she became an alcoholic, and during one period when she was in a treatment center, she entrusted the violin to her mother for safekeeping. At about that time, her father died. When Ann was released from the center, she requested return of the violin, but her mother refused. Who owns the violin? Answer: Ann does. Ann‘s father made a valid inter vivos gift of the violin while Ann was still a student. He intended to transfer ownership to her immediately, and made delivery by permitting her to pick up the violin. From that point on, Ann owned it. Rylands v. Rylands, 1993 Conn. Super. LEXIS 823 (Conn. Super. Ct. 1993). 92. During the Great Depression of the 1930s, the federal government‘s Works Progress Administration hired artists to create public works of art. The goal was to provide employment and beautify the nation. The artist James Daugherty painted six murals on the walls of the public high school in Stamford, Connecticut. During the 1970s, the city began to restore its high school. The architect and school officials agreed that the Daugherty murals should be preserved. They arranged for the construction workers to remove the murals to prevent harm. By accident, the workers rolled them up and placed them near the trash dumpsters for disposal. A student found the murals and took them home, and later notified the federal government‘s General Services Administration (GSA) of his find. The GSA arranged to transport the murals to an art restorer named Hiram Hoelzer for storage and eventual restoration, when funds could be arranged. Over 19 years went by before anyone notified the Stamford School system where the murals were. In the meantime, neither the GSA nor anyone else paid Hoelzer for the storage or restoration. By 1989, the murals were valued at $1.25 million by Sotheby‘s, an art auction house. Hoelzer filed suit, seeking a declaration that the murals had been abandoned. Were they abandoned? What difference would that make when determining ownership? Answer: Abandonment is a vital issue because if Stamford abandoned the murals, Hoelzer probably owns them. An owner abandons property only by deliberately relinquishing all right in it. A court will never presume abandonment. Here, the court concluded that Stamford had never intended to abandon ownership, largely because the city did not know where the murals were. Stamford still owned them. Hoelzer v. City of Stamford, Conn., 933 F.2d 1131, 1991 U.S. App. LEXIS 10830 (2d Cir. 1991). 93. You Be the Judge: WRITING PROBLEM Eileen Murphy often cared for her elderly neighbor, Thomas Kenney. He paid her $25 per day for her help and once gave her a bank certificate of deposit worth $25,000. She spent the money. Murphy alleged that shortly before his death, Kenney gave her a large block of shares in three corporations. He called his broker, intending to instruct him to transfer the shares to Murphy‘s name, but the broker was ill and unavailable. So Kenney told Murphy to write her name on the shares and keep them, which she did. Two weeks later, Kenney died. When Murphy presented the shares to Kenney‘s broker to transfer ownership to her, the broker refused because Kenney had never endorsed the shares as the law requires— that is, signed them over to Murphy. Was Murphy entitled to the $25,000? To the shares?

