Study Guide Business Law 2 - f01.justanswer.com and discussion, and cases for analysis. ......

Study Guide

Business Law 2By

Mike Wilson, Esq.

About the Author

Mike Wilson is a freelance writer and college instructor who hashad wide legal and educational experience.

He graduated with his bachelor of arts degree in English from theUniversity of Kentucky in 1976, and three years later received hisjuris doctorate from the same school. He has been a partner in a law firm and a solo practitioner and has worked in general and family mediation. He has also been a full-time instructor in Paralegal Studies at Sullivan College in Kentucky. He was given the “Teacher of the Year” award in 1997.

Mr. Wilson has had a number of papers published on law-relatedtopics in both scholarly and popular journals.

Copyright © 2015 by Penn Foster, Inc.

All rights reserved. No part of the material protected by this copyright may bereproduced or utilized in any form or by any means, electronic or mechanical,including photocopying, recording, or by any information storage and retrieval system, without permission in writing from the copyright owner.

Requests for permission to make copies of any part of the work should be mailed to Copyright Permissions, Penn Foster, 925 Oak Street, Scranton,Pennsylvania 18515.

Printed in the United States of America

All terms mentioned in this text that are known to be trademarks or service marks have been appropriately capitalized. Use of a term in this text should not beregarded as affecting the validity of any trademark or service mark.

INSTRUCTIONS TO STUDENTS 1

LESSON ASSIGNMENTS 5

LESSON 1: PROPERTY 7

LESSON 2: SALES AND CONSUMER PROTECTION 21

LESSON 3: NEGOTIABLE INSTRUMENTS 37

LESSON 4: INSURANCE, SECURED TRANSACTIONS, AND BANKRUPTCY 47

LESSON 5: TORTS AND CRIMES 59

GRADED PROJECT 67

SELF-CHECK ANSWERS 73

iii

Co

nt

en

ts

Co

nt

en

ts

INTRODUCTIONWelcome to Business Law 2, the second of two courses onthe legal environment of business. This course will completethe exploration of the legal aspects of business that youbegan with Business Law 1. In addition, this course offers a good overall picture of the American legal system and how it affects business on a daily basis.

This study guide, based on your textbook, Business Law withUCC Applications, is divided into five lessons. This studyguide provides your assignments for each lesson, self-checksand their answers, and your exams. Each lesson has severalassignments. To ensure you understand the material alongthe way, self-checks follow each assignment. The answers foreach self-check are at the back of this study guide.

OBJECTIVES When you complete this course, you’ll be able to

� Explain laws pertaining to ownership and transfer ofproperty

� Describe the general principles involved in wills, trusts,and estates

� Discuss the formation of sales and lease contracts andthe legal issues arising from those types of contracts

� Explain the purpose and types of negotiable instrumentsand the role they play in business

� Explain the rights of secured and unsecured creditorsand the consequences of bankruptcy

� Define risk management and discuss the purpose of dif-ferent types of insurance, including life, property,automobile, and health

� Discuss the principles of torts, the different types oftorts, and criminal law as it relates to business

1

Ins

tru

ctio

ns

Ins

tru

ctio

ns

Instructions to Students2

YOUR TEXTBOOKYour textbook for this course, Business Law with UCCApplications, Thirteenth Edition, by Gordon W. Brown and Paul A. Sukys, offers a solid introduction to the basicprinciples of business law. The study guide will help youunderstand the material, but your exams are based on yourtextbook and will test your understanding of the materialcovered in the textbook.

Your textbook’s table of contents in brief begins on page xviiand lists all the chapters and topics covered by the textbook.A more detailed table of contents appears on page xix.

At the end of each chapter, the textbook offers a summary of the material covered, a list of key terms, questions forreview and discussion, and cases for analysis. Each chapteralso contains a quick quiz with answers at the end of the chapter. A glossary appears at the end of the textbook. The appendices at the back of your textbook provide the U.S. Constitution and excerpts from the UniformCommercial Code.

Each chapter offers cases selected to illustrate the legal principles covered in the textbook. Some cases are fictional,but many are summaries from actual cases, affording you theopportunity to review real scenarios that pertain to the mate-rial covered in this course. When reading the case summaries, remember that they involve individuals and busi-nesses facing real problems. The rule of law affects all peopleas they engage in the activities of their daily lives, whetherdirectly or indirectly.

Although the assignments and self-checks may seem like alot to digest at first, don’t worry. The purpose of having several different types of questions is to expose you to morematerial, so when you take your exams, you’ll be prepared.

COURSE MATERIALS This course includes the following materials:

1. Your textbook, Business Law with UCC Applications,which contains the assigned readings, including casesummaries and helpful review questions

2. This study guide, which includes

� A list of lesson assignments

� Introductions to your lessons with discussion of themost crucial portions of the textbook, including,when relevant, new developments in business law

� Self-checks after each assignment and answers tothe self-checks

A STUDY PLAN Think of this study guide as a blueprint for your course.Read it carefully. Use the following procedures to receive themaximum benefit from your studies:

1. Read the lesson introduction in the study guide to get anoverview of what you’ll learn from the textbook, as wellas objectives.

2. Read the instructions for the assignment in the studyguide. First read the assignment in your study guide.Then read the assigned pages in your textbook to graspthe content in your textbook.

3. After you’ve finished each assignment, answer the questions provided in the self-check exercise in yourstudy guide. This will serve as a review of the materialcovered in the assignment. Then check your answerswith those given in the back of the study guide. If youmiss any questions, review the material covering thosequestions. The self-checks are designed to reveal weakpoints that you need to review. Don’t send your answersto the school.

Instructions to Students 3

4. Complete the online textbook chapter quizzes, as well asthe Quick Quizzes that appear throughout each textbookchapter that are assigned at the end of each readingassignment in your study guide. The link to the onlinetextbook chapter quiz is given at the end of each assign-ment. Answers to the Quick Quizzes are at the end ofeach textbook chapter, and feedback will be provided toyou after you take each online textbook chapter quiz.

5. After you’ve completed the self-check and the quizzes, goto the next assignment, following the procedure outlinedin steps 2–4.

6. Complete the first exam. After you take your exam, youcan move on to the next lesson.

7. Follow this procedure for all five lessons.

At any time, you can e-mail your instructor for assistance orinformation regarding the materials.

Now you’re ready to begin Lesson 1. Good luck!

Instructions to Students4

Remember to check your student portal regularly. Your instructor may

post additional resources that you can access to enhance your learn-

ing experience.

Lesson 1: PropertyFor: Read in the Read in study guide: the textbook:

Assignment 1 Pages 9–12 Chapter 29



Examination 060372 Material in Lesson 1

Lesson 2: Sales and Consumer ProtectionFor: Read in the Read in study guide: the textbook:





Lesson 3: Negotiable InstrumentsFor: Read in the Read in study guide: the textbook:





5

As

sig

nm

en

tsA

ss

ign

me

nts

Lesson 4: Insurance, Secured Transactions, and BankruptcyFor: Read in the Read in study guide: the textbook:





Lesson 5: Torts and CrimesFor: Read in the Read in study guide: the textbook:




Graded Project 06038200

Lesson Assignments6

Note: To access and complete any of the examinations for this study

guide, click on the appropriate Take Exam icon on your student portal.

You should not have to enter the examination numbers. These numbers

are for reference only if you have reason to contact Student CARE.

7

Le

ss

on

1L

es

so

n 1

Property

INTRODUCTIONLesson 1 introduces you to the law of property. You’ll learnthat law divides property into two types: real property andpersonal property. You’ll study the law as it pertains to eachtype of property. You’ll also study bailment, which is the tem-porary transfer of personal property to another. You’ll learnabout landlord-tenant law. Finally, you’ll study the law thatgoverns the transfer of property on death and law concerningtrusts.

OBJECTIVESWhen you complete this lesson, you’ll be able to

� Explain ownership of personal property

� Describe the law concerning property that has been lost,misplaced, or abandoned

� Discuss laws related to stolen and gifted personal property

� Describe intangible personal property, such as patents,copyrights, trademarks, and trade secrets

� Define bailment and describe types of bailment and howeach type differs in terms of legal duties created

� Discuss special bailment situations involving innkeepers,carriers, and warehousers

� Discuss real property and the main types of estates inreal property

� Explain how the law on real property treats trees andvegetation, air rights, subterranean rights, water rights,and fixtures

� Define and give examples of easements

Business Law 28

� Explain different types of co-ownership, including jointtenancy, tenancy in common, tenancy by the entirety,community property, and tenancy in partnership

� Explain the methods by which title to real property isacquired, including the differences in acquiring propertyby deed, reason of death, or adverse possession

� Discuss how zoning laws affect property rights

� Explain eminent domain and its use by government toacquire real property for a public purpose

� Define the relationship between a landlord and a tenant,and describe a landlord’s duties and a tenant’s duties

� Differentiate among leasing, licensing, and lodging

� Explain the features of different types of leasehold interests, including tenancy at will, tenancy for years,periodic tenancy, and tenancy at sufferance

� Discuss common terms appearing in a lease agreementand the process of eviction

� Explain probate law and how it may relate to business

� Discuss advance directives and what happens to property when a person dies without a will

� Explain laws that pertain to wills, laws that protect the interest of spouses or children in the estates of decedents, how wills are executed and changed, andgrounds for contesting a will

� Discuss problems arising when people die simultane-ously and what’s involved in settling an estate

� Discuss the law of trusts and common types of trusts

Lesson 1 9

ASSIGNMENT 1Read this introduction to Assignment 1. Then read Chapter 29of your textbook.

Chapter 29 introduces you to personal property and the dif-ferent ways to own personal property. When an individualowns property, that property is owned in severalty. Whenmore than one person owns property, that property is ownedin cotenancy. Cotenants can own as tenants in common or asjoint tenants (also called tenants with right of survivorship).Joint tenants are distinguished from tenants in common inthat when one joint tenant dies, his or her share passes tothe survivor automatically.