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Argument for Murphy: The purpose of the law is to do what a donor intended, and it is obvious that Kenney intended Murphy to have the $25,000 and the shares. Why else would he have given them to her? A greedy estate should not be allowed to interfere with the deceased‘s intentions. Argument for the Estate: Murphy is not entitled to the $25,000 because we have no way of knowing what Kenney‘s intentions were when he gave her the money. She is not entitled to the shares of stock because Kenney‘s failure to endorse them over to her meant he never delivered them, and that is an essential element of a gift. Answer: Murphy gets the $25,000. There was delivery, acceptance, and adequate evidence that Kenney intended the items as gifts. Murphy is not entitled to the shares, though, because without the endorsement there is no delivery, an essential element. Kenney lived for two weeks after instructing Murphy to write her name on the shares and during that time should have endorsed them to her, or caused a broker to do so. IN RE Estate of Kenney, 1993 Ohio App. LEXIS 2481, Ohio Ct. of App., 1993). 94. ETHICS Famous artists Georgia O‘Keefe and Alfred Stieglitz donated 101 artworks to Fisk University in the 1940s. But the gift had two conditions: The pieces could not be sold and they had to be displayed as one collection. Over 50 years later, Fisk could not pay to maintain the collection and decided to sell two of the pieces. Proceeds of the sale would go to restore its endowment and build a new science building. The Georgia O‘Keefe Foundation sued to stop the sale, arguing that the artists would have opposed it. Should the law permit this sale? Do you agree with Fisk‘s actions? What duties do gift recipients have to donors? What would Kant and Mill say? Answer: Answers will vary. Based on Georgia O‘Keefe Foundation v. Fisk University, 312 S.W.3d 1 (2009). 95. The Louisiana Civil Code limits an innkeeper‘s liability for stolen property to $500 and only covers cash, jewelry, rare art items, furs, cameras, and negotiable instruments. While staying at the New Orleans Hilton, Allen Chase was drugged by a woman he met at the hotel bar. He woke up the next morning to find that his gold watch, wallet, credit cards, passport, business papers, and camera were gone. As a result of the drug, Chase suffered health problems, which seriously affected his business. Believing that the hotel bartender had helped the woman who drugged him, Chase sued Hilton for negligence in the amount of $575,000. Who wins and why? Answer: The court limited Chase‘s recovery to $500 per the statute. Allen Chase v. Hilton Hotels, 682 F.Supp. 316 (1988).

Discussion Questions 94. ―Finders keepers, losers weepers‖ is a common children‘s rhyme. Does the law mirror its sentiment? Answer: Answers will vary. 95. Is it sensible to distinguish between inter vivos gifts and gifts causa mortis? Should someone ―on his deathbed‖ be able to change his mind so easily? Answer: Answers will vary. 96. Historically, the law has viewed animals as personal property. As a result, when a pet is wrongfully killed, its owner can only recover the cost of replacing the animal. Some groups have challenged this view, arguing that animals are fundamentally different from other forms of personal property. Do you agree? How should the law address the ownership of animals? Answer: Answers will vary.

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97. Common carriers are usually liable when property is damaged, but they are not liable for ―acts of God‖—floods, hurricanes, and the like. Is this fair? If you send a friend an important item via UPS and the UPS truck is hit by a tornado, who should pay for the lost item? Isn‘t UPS in a better financial position to pay for the loss? (In the end, the company might well offer to pay for the loss even though the law does not require it.) Answer: Answers will vary. 98. If there has been no account activity for an extended period of time, state laws require banks to turn the customers‘ property over to the state. State treasurers or comptrollers are responsible for holding the abandoned or lost property, which often includes money, watches, jewelry, and coins from abandoned safe deposit boxes. What rules should govern this property? How long should citizens have to claim it? What should the government do with unclaimed property? Answer: Answers will vary.

Solution and Answer Guide Beatty/Samuelson/Abril, Essentials of Business Law, 7e, 2022, 9780357634059; Chapter 44: Planning for the Future: Wills, Trusts, and Insurance

Table of Contents Multiple Choice Questions ..................................................................................................................................... 100 Case Questions ........................................................................................................................................................... 102 Discussion Questions................................................................................................................................................ 103

Multiple Choice Questions 22. CPA QUESTION A decedent‘s will provided that the estate was to be divided among the decedent‘s issue per capita and not per stirpes. If there are two surviving children and three grandchildren who are children of a predeceased child at the time the will is probated, how will the estate be divided? a. 1/2 to each surviving child b. 1/3 to each surviving child and 1/9 to each grandchild c. 1/4 to each surviving child and 1/6 to each grandchild d. 1/5 to each surviving child and grandchild Answer: D 23. Hallie is telling her cousin Anne about the will she has just executed. ―Because of my broken arm, I couldn‘t sign my name, so I just told Bertrand, the lawyer, to sign it for me. Bertrand was also the witness to the will.‖ Anne said, ―You made a big mistake: I. ―You should have made at least some sort of mark on the paper.‖ II. ―The lawyer is not permitted to witness the will.‖ III. ―You did not have enough witnesses.‖ Which of Anne‘s statements is true? a. I, II, and III b. Neither I, II, nor III c. Just I