Nine states recognize a form of ownership called communityproperty, in which property (except a gift or inheritance)acquired by either spouse during the marriage belongs toboth spouses equally. Spouses may bequeath their share ofcommunity property by will to whomever they choose, but ifthey die without a will, the property passes by survivorship tothe surviving spouse.

There are special rules for lost and abandoned property.Someone who finds lost property becomes the owner aftermaking reasonable but unsuccessful efforts to find the origi-nal owner. When property is stolen, a thief doesn’t therebyacquire title and is incapable of transferring title to anyone.Abandoned property, if proven abandoned by clear and con-vincing evidence, belongs to whoever finds it. The right toabandoned shipwrecks outside the boundaries of a state isgoverned by the law of finds or the law of salvage. If an abandoned shipwreck is found in the submerged land of anystate, the Abandoned Shipwreck Act of 1987 applies ratherthan the law of finds or the law of salvage.

Personal property can be gifted. The donor is the person making the gift, and the donee is the person receiving thegift. The gift is complete if the donor intended to make a giftand delivered the gift, and the donee accepted the gift.

The Uniform Transfers to Minors Act establishes proceduresto protect the rights of minors who are donees. Minors areassured that gifts to them will be either used for their benefit

Business Law 210

or turned over to them when they become adults. The IRShas special kiddie tax rules that determine how much of theincome is taxed to the child and how much to the parent.

Intellectual property is a kind of intangible property. Patentsgive inventors exclusive rights, for a time, to processes,machines, chemical formulas, and articles of manufacture.Copyrights protect the work of authors, artists, musicians,and software designers from unauthorized reproduction,republication, or sale. The owner of a trademark can registerthat trademark and thereby protect the exclusive right to usethat trademark. However, companies may lose trademarkprotection if the trademark becomes a popular generic termby use of a large segment of the public.

Bailment involves transfer of possession of personal propertytemporarily with the intent that it be returned later. Thebailor is the person transferring possession. The bailee is the person temporarily receiving possession. Bailments aredistinguished by whom they benefit. Bailment could benefitonly the bailor—for example, asking a friend to mail you apackage as a favor. Bailment could benefit only the bailee—for example, your neighbor borrowing your wheelbarrow.Mutual-benefit bailments benefit both parties—for example,leaving your clothes at the dry cleaners (you benefit fromhaving your clothes cleaned, and the cleaner benefits byreceiving payment for the service).

Traditionally the type of care a bailee had to exercise withregard to the property transferred depended on the type ofbailment. If the bailment benefited only the bailee, great carewas required. If it benefited only the bailor, slight care wasrequired. If it benefited both, ordinary care was required.Today, many jurisdictions simply apply a reasonable carestandard to all types of bailments.

Ordinarily, a plaintiff claiming property damage caused bynegligence has the burden to prove negligence. However,when property in the possession of a bailee is damaged, theburden of proof is shifted to the bailee to prove that he or shewasn’t negligent.

Lesson 1 11

Certain types of bailees have special additional duties. Undercommon law, innkeepers have a duty to provide accommoda-tions if they’re available and serve as insurers for theirguests’ property. Innkeepers must use reasonable care inprotecting guests from harm, must respect guests’ privacy,and must not discriminate based on race, creed, color, sex, or ethnicity, pursuant to the Civil Rights Act of 1964.Innkeepers may, however, turn away those whose presencemight endanger the other guests.

Common carriers also are a special type of bailee. With cer-tain exceptions, common carriers, whether negligent or not,are insurers of all goods accepted for shipment. They’re notresponsible for acts of god, acts of public enemies, acts ofpublic authorities, acts of the shipper, or damages caused bythe inherent nature of the item being shipped.

Warehousers are also a type of bailee. A public warehouse isa warehouse that any member of the public may pay to storegoods in. A private warehouse is a warehouse not open to thepublic. Warehousers must use reasonable care and are liablefor damage caused by failure to exercise reasonable care.

Warehousers who aren’t paid have a lien on goods stored inthe warehouse and may retain possession of them until paid.The lien covers the storage charge and other charges, such as transportation, insurance, and expenses incurred to pre-serve the goods. The lien is lost if the warehouser voluntarilygives up possession of the goods or wrongfully fails to deliverpossession.

Review and ApplicationWhen you finish reading the chapter,

� Answer the Quick Quiz questions on pages 638 and 649.Check your answers on page 652. These quizzes will notbe scored so don’t send them to the school; they’re foryou to gauge your progress. If there are any questionsyou don’t understand, refer back to the textbook andreread the assignment.

Business Law 212

� Complete the online textbook chapter quiz athttp://highered.mheducation.com/sites/0073524956/student_view0/chapter29/chapter_quiz.html. Feedback onyour answers will be provided once you finish the quizand click the Submit Answers button.

� Take a moment to complete Self-Check 1. You can checkyour answers by turning to the back of this study guide.If you have trouble with any of the material, review thosesections in your text.


Chapter 30 introduces you to real property. Real property island and things permanently attached to land. Real propertyincludes things on the surface, such as buildings, fences,and trees; things below the surface, such as minerals; andthe airspace above the surface. Landowners own the airspaceas high as they can effectively possess or reasonably control.

Self-Check 1At the end of each section of Business Law 2, you’ll be asked to pause and check

your understanding of what you’ve just read by completing a “Self-Check” exercise.

Answering these questions will help you review what you’ve studied so far. Please

complete Self-Check 1 now.

Answer the “Questions for Review and Discussion” on page 650 of your textbook.

Check your answers with those on page 73.

Lesson 1 13

Trees are a kind of vegetation, but not all vegetation is realproperty. Trees, shrubs, vineyards, and perennial crops aretreated as real property, but annual crops are personal property.

Fixtures are items that were formerly personal property butthat have become attached to real property. Whether an itemis a fixture depends on various factors a court will consider.Those factors include whether the item has been temporarilyor permanently installed, whether the item has been adaptedto the intended use of the real property, and the intent of theparty at the time the item was attached to the real property.

Easements are rights to use property for a limited purpose—for example, an easement for ingress and egress, whichmeans a right to cross someone else’s property to go into and come out of your own property. An easement can be created by grant (expressly conveying the easement to some-one), reservation (retaining an easement right in property one has outconveyed), or implication (implied under the circumstances).

In law, estate is used in various ways. One use of estate is todescribe the degree of ownership of real property. A leaseholdestate gives one the right to occupy property as a tenan. Afreehold estate is a greater degree of ownership and consistsprimarily of two types: a life estate, which is the right to ownfor life, and a fee simple, which is an absolute and unlimitedownership. Fee simple estates pass on death to whoevertakes the decedent’s estate.

Dower for widows and curtesy for widowers are common-lawrights to a life estate in one-third of the real estate owned bythe spouse during the marriage. Many states have eliminatedor modified dower and curtesy rights.

Tenancy by the entirety may be held only by a husband and awife. On the death of one, his or her interest passes to thesurviving spouse. A tenancy in partnership is another type ofownership that exists in some states.

Ownership of real property may be acquired in three ways.First, ownership may be acquired by deed. The conveyancemay be a sale or a gift. Different types of deeds can be distin-guished by the extent that title is warranted by the grantor.

Business Law 214

These types include general warranty deeds, special warrantydeeds, bargain-and-sale deeds, and quitclaim deeds. Second,ownership may be acquired by reason of death, and the propertymay pass by will or by descent in the case of intestacy. Third,ownership may be acquired by adverse possession, which occurswhen a nonowner, for a period set by applicable state statutes,continuously, openly, and without permission of the owner pos-sesses property. After the requisite period has run, the possessorbecomes the new owner.

Zoning is governmental regulation of the use of property.Properties are classified or zoned into various categories, andonly certain types of use are permitted in each zone. If one hasestablished a use that was permitted at the time, but due tochanges in zoning is no longer permitted, the use is called a non-conforming use and the owner may continue such use. A varianceis permission granted by zoning authorities to engage in a usenot normally permitted under applicable zoning ordinances.

Eminent domain is the power government has to take privateproperty for a public purpose. An example would be taking landto build a road or a public park. The government must pay fairvalue for the land it takes.

A leasehold is an interest in real estate, but the landlord-tenant relationship also is a contract in which the owner of thereal estate allows the tenant to have possession for a period inexchange for consideration. To create the relationship, five thingsare necessary: (1) consent of the landlord to the occupancy, (2)transfer of possession and control to the tenant in subordinationto the landlord’s rights, (3) a landlord’s right to return of theproperty at the end of the lease, which is called a reversion, (4)creation of an ownership interest in the tenant called a leasehold,and (5) satisfaction of all the other elements necessary to create acontract (mutual assent, competent parties, consideration andlawful purpose).

A license gives permission to someone to perform acts on prop-erty that would otherwise be trespass but doesn’t confer apossessory estate and is usually not transferable. It doesn’trequire consideration and need not delineate the space to beoccupied or used. In contrast, a lease gives exclusive possession,describes the property leased, states the term of the lease andrent to be paid, and, in some cases, may have to

Lesson 1 15

be in writing. A lease also is different from lodging. A lodger is atype of licensee with the right to use property but not to possessit.

There are four types of tenancy. A tenancy for years is an estatefor a fixed time period—it may be less than a year. A periodic ten-ancy is a fixed-period tenancy that continues for successiveperiods until one of the parties chooses to terminate the arrange-ment. A tenancy at will is a tenancy for which no term has beenfixed. Tenancy at sufferance is a way of describing someone whowrongfully remains in possession after his or her tenancy expires.

To create a lease, the parties must define the bounds of the prop-erty being leased, identify the term of the lease, and agree on adefinite rent.

A tenant may transfer the right to occupy property by assignmentor by sublease. Assignment is a transfer of the tenant’s rightsunder the lease. A sublease is a new lease between the tenant andthe sublessee. If the transfer of the right to occupy property is forless than the remainder of the term, or there’s any sort of rever-sion right retained by the tenant, the arrangement will be treatedas a sublease. Leases may require that the landlord’s approval beobtained before assignment or subleasing may occur.