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d. Just II e. Just III Answer: E 24. Blake tells his client that there are five good reasons to set up a trust. Which of the following is not a good reason? a. To pay his grandchildren‘s college tuition if they go to the same college he attended b. To save money, since setting up a trust is cheaper than a will c. To make sure the money is properly invested d. To avoid probate e. To safeguard his privacy Answer: B 25. An electronic will is valid a. only if it is printed out and signed by the testator. b. if there is an audio or video recording of the testator signing the will. c. only if the witnesses were in the same room as the testator when he signed the will. d. if the will is in any way legible, including in computer code. e. if the will is signed with any tangible symbol as long as the symbol was created with the intent to validate the will. Answer: E 26. If Chip buys an insurance policy covering his daughter Sarah‘s apartment, which of the following statements is true? a. Sarah is the insured, the beneficiary, and the owner b. Chip is the insured, the beneficiary, and the owner c. Sarah is the beneficiary; Chip is the insured and the owner d. Sarah is the insured and the beneficiary; Chip is the owner Answer: D

Case Questions 96. If your grandparents were to die leaving a large estate, and all of their children were also dead, would you have a larger inheritance under a per stirpes or a per capita distribution? Answer: Answers will vary. It depends on the number of siblings you have in relation to the number of children in each of the other branches of the family. For example, if the decedents had two children, under per stirpes distribution, they would each inherit half the estate. If the children were dead, their children (the grandchildren of the decedents) would split the parents‘ portions. So, if you were an only child, you would get half the estate. If you had three siblings, you would get ¼ of half, or 1/8 of the estate. In the same example, but under per capita, each grandchild would get 1/5 of the estate. So, per stirpes is better if you have few siblings; per capita is better if your sibling group is larger than the average sibling group in the extended family. 97. You Be the Judge: WRITING PROBLEM Linda and Eddie had two children before they were divorced. Under the terms of their divorce, Eddie became the owner of their house. When he died suddenly, their children inherited the property. Linda moved into the house with the children and

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began paying the mortgage that was in Eddie‘s name. She also took out fire insurance. When the house burned down, the insurance company refused to pay the policy because she did not have an insurable interest. Do you agree? Argument for the Insurance Company: Linda did not own the house; therefore, she had no insurable interest. Argument for Linda: She was harmed when the house burned down because she and her children had no place to live. She was paying the mortgage, so she also had a financial interest. Answer: Linda had an insurable interest because she had made a substantial financial contribution by paying the mortgage. Also, the house was owned by her children and as their guardian, she had an insurable interest in the house. Motorists Mutual v. Richmond, 676 S.W.2d 478 (Ky. Ct. App. 1984). 98. Dannie Harvey sued her employer, O. R. Whitaker, for sexual harassment, discrimination, and defamation. Whitaker counterclaimed for libel and slander, requesting $1 million in punitive damages. Both Whitaker and Harvey were insured by Allstate under identical homeowner‘s policies. This policy explicitly promised to defend Harvey against the exact claim Whitaker had made against her. Harvey‘s Allstate agent, however, told her that she was not covered. Because the agent kept all copies of Harvey‘s insurance policies in his office, she took him at his word. She had no choice but to defend against the claim on her own. Whitaker mounted an exceedingly hostile litigation attack, taking 80 depositions. After a year, Allstate agreed to defend Harvey. However, instead of hiring the lawyer who had been representing her, it chose another lawyer who had no expertise in this type of case and was a close friend of Whitaker‘s attorney. Harvey‘s new lawyer refused to meet her or to attend any depositions. Harvey and Whitaker finally settled. Whitaker had spent $1 million in legal fees, Harvey $169,000, and Allstate $2,513. Does Harvey have a claim against Allstate? Answer: Harvey sued Allstate for a violation of the covenant of good faith and fair dealing. A jury awarded her $94,000 plus attorney‘s fees. Harvey v. Allstate Insurance Co., 1993 U.S. app. LEXIS th 33865 (10 Cir. 1993). 99. When Gregg died, his will left his money equally to his two children, Max and Alison, whom he explicitly named. Max had died a few years earlier, leaving behind a widow and four children. Who will get Gregg‘s money? Answer: Alison will inherit everything. His grandchildren would inherit only if his will said ―to his issue‖ or if the will named the grandchildren explicitly. 100. Suzy Tomlinson, 74, met a tragic end—she drowned, fully clothed, in her bathtub after a night out partying with 36-year-old J.B. Carlson. He had taken her home at 1:00 a.m. and was the last person to see her alive. The two were not only party buddies; Suzy was on the board of directors of a company J.B. had started. Her family was stunned to find out that she had a $15 million life insurance policy, with the proceeds payable to a company J.B. controlled. He said it was a key person policy. He wanted to protect the company if she died because she had frequently introduced him to potential investors. Is the life insurance policy valid? Answer: Did Carlson have an insurable interest? The court denied the insurance company‘s motion for summary judgment in its suit seeking a declaration that Carlson did not have an insurable interest. That was in 2010 and there have been no further proceedings, which indicates the case may have settled. There was lots of suspicious evidence, however. Tomlinson‘s children say that she never took baths. When she applied for insurance, she claimed assets of $47 million. In fact, she had virtually no assets. Carlson had taken out a loan at 17 percent interest to pay the