When dwellings are rented, most states imply a warranty by thelandlord that the property is habitable.

Landlords have certain duties under leases. These duties includea duty to refrain from violating laws against discrimination, to make repairs necessary to maintain the habit-ability of the premises, and to deliver peaceful possession or quietenjoyment. Landlords may not commingle security deposits andmust return the balance of any security deposit to the tenant atthe end of the lease.

Tenants also have duties, including paying the rent; complyingwith any conditions and covenants in the lease, such as keepingthe property clean; not committing waste, which is damaging theproperty being rented; and returning to the landlord all fixtures(other than trade fixtures) added by the tenant during the term ofthe lease.

Landlords are responsible for harm caused by defects in commonareas if the landlord was negligent. Tenants are responsible forharm caused by defects in areas controlled by the tenant.

Business Law 216

Landlords have the right to evict tenants who violate theterms of the lease. Some states permit landlords to enterwrongfully held premises and retake possession if it can bedone peacefully. The common law name for a lawsuit broughtto evict is ejectment. Unlawful detainer is a legal proceedingwith the same purpose but accomplishes its objective morequickly. Strict notice requirements apply.


� Answer the Quick Quiz questions on pages 658, 661,666, 671, and 674. Check your answers on page 677.These quizzes will not be scored so don’t send them tothe school; they’re for you to gauge your progress. Ifthere are any questions you don’t understand, refer backto the textbook and reread the assignment.



Self-Check 2Answer the “Questions for Review and Discussion” on page 676 of your textbook.


Lesson 1 17


Chapter 31 introduces you to will, trusts, and estates. Thetext will explain probate law and how it may relate to busi-ness. Probate is the court supervised administration of adecedent’s estate. Each state’s law is different on the proce-dures involved, so you’ll need to check your state’s law whenaddressing probate matters. A decedent’s property is distrib-uted according to the instructions in the decedent’s will, or ifthere’s no will, according to the law of intestate succession.

Probate is relevant to business entities in a variety of ways.All businesses are owned by people in one way or another,and their interest in a business—whether sole proprietorship,partnership, or stock in a corporation—passes on death tosomeone. In addition, businesses who are creditors may haveclaims against estates for business-related debts. Also, thedeath of a partner dissolves a partnership, absent an agree-ment to the contrary, and the deceased partner’s estate hasthe right to be paid the value of the partner’s share or havethe partnership liquidated and be paid from the net proceeds.

Advance medical directives are written instructions for futuremedical care in the event the patient becomes unable to givesuch instructions. The most common use of advance medicaldirectives is a living will, which expresses a person’s wishesregarding whether he or she, if in a terminal condition or per-sistent vegetative state, wishes to be allowed to die a naturaldeath rather than being kept alive by artificial means.Another way to accomplish these purposes is to execute ahealth care proxy, which authorizes another person to makemedical decisions in the event of incapacity.

A durable power of attorney is a power of attorney that’s notaffected by the disability of the principal.

A will, also called a last will and testament, is a documentthat governs transfer of one’s property at death. A personwho dies with a will is testate, a person who dies without awill dies intestate. A person who makes a will is a testator.Any competent adult may make a will. Competency to make a

Business Law 218

will requires that the testator generally knows the nature andextent of the property he or she owns, knows who would bethe natural recipients of the estate, is free from delusionsthat might influence the terms of the will, and intends tomake a will.

State laws differ on the formal requirements for executing awill, but in general, it must be in writing, signed by the testa-tor, and witnessed in the testator’s presence by the numberof witnesses required under state law.

State laws create various types of protection for the familywhen a decedent dies. These include family allowances, thehomestead exemption, exempt property, dower and courtesy,and the right of a surviving spouse to elect against the willand take a forced share of the estate. These devices aredescribed in your text.

In general, children may be omitted from a will. Omitted children must prove they were mistakenly rather than inten-tionally omitted to receive a share of the estate. To avoidconfusion about whether the omission was a mistake, a testator should state specifically that a child is being omittedintentionally. To the extent children have rights in an estate,adopted children are treated the same as children of thebody.

Sometimes people make wills and change their minds. Willsmay be revoked by burning, tearing, canceling, or obliteratingthe will with intent to revoke. They also may be revoked byexecuting another will. In some states, marriage, divorce, orannulment may revoke a will in whole or in part.

When people die owning assets, their estate must be pro-bated. Heirs are notified, and an executor or administrator is appointed to settle the estate. Settling the estate involvescollecting the assets, paying debts, paying taxes, and distrib-uting what remains according to the will or the law ofintestate succession if the person dies without a will.

A trust divides ownership between a trustee, who holds legaltitle, and a beneficiary, who holds equitable or beneficial title.This allows the trustee to control the property for the benefitof the beneficiary.

Lesson 1 19


� Answer the Quick Quiz questions on pages 680, 689,692, and 694. Check your answers on page 697. Thesequizzes will not be scored so don’t send them to theschool; they’re for you to gauge your progress. If thereare any questions you don’t understand, refer back tothe textbook and reread the assignment.



Then review the material you’ve learned in this study guideand the assigned pages in your textbook for Assignments 1–3. When you’re sure that you completely understand theinformation presented in those assignments, complete yourmultiple-choice examination for Lesson 1.

Self-Check 3 Answer the “Questions for Review and Discussion” on pages 695–696 of your textbook.


Business Law 220

NOTES

21

Le

ss

on

2L

es

so

n 2

Sales and ConsumerProtection

INTRODUCTIONLesson 2 introduces you to sales and consumer protection.Much of contract and property law provides the legal supportfor commercial activity, and a significant portion of commer-cial activity involves sale or lease of goods. In this lesson,you’ll learn that the Uniform Commercial Code (UCC) pro-vides statutory law that governs the sale and lease of goods.Warranties are representations regarding the quality or performance of a product. You’ll study laws applicable towarranties.

Products can cause injury to persons who buy them or usethem. Products also can injure innocent bystanders. You’llstudy the law pertaining to product liability.

Consumers can be harmed in commercial transactions. You’ll learn about laws designed to protect consumers.


� Explain the basic principles governing the sale and leaseof goods

� Discuss how the law treats contracts created for sale ofgoods and services

� Discuss the special rules that apply to sales contractsand how those rules may differ from common law con-tract rules

� Discuss UCC writing requirements for sales contractsand how they may differ from common law rules

� Explain void and voidable title

Business Law 222

� Discuss the relationship of passage of title and risk of loss

� Discuss the rules for risk of loss when the goods are delivered

� Explain the law concerning sales with right of return

� Explain how the UCC defines the obligations of sellerand buyer

� Describe tender of delivery, the rules concerning it, andhow it affects the duties of the parties

� Identify the rights of buyers when the goods that aredelivered are nonconforming

� Explain the seller’s right to cure an improper tender

� Discuss breach of contract under the UCC, includinganticipatory breach, and identify remedies availableunder the UCC for breach

� Explain the difference between express and implied warranties

� Identify the three automatic implied warranties underthe UCC

� Discuss and differentiate the three theories of productliability: warranty, negligence, and strict liability

� Discuss protections afforded consumers against unfair ordeceptive acts or practices

� Explain the role of the Federal Trade Commission in con-sumer protection

� Discuss the main features of the Consumer ProductSafety Act and the Consumer Leasing Act

� Describe important consumer-protection provisions thatappear in other federal laws

Lesson 2 23


Chapter 13 introduces you to the law on sale and lease ofgoods. The UCC governs the law of contracts for sale andlease of goods. The law applies to transactions between indi-viduals, between businesses, and between consumers andbusinesses. In some cases, there may be special rules fortransactions between merchants.

In general, goods are movable, tangible property. Examplesare cars, clothes, and furniture. Laws concerning sale ofgoods for the most part apply to future goods as well, such as minerals in the group that will be mined, fish in the sea,or timber yet to be cut.

Contracts for sale of goods can involve a sale of goodspresently or it may contemplate sale of goods in the future.Both types of contracts are contracts for sale covered by the UCC.

Sometimes contracts contemplate both sale of goods and provision of services. When that’s the case, a court will lookat which element dominates the contract to classify it as acontract for sale of goods or a contract for services.

The UCC has special rules that apply to sale of goods that, in some cases, may differ from the common law that governsother contracts. Many of these rules are intended to make it easier to create contracts without following common lawcontract rules strictly. Examples of special rules in the UCCapplicable to sale of goods include the following:

� No consideration is necessary to modify a contract forthe sale of goods. Under the common law, additional ornew consideration is required to modify a contract.

� The UCC imposes a duty on the parties to act and dealwith each other in good faith and fairly.

� The UCC expressly permits course of dealing and usageof trade to be considered when interpreting the terms ofa contract.

Business Law 224

� Sales contracts can be created in any matter that showsthe parties reached an agreement.

� Under common law, contracts couldn’t be created unlessthe material terms were agreed on. Under the UCC, con-tracts can be created even if all terms aren’t stated, if theparties intend to contract. Thus, for example, a contractcould be created even though the price or time for deliv-ery wasn’t discussed. The UCC has rules used to supplythe missing terms. For example, if the price isn’t stated,it will be a “reasonable” price at the time of delivery.

� Unless otherwise specified in the offer, acceptance can bein any manner sufficient to show agreement, includingshipment of the goods.

� Under common law, to create an option contract, consideration had to be given in exchange for holding the offer open. Under the UCC, a written promise by amerchant to hold an offer open is binding without anyconsideration.

� Output contracts obligate sale and purchase not of a definite number but in terms of output produced.Requirement contracts similarly define quantity in termsof need rather than a definite number. Such contractsweren’t permitted under common law because the termswere too indefinite. However, output and requirementcontracts are allowed under the UCC as long as the parties deal in good faith and according to reasonableexpectations.