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premiums and the loan was about to come due. Am. Gen. Life Ins. Co. v. Germaine Tomlinson Ins. Trust, 2010 U.S. Dist. LEXIS 103730 (S.D. Ind. Sept. 30, 2010).

Discussion Questions 99. ETHICS Donna and Carl Nichols each bought term life insurance from Prudential Insurance Company of America. These policies contained a provision stating that if the insured became disabled, the premiums did not have to be paid and the policy would still stay in effect. This term is called a waiver of premium. Carl became totally disabled, and his premiums were waived. Some years later, two Prudential sales managers convinced the Nicholses to convert their term life insurance policies into whole life policies. They promised that, once Carl made the conversion, he would only have to pay premiums on the new policy for a six-month waiting period. They even wrote ―WP to be included in this policy‖ on the application form. ―WP‖ stood for waiver of premium benefit. Only after the new policy was issued did the Nicholses learn that Prudential would not waive the premium. The Nicholses had exchanged a policy on which they owed nothing further for a policy on which they now had to pay premiums that they could not afford. Do the Nicholses have a claim against Prudential? Regardless of the legal outcome, did Prudential have an ethical obligation to the Nicholses? Answer: Answers will vary. 100. Should you have a will? Do you have one? Answer: Answers will vary. 101. ETHICS Is an asset protection trust ethical? Should wealthy people be able to avoid paying legitimate creditors? What about perpetual trusts that avoid estate taxes forever? State legislators pass laws that permit such trusts to attract trust business from out of state. Trusts generate billions of dollars in fees each year. If you were a state legislator, how would you vote when this law came up for approval? If you had substantial assets, would you put them in such a trust? What Life Principles apply here? Answer: Answers will vary. 102. Billionaire Warren Buffett said that children should inherit enough money so that they can do anything, but not so much that they can do nothing. Is it good for people to inherit money? How much? At what age? How much would you like to leave your children? Answer: Answers will vary. 103. ETHICS Life insurance policies place the burden on beneficiaries to notify the insurance company when an insured dies. The company itself has no obligation to hunt down the heirs of dead customers. But sometimes beneficiaries do not know that their relative had a policy. Some state authorities are now requiring insurance companies to run a list of their policy owners through a database of people who have died. But the insurance companies are objecting because, they say, they priced the policies originally on the assumption that a certain percentage of them would never be paid. What is the ethical choice for insurers? What would Kant or Mill say? Answer: Answers will vary.

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