� Under common law, acceptance had to be a “mirrorimage” of the offer, neither varying nor adding to theterms of the offer. Under the UCC, the presence of minordifferences in the acceptance doesn’t make the accept-ance ineffective. However the different terms don’tbecome part of the contract unless both parties are mer-chants, the differences aren’t material, and no objectionis made within a reasonable time.

The statute of frauds is a list of contracts that have to be inwriting to be enforceable. The UCC law on sale of goods hasits own writing requirement. Contracts for sale of goods for

Lesson 2 25

$500 or more, or lease of goods for $1,000 or more, must bein writing to be enforceable. Like with the statute of frauds,the writing must be signed by the party against whomenforcement is sought. However, the requirements of thewriting are less stringent than under the common law, andthere are exceptions to the writing requirements. For exam-ple, if both parties are merchants and one of the partiesreceives written confirmation and doesn’t object to it in writ-ing within 10 days, the contract is enforceable against theparty who didn’t object to the confirmation. You’ll want tonote the other exceptions discussed in your textbook.

Title is the right to ownership of goods. A bill of sale is a written evidence of transfer of such ownership from one person to another. However, a bill of sale doesn’t prove thatthe possessor has good title. What if the goods were stolen or obtained by fraud and then transferred to an innocentpurchaser? Does the innocent purchaser have good title?This depends on whether the transferor’s title was void orvoidable.

Void title isn’t title, has never been title, and can never betitle. Voidable title means the title may be voided if one of the parties acts to void it.

If goods are stolen, title is void. The innocent purchaser cansue the person who sold the stolen item to him or her, butthe true owner is entitled to return of the item. Voidable titlecan arise when property is obtained by fraud, misrepresenta-tion, mutual mistake, undue influence, or duress. Voidabletitle means title can be voided if the injured party acts to voidit. Title acquired from a person lacking capacity, such as aminor or mentally impaired person, is also voidable. Voidabletitle is valid title until it’s voided.

When goods are entrusted to a merchant who in turn sellsthem in the ordinary course of business to someone whodoesn’t know about the real owner’s rights, the originalowner loses title. The owner can sue the merchant if sale waswrongful, but the purchaser has good title. This rule allowscustomers to have confidence that what they buy will belongto them. An exception to the rule is stolen property.

Business Law 226

If goods are lost, damaged, stolen, or destroyed between thetime delivery begins and delivery is completed, who bears theloss? The UCC addresses this question. Except when goodsare to be picked up by the buyer, and a few other situations,risk of loss passes when title passes. Thus, one needs toknow when title passes from seller to buyer.

A shipment contract is one in which the seller delivers thegoods via a common carrier. In a shipment contract, title andrisk pass when the goods are given to a common carrier fordelivery. If the terms of shipment don’t specify a shippingpoint or destination, it’s assumed to be a shipment contract.

In a destination contract, the seller’s obligation is to deliverthe goods to a destination. Title and risk pass when the sellertenders the goods at the place of destination.

Where delivery isn’t required and buyer picks up the goods,title passes to the buyer when the contract is made, but riskof loss passes when the buyer receives the goods. If the sellerisn’t a merchant, the risk passes when seller tenders thegoods to the buyer.

Some types of goods are sold with documents of title thatauthorize the buyer to pick up the goods at a warehouse. Insuch cases, receipt of the document of title is the event thatcauses title and risk to pass.

These are default rules, and in general, the parties canexpressly agree on when risk and title pass. However, if theagreement allows the seller to retain title after the goods areshipped, title passes to buyer at shipment, and the seller istreated as having a security interest in the goods rather thanhaving title.

Sales that permit conforming goods to be returned are “saleson approval” when the goods are for the buyer’s use, and riskand title don’t pass until buyer approves the goods. If thereturn is permitted and the goods are for resale, these are“sales or return” and title and risk pass at the time of saleand if returned are returned at buyer’s risk and expense.

Buyers may insure goods from the moment the contract ismade and the goods are identified to the contract, eventhough title has yet to pass.

Lesson 2 27





Self-Check 4 Answer the “Questions for Review and Discussion” on page 296 of your textbook.


Business Law 228


Chapter 14 concerns performance and breach of the obliga-tions under a sales contract. The UCC defines the obligationsof parties to a sales contract in a very simple manner: Theseller is obligated to tender conforming goods, and the buyeris obligated to accept and pay for them. Conforming goodsmeans that the goods conform to the requirements of thesales contract.

To tender performance is to attempt or offer to do what one is obligated to do under the sales contract. The seller mustmake tender of delivery, and the buyer must make tender ofpayment. If one party fails to make tender, that party can’tbring suit, even if the other party is in breach.

Tender of delivery requires that conforming goods be at the buyer’s disposition. Delivery must be at a reasonabletime, and the seller must be given notice of delivery. If it’s a shipment contract, tender of delivery is accomplished bydelivering the goods to a common carrier and contracting to have them transported to the buyer. If delivery is made by transporting the goods to a warehouse where the buyerwill pick them up, the seller must deliver to the buyer any documents necessary to claim the goods or obtainacknowledgment from the warehouse of the buyer’s right to claim them.

Tender of payment may be made in any manner that’s cus-tomary, such as a check, provided that buyer may demandlegal tender if the buyer gives the seller a reasonable time toobtain it.

A buyer has a duty to accept the goods but has an interven-ing right to inspect them before accepting or paying. Anexception exists for goods shipped cash on delivery (c.o.d.)or when the contract provides for payment against a docu-ment of title.

If the goods are nonconforming, the buyer may reject them oraccept them, or the buyer may accept any commercial unit or units and reject the other units. Rejection must occur

Lesson 2 29

within a reasonable time after delivery or tender. If goods are rejected, the buyer must notify the seller and identify the defect in what was tendered and give the seller a chance to correct the problem. The seller has a right to correct the problem if the time for performance hasn’t expired. This rightexists until the contract time has expired.

The buyer must hold rejected goods long enough to give theseller a chance to remove them. If the seller gives no instruc-tions about what to do with the goods, the buyer may storethem, ship them back to the seller, or resell them, all to theseller’s account. If the buyer is a merchant, there are additionalduties: the buyer must follow seller’s reasonable instructionsregarding disposition of the goods; if there are no instructions,the buyer has a duty to make reasonable attempts to sell thegoods if they’re perishable or likely to decline in value quickly.

Acceptance occurs when the buyer signifies that the goods areconforming, signifies a willingness to accept the goods thoughnot conforming, fails to reject them within a reasonable time, oracts with regard to the goods in a way that’s inconsistent withthe seller’s ownership.

The UCC provides a number of remedies for the seller when thebuyer breaches: withhold delivery of goods, stop delivery ofgoods in transit, resell the goods, sue for damages (differencebetween market price and contract price or the profit sellerwould have made had the contract been performed), sue for incidental damages that result indirectly from the breach, suefor the price under the contract, or cancel the contract.

The UCC also provides remedies for the buyer when the sellerbreaches: cover (purchase the same goods from someone else)and sue for the difference between the contract price and the cost of the cover, sue for damages (difference between con-tract price and market price) and incidental and consequentialdamages, keep the goods and seek an adjustment in the price,or sue for specific performance if money damages are inade-quate, such as when the goods are unique, rare, or speciallymanufactured.

Warranty is another name for a guarantee. It’s a representationof fact on which the contract is based. Often the warranty concerns the quality of a product. The words warranty and

Business Law 230

guarantee don’t have to be used. What matters is whether theseller has made a statement of fact or promise concerning theproduct.

Express warranties can arise from express statements of factor promise by a description of the goods or by use of a sam-ple or model. The federal Magnuson-Moss Warranty Act isdesigned to prevent deceptive warranty practices and provideconsumers with information about warranties on the prod-ucts they purchase. Under the act, when a written warrantyis given, it must be made available to the consumer beforethe consumer purchases, must state the terms and condi-tions in simple, understandable language, and must statewhether it’s a full warranty or a limited warranty.

A full warranty is one under which the product will berepaired or replaced without charge within a reasonable timeif it proves to be defective. A limited warranty is any warrantythat’s not a full warranty.

In addition to express warranties that a seller may make,there are three automatic implied warranties under the UCC. The first is warranty of title. Under the implied war-ranty of title, the seller warrants that the seller is transferringgood title, free of all claims. The second is warranty of merchantability. Warranty of merchantability applies to mer-chants selling goods and means the goods are of ordinaryquality and would pass without objection in the trade underthe contract description, be of fair average quality if fungiblegoods, be fit for the normal purposes for which such goodsare used, be of even kind quality and quantity, be properlypackaged, and conform to any representations about thegoods made on the packaging. The third is warranty of fit-ness for a particular purpose. This arises during negotiationsbetween buyer and seller if buyer makes known a purposeand relies upon seller’s knowledge to choose the product.

Implied warranties of merchantability don’t apply to obviousdefects that would be discovered on examination if the buyerhas the opportunity to examine. Implied warranties also may be disclaimed. To disclaim merchantability, the word merchantability must be used, and if in writing, the dis-claimer must be conspicuous. To disclaim fitness for a

Lesson 2 31

particular purpose, the disclaimer must be written and con-spicuous. Phrases like as is and with all its faults are alsoused to make disclaimers.

If warranties are breached, the buyer must give notice withina reasonable time after the defect was discovered or shouldhave been discovered, or the buyer may lose the right to suefor damages.


� Answer the Quick Quiz questions on pages 303, 309,and 314. Check your answers on page 316. Thesequizzes will not be scored so don’t send them to theschool; they’re for you to gauge your progress. If thereare any questions you don’t understand, refer back tothe textbook and reread the assignment.





Business Law 232


Chapter 15 concerns product liability and consumer protection. In addition to suing under the theory of breach of warranty, a person harmed by a product may sue in tortunder negligence theory or under strict liability. Negligencetheory requires proof that the manufacturer failed to exercisereasonable care. This may be difficult to prove sometimes as the consumer or user has no first-hand knowledge of howthe product was made. Under strict liability, the injured partymust prove that the product was sold in an unreasonablydangerous condition that proximately caused the injury.

Consumer protection laws apply to transactions betweenbusinesses and consumers. The Federal Trade Commission(FTC) Act prohibits unfair or deceptive practices in or affect-ing commerce. Unfair and deceptive practices can include

� Fraudulent misstatements that deceive

� False statements about the construction, durability, reliability, safety, strength, condition, or life expectancyof a product

� Failing to disclose facts that would cause a buyer not topurchase

Examples of unfair or deceptive acts include fraudulent mispresentations, bait-and-switch, odometer tampering, andsending unordered merchandize. Regarding the latter, therecipient may treat it as a gift or dispose of it however theychoose.

The FTC created a Used Car Rule that requires a buyer’sguide be posted on the window of the car disclosing the following:

� That the car is sold as is, with limited warranties only, or with full warranty

� The length of any express warranty, the systems covered,and the percentage of repair costs the buyer must pay

� A warning not to rely on spoken promises

Lesson 2 33

� A suggestion that consumers ask to have the vehicleinspected by their own mechanic

� A list of the 14 major systems of an automobile andsome of the principal defects that occur in these systems

Another rule created by the FTC is the Cooling-Off Rule,which applies to sales of goods or services of more than $25that occur away from the seller’s regular place of business,such as at the consumer’s home. Under this rule, the buyerhas three days to cancel the sale and must be given twocopies of a cancellation form, one of which can be sent to theseller to cancel the deal.

The FTC’s Negative Option Rule requires sellers of subscrip-tions, such as magazines or CD clubs, to tell subscribers:

� How many selections they must buy, if any

� How and when they can cancel membership

� How to notify the seller that they don’t want a selection

� When to return the negative option form to cancel shipment of a selection

� When they get credit for return of a selection

� How postage and handling costs are charged

� How often they’ll receive announcements and forms

The FTC’s Mail, Telephone, Internet, or Fax Rule requires sell-ers to ship orders within the time promised in advertisementsor, if none, within 30 days of receipt of the order. If there’s adelay, an option notice must be sent giving the option toaccept the delay or cancel the order.

The FTC’s Telemarketing Sales Rule does the following:

� Prohibits calling if the consumer hasn’t asked to becalled

� Restricts calling time to between 8:00 A.M. and 9:00 P.M.

� Requires telemarketers to disclose that it’s a sales call,the seller’s name, and what’s being sold before makingtheir pitch

Business Law 234

� Requires the consumer to be told, if it’s a prize promo-tion, that no purchase or payment is necessary to enteror win

� Prohibits misrepresentations

� Requires disclosure of total cost of product

� Prohibits withdrawal of money from consumer’s checkingaccount without express, verifiable authorization fromthe consumer

� Requires that certain services (credit repair, “recoveryroom,” and advance-fee loans) be performed before thecustomer is required to pay

The FTC’s 900-Telephone Number Rule requires that callersbe warned of the cost and given a chance to hang up beforecharges begin, that telephone companies block service to 900numbers if requested by the customer, and that customersbe sent annual pay-per-call disclosures. It also bars phonecompanies from disconnecting phone service to customerswho refuse to pay for 900-number calls.

The Can Spam Act requires unsolicited commercial e-mail betruthful and not use misleading subject lines or incorrectreturn addresses. E-mail containing pornography must bespecifically labeled in the subject line. Spammers are prohib-ited from harvesting e-mail addresses from chat rooms orother sites without permission. The FTC is authorized toestablish a Do-Not-E-mail Registry.

The FTC has Antislamming Rules to protect consumers whosetelephone service was changed without permission. The con-sumer need not pay for service up to 30 days after beingslammed. After that, you must pay for services to yourauthorized company at the authorized company’s rate ratherthan at the slammer’s rate.

The Consumer Product Safety Act protects consumers fromunreasonable risk of injury from hazardous products. The actapplies both to products made in America and imported thatare intended for personal use, consumption, or enjoyment.The Consumer Product Safety Commission has the power to

Lesson 2 35

create standards and rules and to enforce those rules withsanctions. The commission can seek injunctions, can banhazardous products, and can impose fines.

The Consumer Leasing Act requires disclosure of informationthat allows the buyer to compare the cost of leasing with thecost of buying.

The Truth-in-Lending Act requires creditors to disclose financecharges and the annual percentage rate (the true cost of thedebt when charges in addition to interest are factored in)before loaning to customers. Credit card holders aren’tresponsible for charges made on lost, stolen, or possibly misused cards after notifying the card company, and exposure for unauthorized charges is limited to $50.

The Equal Credit Opportunity Act prohibits denying creditbased on gender, marital status, color, race, religion, nationalorigin, ethnicity, age, or receipt of public assistance.

The Fair Debt Collection Practices Act prohibits debt collectorsfrom engaging in deceptive or abusive practices. Among theprohibited practices are overcharging, harassment, and dis-closing information about the debt to third parties.




Business Law 236



Self-Check 6Answer questions in “Questions for Review and Discussion” on page 334 of your textbook.


Negotiable Instruments

INTRODUCTIONNegotiable instruments are written documents that contain apromise or an order to pay money. In this lesson, you’ll learnabout the different types of negotiable instruments and therules governing them. You’ll learn how negotiable instru-ments are transferred. You’ll study the special protectionsafforded holders in due course. You’ll also study the lawsthat govern the relationships between banks and their depositors.


� Identify the purpose of and parties to negotiable instruments

� Explain types of promise instruments and order instruments and the differences in their features

� State the requirements for a writing to constitute a negotiable instrument

� Explain how negotiable instruments are transferred andthe difference between assignment and negotiation

� Explain how instruments are negotiated by endorsementand the different types of endorsement

� Discuss the obligations of those who endorse a negotiable instrument

� Discuss the issues raised when there are multiple payees, unauthorized endorsements, and forged endorsements

� Define the term holder in due course and explain why itmatters

37

Le

ss

on

3L

es

so

n 3

Business Law 238

� Discuss personal defenses that can’t be asserted againsta holder in due course

� Discuss real defenses that can be asserted against allholders

� Explain the liability of makers, acceptors, drawers, andendorsers

� Discuss the duties that banks have to depositors andthat depositors have to banks

� Explain how electronic banking works

� Describe the process of bank deposits and collections


Chapter 16 introduces you to the purpose and types of negotiable instruments.

The purpose of negotiable instruments is to facilitate trans-fers of money and borrowing of money.

Promissory notes and certificates of deposit are two types ofnegotiable instruments that contain a promise to pay money.The parties to a note are the maker and the payee. A demandnote is payable whenever the payee chooses to demand pay-ment. A time note is payable at some defined future date.Installment notes are payable in a series of installments atspecified times.

Drafts and checks are negotiable instruments that contain anorder to pay money. The parties to a draft are the drawer,drawee, and payee. A check drawn on a checking account isa kind of draft. Using the example of a check drawn on abank, the person writing the check is the drawer, the personto whom the check is made payable is the payee, and thebank on which the check is drawn is the drawee. Draweesare liable on drafts only when they accept them.

The UCC doesn’t require that a preprinted form be used towrite checks and allows for any writing to serve as a check ifit otherwise meets the requirements of the UCC.

Lesson 3 39

A bank draft is a check drawn by one bank on another bankin which it has funds on deposit. Such accounts may be usedto facilitate a customer’s business transactions in distantplaces. A cashier’s check is drawn by the bank on itself. Acertified check is a check guaranteed by the bank at therequest of either the depositor or the holder. The UCC doesn’trequire banks to certify checks. A money order is a type ofdraft that may be purchased from banks, post offices, orother companies as a substitute for a check.

A bearer is a person who possesses a negotiable instrumentpayable to “bearer,” “cash,” or an instrument that has beenendorsed in blank. A holder is a person in possession of aninstrument issued or endorsed to that person’s order or tothe bearer. A holder in due course is one who’s treated favor-ably and immune from certain defenses.

Negotiable instruments are used daily by millions of peopleand are highly trusted. When an instrument is transferred bynegotiation, the person receiving the instrument is providedwith more protection than might have been available to theperson from whom it was received. In some instances, thetransferee may be able to recover money using the instru-ment when the person transferring it couldn’t have done so.

Negotiable instruments may be assigned or transferred.Assignment occurs when the instrument is transferred with-out proper endorsement or otherwise in a form that’s notnegotiable. An assignee has only the rights of the assignorand is subject to all defenses existing against the assignor.

Negotiation occurs when the transfer makes the transferee aholder. A holder has greater rights than an assignee.Negotiation is accomplished by endorsement with the intentto transfer ownership.

Different types of endorsements include the following:

� A blank endorsement, which is a signature alone, inwhich the holder of such an instrument can recover itsface value by delivery alone, even if the holder isn’t theperson who made the endorsement

� A special endorsement, which is made by writing “pay tothe order of” or “pay to” followed by the name of the per-son to whom it’s transferred, and then followed by theendorser’s signature

Business Law 240

� A restrictive endorsement, which limits the subsequentuse of an instrument, such as endorsing “for depositonly”

� A qualified endorsement, which limits the liability of theendorser

Certain warranties are automatically made by a person whoreceives consideration for an instrument (for example, uses acheck to pay for goods or cashes a check at a bank):

� The endorser has the right to enforce the instrument(has good title).

� All signatures are genuine or authorized.

� The instrument hasn’t been materially altered.

� No defense of any party is good against the endorser.

� He or she has no knowledge of bankruptcy of the maker,acceptor, or drawer of an unaccepted instrument.

Unless the endorsement provides otherwise, an endorseragrees to pay any subsequent holder the face amount of theinstrument.

If an instrument is payable to one person and another person, it must be endorsed by both. If it’s payable to oneperson or another person, the endorsement by either is sufficient.

The tort of conversion is committed when an instrument ispaid on a forged endorsement. A forged endorsement isn’teffective as the signature of the person whose name is signedunless

� It’s ratified

� The person signing is an impostor and impersonates theperson whose name is signed

� The maker intends the payee to have no interest or thepayee is a fictitious person

� An agent pads the payroll by supplying the employerwith fictitious names

Lesson 3 41


� Answer the Quick Quiz questions on pages 351 and 358.Check your answers on page 361. These quizzes will notbe scored so don’t send them to the school; they’re foryou to gauge your progress. If there are any questionsyou don’t understand, refer back to the textbook andreread the assignment.



Self-Check 7Answer the “Questions for Review and Discussion” on pages 359–360 of your textbook.


Business Law 242


Chapter 17 discusses defenses that can be asserted toenforcing negotiable instruments and differentiates betweenthe liabilities of holders and the liabilities of holders in duecourse.

A holder in due course takes the instrument for value, in good faith, and without notice of any defenses. A holder whoreceives an instrument from a holder in due course acquiresthe rights of a holder in due course even though he or shemight not otherwise qualify as a holder in due course. This iscalled a shelter provision and is designed to permit holders indue course to transfer all of their rights to others. The shelterprovision doesn’t apply to a holder who has committed fraudor an illegal act.

Personal defenses are sometimes called limited defensesbecause they can’t be used against a holder in due course.The most common personal defenses are breach of theunderlying contract for which the instrument was considera-tion, lack or failure of consideration (the underlying contractis unenforceable due to lack of consideration), fraud in theinducement, lack of delivery (the holder obtains possession insome manner other than voluntary delivery), and payment.

The FTC has adopted a “holder in due course rule” thatallows consumers obligated under credit contracts to assertpersonal defenses against holders in due course, such as afinance company that might purchase the credit obligation.

Real defenses may be asserted against all holders, includingholders in due course. Real defenses include minority, lack ofcapacity, illegality, duress, fraud as to the nature of thetransaction, bankruptcy, unauthorized signature, and alteration.

The term presentment means a holder’s demand to pay oraccept an instrument. Presentment may be made by anycommercially reasonable means. The term dishonor refers torefusal to pay when an instrument is due or to accept whenproperly presented. Dishonor also occurs when presentmentis excused and the instrument is past due and unpaid.

Lesson 3 43

The obligations of makers, acceptors, and endorsers are different. Makers of notes and acceptors of drafts must paywithout reservation. Endorsers, on the other hand, must payonly if a properly presented instrument is dishonored andnotice of the dishonor is given to the drawee or party obli-gated to pay the instrument. Notice of dishonor may be givenby any reasonable means. Nonbank holders must give noticeof dishonor to the drawer and endorsers within 30 days following the dishonor







Business Law 244

ASSIGNMENT 9Read this introduction to Assignment 9. Then read Chapter 18 ofyour textbook.

Chapter 18 describes rules governing bank deposits and collections. Banks and their depositors have contractual relationships both of debtor and creditor and of agent and prin-cipal. The bank becomes a debtor when the customer depositsmoney. The bank acts as an agent when honoring drafts drawnby the customer on the account.

Banks must honor checks if there are sufficient funds in thecustomer’s account, unless the check is stale, which means it’spresented for payment more than six months after its date. Ifthe bank fails to honor a check due to a mistake by the bank,the bank is liable for actual damages caused by the dishonor.However, unless the check is certified, the bank has no liabilityto the holder of the check.

A bank continues to have authority to honor checks of a customer who’s deceased or becomes incompetent until itreceives notice of the death or incompetence. Even with notice,banks may honor or certify checks for 10 days after the deathof the drawer.

If a bank pays an altered amount of a check to a holder, it maydeduct from the account only the amount of the check as it wasoriginally written. If the bank honors a forged check, it’sresponsible to the depositor. However, the UCC imposes a dutyon depositors to examine their bank statements and canceledchecks promptly and to report forged or altered checks or theymay lose the right to hold the bank responsible for these losses.

Banks haven’t always made deposited funds available with thesame timeliness. As a result, the Competitive Banking Act wasadopted. Pursuant to regulations issued by authority of this act,the following rules apply:

� Funds from checks drawn on the U.S. Treasury or anystate or local government, and funds from any bank draft,cashier’s check, or postal money order must be made avail-able on the next business day (with some exceptions).

� Funds from checks drawn on banks within the sameFederal Reserve district must be available within two busi-ness days.

Lesson 3 45

� Funds from checks drawn on banks outside the bank’sFederal Reserve district must be available within five businessdays.

In many states, writing a check on an account that one knows hasinsufficient funds to cover the check is larceny.

A written stop-payment order is binding for six months unlessrenewed in writing. An oral stop-payment order is binding for 14days.

The FDIC insures deposits for up to $100,000 and joint accountsfor up to an additional $100,000.

Electronic banking is a very important feature of modern life. Manypeople use automated teller machines (ATMs) to deposit or with-draw money using an ATM card with a personal identificationnumber. Debit cards can be used to purchase goods and servicesby subtracting money electronically from a bank account. Somebanks permit payment by e-check, in which funds are electroni-cally transferred from a customer’s checking account. Businessesthat deal with large sums of money can avoid loss of interest andachieve other advantages by using electronic fund transfers.

ATM customers are entitled to a written receipt documenting theirtransaction, and the transactions must appear on bank statementssent to the customer. A consumer’s liability for unauthorized useof an ATM card is limited to $50 if notice of loss or theft is given tothe bank within two business days. After that, liability increases to$500 and becomes unlimited if notice isn’t given within 60 days.

A depository bank is the first bank to which an item is transferredfor collection. A payor bank is a bank by which an item is payable,including a drawee bank. In some circumstances, the same bankcould be both.

The process of collection of a check is as follows. The depositorybank acts as the customer’s agent for collection of the money fromthe payor bank. The check is sent to the payor bank, and if hon-ored, the amount is deducted from the drawer’s account. If thecheck is dishonored, it will be returned to the payee and creditswill be revoked.

The Check 21 Act allows use of a substitute check—a paper repro-duction of the original that can be processed. Customers don’thave an absolute right to see the original canceled check, only theright to return of a substitute check. The use of a substitute checkfacilitates electronic check processing.

Business Law 246






Self-Check 9Answer the “Questions for Review and Discussion” on pages 392–393 of your textbook.


Insurance, SecuredTransactions, andBankruptcy

INTRODUCTIONLesson 4 addresses the role that insurance, secured transactions, and bankruptcy play in business law.


� Explain the purpose of insurance and binders

� Identify parties to an insurance contract

� Explain insurable interest and why it matters

� Define subrogation and explain how it occurs

� Discuss the features of life insurance, property insur-ance, health insurance, and an insurance application

� Discuss issues concerning premiums and lapse of coverage

� Describe grounds for cancellation of a policy by theinsurer

� Discuss how security interests are created in real property using mortgages

� Explain the different types of mortgages

� Define the rights and duties of mortgagors and mort-gagees, especially when there are multiple mortgages

� Explain how security interests are created in personalproperty

� Differentiate between attachment of a security interestand perfection of a security interest

47

Le

ss

on

4L

es

so

n 4

Business Law 248

� Describe options that a security holder has when thedebtor defaults

� Explain the process and features of Chapter 7, 11, 12,and 13 bankruptcies

ASSIGNMENT 10Read this introduction to Assignment 10. Then read Chapter 19 of your textbook.

Chapter 19 introduces you to the insurance contract. Thereare many types of insurance, and almost any risk can beinsured. An insurance contract has the same requirementsas any other contract—offer, acceptance, mutual assent,capable parties, consideration, and a legal subject matter. Inaddition, insurance contracts require that the person apply-ing for insurance have an insurable interest in the subjectmatter of the insurance. For example, individuals have aninsurable interest in their own lives and lives of spouses and children but generally not in the lives of strangers.Businesses may have an insurable interest in the lives ofpartners and key employees. Creditors can have an insurableinterest in the lives of debtors.

A person has an insurable interest if the loss caused by therisk insured would result in financial loss or liability. Forexample, to have property insurance, one must have a continuing interest in the property being insured. For lifeinsurance, the interest must exist only when the policy isissued.

Insurers have subrogation rights. This means they step intothe shoes of those who are paid for purposes of being able toassert claims the compensated party could have asserted. Forexample, when a medical insurer pays hospital bills of aninsured injured in a car accident, the insurer is subrogatedto any money that might be due the insured from the partyat fault up to the amount that the medical insurer paid onthe bills.

There are many types of life insurance. Straight life insurance(whole life) requires payment of premiums throughout the lifeof the insured and pays the face value of the policy on the

Lesson 4 49

insured’s death. Limited payment life insurance is similar, butprovides that premiums be paid only during a stated periodof time, such as 30 years. Both of these types of insurancehave a cash surrender value.

Term insurance provides coverage only for a specified termand has no cash surrender value.

An endowment policy combines insurance and investmentand pays the face value to the beneficiary at death or, if the insured outlives the term of the policy, to the insured.Insurers aren’t obligated to pay the life insurance proceeds if the insured is legally executed, commits suicide, or is killed in war.

Insurance policies may contain optional provisions that canbe added for a price. Double indemnity provides for doublepayment if death results from an accident. Waiver of premiumoption excuses nonpayment of premiums caused by disabil-ity. Guaranteed insurability gives an option to purchase more insurance later, notwithstanding a change in theinsured’s health.

There are many types of property insurance, including fireinsurance, marine insurance, homeowner’s insurance,renter’s insurance, and flood insurance. Fire insurance usually covers losses other than those directly caused by the fire, such as losses from water used to fight the fire,scorching, smoke damage to goods, deliberate destruction of property necessary to control a spreading fire, lightning(even if there’s no resultant fire), riot or explosion, if a firedoes result, and losses through theft or exposure of goodsremoved from a burning building.

Automobile insurance may include some or all of the follow-ing coverages:

� Bodily injury liability

� Property damage liability

� Collision insurance (damage to the car caused by the accident)

� Comprehensive insurance against loss or damage toone’s vehicle caused by fire, lightning, flood, hail, wind-storm, riots, breakage of glass, theft, or pilferage

Business Law 250

� Medical insurance for medical expense incurred by occupants of the car

� Uninsured motorist coverage to cover bodily injury wherethe other at-fault driver had no insurance

Many states make no-fault insurance coverage mandatory.No-fault insurance provides that car owners may collect damages and medical expenses from their own insurancecarriers, regardless of responsibility.

Health insurance coverage may include physician care, prescription drugs, inpatient and outpatient hospital care,surgery, dental, vision, and long-term care for the elderly.

Medicare is a federal government health insurance programfor those 65 and older who are covered by Social Security.Medicaid is a health care plan for low-income persons.

To obtain insurance, one must file an application. The appli-cation may be accepted or rejected. During the period afterapplying and before approval, the applicant has exposure.The insurer may issue a binder providing temporary coverageuntil the policy goes into effect.

To have coverage, one must pay premiums. The premiumamounts may differ from person to person as the risk variesfrom person to person. If a premium payment is missed, thepolicy lapses. Many policies allow a grace period of 30 daysor so to make up the missed payment and keep coverage.

Policies may require warranties by the insured promising toabide by certain restrictions as a condition precedent to cov-erage. If the warranty is breached, the insurance companymay cancel the policy or refuse payment of loss. Also, if theinsured has committed concealment (intentionally withhold-ing a material fact from the insurer) or misrepresentationwhen obtaining the policy, the insurer may cancel the policyas it was obtained under false pretenses.

Lesson 4 51




� Take a moment to complete Self-Check 10. You cancheck your answers by turning to the back of this studyguide. If you have trouble with any of the material,review those sections in your text.



Business Law 252


Chapter 20 introduces you to mortgages and security interests. These devices allow debtors to provide collateral to creditors to secure payment of debt.

Most people don’t have enough cash to buy a home or a carwithout borrowing. Lenders want assurance that the moneyloaned will be repaid. Security devices provide that necessaryassurance.

The instrument used to create a security interest in real estateis called a mortgage. There are various types of mortgages.

A conventional mortgage is one that’s not insured or guaranteedby the government. In contrast, FHA and VA mortgages arebacked by the federal government, who reimburses the lenderfor losses resulting from the debtor’s default. Variable-rate mort-gages have interest rates that can rise or fall in relation to someobjective index or measure, such as Treasury bond interestrates. Graduated mortgages have lower payments in the begin-ning that increase over time. A balloon mortgage has fixedpayments with a very large payment at the end.

Mortgages and deeds are recorded in a public office to give theworld notice of the owner’s title or the creditor’s claim againstthe property. Failure to record can lead to loss of priority overpurchasers who take in good faith, for value, and withoutactual knowledge of the prior encumbrance or sale.

The owner putting up the property as collateral is called themortgagor. The lender secured thereby is called the mortgagee.In most states, the mortgagor has the right to possession,income from the property, use of the property (including theright to give second or third mortgages), and the right to pay offthe mortgage in full (redemption right). The mortgagee has theright to sell or assign its mortgage interest, to receive paymentson the debt according to the terms of the promissory note, andto accelerate the debt and foreclose in the event of default. Themortgagee’s interest in the property is protected by due processrights.

Lesson 4 53

Mortgages may be assumed by third parties with the permissionof the mortgagee. When buyers assume a mortgage, they agreewith the lender to pay the mortgage. In contrast, if a buyer takesthe property subject to a mortgage, the seller has agreed to con-tinue paying the mortgage.

The instrument used to secure a debt with personal property ascollateral is called a security agreement. A security agreementmust be in writing, be signed by the debtor and describe the collateral. The security agreement attaches when the debtor,owning an interest in property, puts it up as collateral and thecreditor either takes possession of the property or the partiessign a security agreement. Attachment makes the agreementbinding on the debtor. However, to make the creditor’s rightssuperior to subsequent creditors and purchasers, the securityinterest has to be perfected. Perfection is accomplished by filing afinancing statement in the appropriate public office. For sometypes of debts, perfection can be accomplished by attachmentalone or by possession of the collateral.

The UCC has rules to determine priorities among secured andunsecured creditors making claim to the same collateral. In mostcases, perfected security interests have priority over unperfectedsecurity interests, conflicting security interests rank according totime of filing or perfection, and when two or more parties haveunperfected security interests in the same collateral, priority goesto the interest that was first to attach. However, there are excep-tions:

� Purchase money security interests in collateral other thaninventory have priority over a conflicting security interest inthe same collateral if perfected within 10 days after thedebtor receives possession of the collateral. However, exceptfor farm products, buyers in the ordinary course of businesshave priority over security interests in inventory. Buyers offarm products in ordinary course of business who pay forand take the collateral without actual notice of conflictinginterests have priority over unperfected security interests.

� Buyers of consumer goods take free of perfected securityinterests if they have no actual knowledge.

When the debtor defaults, the secured party may repossess theproperty (and may do so without going through court if it can bedone peaceably) and sell it to raise money to pay the debt. Ifmoney is left over after all secured creditors are paid, the excess

Business Law 2

54

goes to the debtor. For security interests in personal property,the sale may be public or private, as long as the manner ofsale is reasonable. If the goods are consumer goods and thedebtor has paid 60 percent or more of the price or the pur-chase money security interest, the secured party must sell thegoods within a certain period of time. The debtor must be noti-fied of the sale and has the right to buy the goods.


� Answer the Quick Quiz questions on pages 433, 437, and440. Check your answers on page 443. These quizzes willnot be scored so don’t send them to the school; they’re foryou to gauge your progress. If there are any questions youdon’t understand, refer back to the textbook and rereadthe assignment.


� Take a moment to complete Self-Check 11. You can checkyour answers by turning to the back of this study guide. Ifyou have trouble with any of the material, review thosesections in your text.



Lesson 4 55


Chapter 21 introduces you to bankruptcy. Bankruptcy is alegal process that allows debtors to discharge or adjust theirdebts. The U.S. Constitution gives the federal governmentjurisdiction over bankruptcy proceedings, and federalstatutes have been adopted to implement that power.Different types of bankruptcy appear in different chapters of the federal laws governing bankruptcy.

Some property is exempt from claims in bankruptcy court.There are federal exemptions, and there may be state exemp-tions. Some states require a debtor to use state exemptionsrather than the federal exemptions. Others let the debtorchoose either the state or the federal exemptions. In otherstates, only the federal exemptions may be used. In federalexemptions, there are three categories of exempt property:homestead and household items, exemptions for necessities,and exemptions for benefit and support payments. Theexemptions are subject to maximum dollar amounts.

In Chapter 7 bankruptcy, also called liquidation, a trusteesells the debtor’s nonexempt property and uses the proceedsto pay creditors. Whether the creditors can be fully paid fromthe proceeds, the debts are nonetheless discharged (unlessthey’re certain types of debts that aren’t dischargeable).Secured creditors are paid from the proceeds of sale of thecollateral that secured their debt. Priority of payment other-wise is in the following order:

� Support obligations to a spouse or child

� Costs of administering the bankruptcy

� Post-petition unsecured debts

� Wages and employee benefit plans

� Payments to workers in the fishing and farming industries

� Certain deposits and advances

� Taxes

Business Law 256

� Certain unsecured claims

� Claims for injury or death caused by an intoxicateddriver

� Other unsecured debts

Chapter 7 usually is voluntary, but creditors can file for itagainst a debtor, which is called involuntary. To qualify forChapter 7, the debtor must satisfy a means test, meet with acredit counselor before filing for bankruptcy, provide federalincome tax returns for the most recent tax year, and take acourse in financial management after filing bankruptcy.

The means test can be passed in any of three ways: (1) thedebtor’s average income for the past six months is less thanthe state’s median income, (2) the debtor’s disposable incomeis less than $100 per month, or (3) if disposable income isbetween $100 and $167, the amount isn’t enough to paymore than 25 percent of outstanding unsecured debts over afive-year period. If the debtor can’t pass the means test, thedebtor may be eligible to file bankruptcy under a differentchapter.

A voluntary petition for bankruptcy is filed in federal districtcourt, listing creditors and the amount owed, along with a lotof other information concerning income and expenses andproperty the debtor claims is exempt. Under certain circum-stances, creditors can initiate involuntary bankruptcy if thedebtor is persistent in failing to pay bills as they become due.

Filing for bankruptcy results in an immediate order called theautomatic stay, which prevents creditors from taking steps tocollect their debts. The prohibition includes taking steps in alegal proceeding, such as a foreclosure action. This fulfillsone objective of bankruptcy—to put the creditors on equalfooting. The stay can be lifted upon the motion of a creditorfor good cause.

Chapter 11 is a business reorganization. Rather than sellingall of the debtor’s property, a reorganization plan is proposedthat changes the debtor’s payment obligations, which allowsthe debtor to continue in business while paying creditors.One half of creditors whose rights are impaired by the plan(that is, the plan will pay them less than what’s owed) haveto approve the plan.

Lesson 4 57

Chapter 12 is a reorganization for family farmers and fisheries. Like in Chapter 11, the debtor can continue inbusiness while following a debt adjustment plan to pay credi-tors. To be eligible, the debtor must get at least 50 percent of his or her income from farming or fishing. In addition, 50percent of a farmer’s debt must be from farm expenses and80 percent of a fisher’s debt must be from either farming orfishing. Chapter 12 filings are always voluntary—creditorscan’t use Chapter 12 to force a debtor into bankruptcy.

Chapter 13 is a debt adjustment plan for individuals, whichalso allows the debtor to keep his or her property while pay-ing creditors according to a plan. On completion of the plan,most of the remaining debt is discharged. Only individualswith regular income can file Chapter 13. Before filing, theindividual must have met with an approved credit counselor.Individuals with unsecured debt exceeding $307,675 orsecured debt exceeding $922,975 are ineligible to file Chapter 13.

The following debts aren’t dischargeable in bankruptcy:

� Debts created by debtor misconduct, such as fraud

� Government-enforced debts, such as back taxes, studentloans, government-imposed fines and penalties, alimony,and child support

� Debts created by excessive spending, such as luxuryitems and cash advances of a certain amount purchasedor obtained close to the time of filing bankruptcy



Business Law 258






Crimes and Torts

INTRODUCTIONLesson 5 introduces you to law concerning crimes and torts.Although crimes may have individual victims, crimes areoffenses against the public at large and are punished by thegovernment on behalf of all of us. Torts, on the other hand,are private wrongs that injure a person or his or her prop-erty, business, or reputation. Torts are prosecuted by theindividual harmed. The same event could be both a tort anda crime.


� Define crime and the different classes of crimes

� Explain the elements of crimes and the role that mentalstates play in defining crimes

� Discuss the purposes of punishment of crimes

� Define the essential elements of crimes against people,against property, and involving business

� Explain electronic crimes and federal e-crimes

� Discuss defenses to criminal liability, including insanity,entrapment, justifiable force, and mistake

� Define torts and explain the differences between tortsand crimes

� Define the essential elements of common intentionaltorts

� Explain the law of negligence and define the elements ofnegligence and defenses to negligence claims

� Discuss the concept of strict liability and identify areasin which strict liability applies

59

Le

ss

on

5L

es

so

n 5

Business Law 260

� Explain electronic torts

� Describe remedies available to those injured by torts

� Explain survival statutes

� Discuss nature of wrongful death actions


Chapter 5 introduces you to crimes, which are offensesagainst the public at large. Those who commit crimesthreaten the peace and well-being of society as whole. Forthis reason, crimes are punished by government on behalf ofeveryone in the community. Criminal law protects the publicat large, preserves order and stability, and deters individualsfrom committing acts that disrupt or harm society.

There are two theories about the purpose of punishment.One theory focuses on the effect punishment has in protect-ing society at large. The other focuses on making theconsequences to the individual fit the crime.

Crimes can be classified into two categories: felony and misdemeanor. Felony is a crime punishable by death orimprisonment for a year or more. A misdemeanor is a lessserious crime punishable by imprisonment less than a year.Criminal law punishes actions, not thoughts. In some cases,failure or refusal to act may be criminal. Involuntary move-ments, such as in a seizure, generally aren’t actions thatwould be punished criminally.

States of mind often are important in defining crimes.Criminal statutes generally define four states of mind as ele-ments of crimes: (1) purpose or intent, in which you intendthe harmful act, (2) knowledge, which is awareness of a likelyparticular result, (3) recklessness, which is a perverse disre-gard of a known risk, and (4) negligence, which is a failure toperceive a risk.

Lesson 5 61

Because crimes involve a culpable state of mind, some defenses—such as insanity, entrapment, justifiable force (self-defense), andmistake—are based on negating the bad state of mind.

The oldest test for insanity is the M’Naughten rule, which requiresthat mental incapacity was so serious that it deprived the defen-dant of the ability to know the nature and wrongfulness of hisactions. Another insanity test is the irresistible impulse test, whichrequires that at the time of the crime, the defendant was subjectto a mental condition that made them unable to control theiractions. Under the American Law Institute’s test, a person isn’tresponsible for a crime if “because of mental disease or defect, helacks substantial capacity either to appreciate the criminality ofhis conduct or to conform his conduct to the requirements of law.”

Entrapment defense arises when the government induces someoneto commit a crime he or she wasn’t otherwise disposed to commit.

Motive is the reason a wrongdoer commits a crime. While motivehelps explain what happened or can convince a jury that thedefendant had an intentional state of mind, motive isn’t a neces-sary element of crime.

Crimes against persons include homicide (the killing of a humanbeing), battery (the unlawful touching of another person), assault(an attempted battery), and kidnapping (an abduction againstone’s will). Crimes against property include burglary (unlawfulentry into a building with the intent to commit a felony), arson(the burning of another’s property), robbery (taking property underthreat of force), larceny (theft by taking and carrying away prop-erty), and extortion (theft by coercion). Crimes involving businessinclude larceny by false pretenses (theft through deception),embezzlement (wrongfully taking property entrusted to you),bribery (soliciting or receiving something of value to influence offi-cial action), and forgery (creating or using false or altereddocuments with the intent to defraud).

In recent years, some states have criminalized hate speech. Thesestatutes may raise constitutional issues concerning freedom ofspeech if the statutes are content specific.

With the advent of computers and the Internet, criminal activityhas taken new forms. Some jurisdictions have adopted new lawsthat criminalize certain electronic activity, which is preliminary tocommitting crimes using a computer. For example, gaining unau-thorized access to a computer with the intent to commit a crime

Business Law 262

can be e-trespass. Crimes committed with computers includeelectronic extortion, stalking, and spoofing (using false identi-ties or fraudulent Web sites).

Crimes that target computers include electronic terrorism,identity theft, vandalism, and germ warfare. Your textbookalso describes a number of laws to combat electronic crimesadopted by the federal government.


� Answer the Quick Quiz questions on pages 90, 95, 101,106, and 109. Check your answers on page 113. Thesequizzes will not be scored so don’t send them to theschool; they’re for you to gauge your progress. If thereare any questions you don’t understand, refer back tothe textbook and reread the assignment.





Lesson 5 63


Assignment 14 introduces you to tort law. Tort is a privatewrong that harms another’s person, property, or reputation.The same event could be both a crime and a tort. The pri-mary purpose of tort law is to compensate the injured partyfor damage caused by the tortfeasor.

Individuals are responsible for their own torts. Employers arevicariously liable for torts of an employee under the doctrineof respondeat superior if the tort was committed within thescope of the employer’s business.

Torts occur when someone violates a duty imposed by law.Torts may be categorized with reference to the state of mindinvolved. Intentional torts involve intentional acts that violateduties. Intentional torts include the following:

� Assault (causing apprehension of harmful or offensivecontact)

� Battery (harmful or offensive contact)

� False imprisonment

� Defamation (false statements communicated to othersthat harm reputation)

� Disparagement (false statements communicated to othersthat question quality of or title to property)

� Fraudulent misrepresentation

� Invasion of privacy

� Intentional infliction of emotional distress

� Misuse of legal process

Negligence is the failure to exercise reasonable care to avoidharming others or their property. In negligence, the state ofmind isn’t an intentional violation, but rather one of careless-ness. The elements of negligence are duty, breach of that

Business Law 264

duty, proximate cause, and actual harm. In other words, aperson who breaches a duty and thereby causes damage isliable for the damage caused.

Even where the elements of negligence are present, there maybe defenses that can be asserted. One defense is contributorynegligence, when the plaintiff contributes to causing theharm. In such cases, the plaintiff’s own negligence bars himor her from collecting damages from the other party. This canlead to harsh results, where the defendant is mostly at faultand the plaintiff was only slightly at fault. Because of thepotential for harsh consequences, many states have adoptedcomparative negligence. Under this approach, the negligenceof both parties is weighed, and the defendant pays for thepercentage of damage attributable to his or her own fault.Many states also provide that the defendant must be more atfault than the plaintiff for the plaintiff to recover anything.

Assumption of the risk is a defense also. Under this defense, ifa person voluntarily exposes him- or herself to a known dan-ger, the person can’t complain if he or she is thereby harmed.An example would be walking across a floor that has justbeen waxed and has a sign placed on it warning that thefloor is slippery. If you see the sign, choose to walk acrossthe floor anyway, and slip and fall, you can’t complainbecause you “assumed the risk.”

Strict liability is a tort theory that imposes liability even if youwere neither careless nor intended to commit a harmful act.The theory applies to certain ultrahazardous activities, suchas using explosives or handling wild animals. If you choose touse explosives for some reason, the law will hold you respon-sible for the consequences caused to other people regardlessof how careful you are.

Strict liability also applies to product liability. Under productliability, a maker or seller of a product that’s defective isliable for the damages caused to others. A product is defec-tive if it’s unreasonably dangerous.

The Internet has provided a new medium through which torts can be committed. Electronic torts, or e-torts, involveinvasion, distortion, theft, falsification, misuse, destruction,or financial exploitation of information stored in or related toan electronic device. E-torts include e-defamation, e-dispar-agement, and e-invasion of privacy.

Lesson 5 65

Wrongful death is a statutory action in which the family of adecedent sues for loss of support. In other words, when atortfeasor causes death, that gives rise to a claim by the family against the tortfeasor for the loss of support that thedecedent would have provided to them.

Under common law, the right to sue in tort was lost when aperson died. Survival statutes modified the common law toallow for suits for most torts (but not libel or slander). Suit isbrought or continued by the executor or administrator of thedecedent’s estate.

Most tort cases seek compensatory damages. These damagescan be divided into two categories, economic damages directlyquantifiable, such as medical expense or income loss, andnoneconomic damages that can’t be directly quantified, suchas pain and suffering. If the tortfeasor’s actions are particu-larly blameworthy or malicious, punitive damages may beawarded also. If the tort involves an ongoing condition oractivity, the plaintiff also may be entitled to an injunctionbarring the defendant from engaging in the activity or requir-ing the defendant to take steps to eliminate the problem


� Answer the Quick Quiz questions on pages 117, 123,127, 128, 131, 132, and 135. Check your answers onpage 138. These quizzes will not be scored so don’t sendthem to the school; they’re for you to gauge yourprogress. If there are any questions you don’t under-stand, refer back to the textbook and reread theassignment.


Business Law 266


Then review the material you’ve learned in this study guideand the assigned pages in your textbook for Assignments 13and 14. When you’re sure that you completely understandthe information presented in those assignments, completeyour multiple-choice examination for Lesson 5.

Self-Check 14Answer questions 1–9 of the “Questions for Review and Discussion” on page 136 of your textbook.


67

Gra

de

d P

roje

ct

Gra

de

d P

roje

ct

BackgroundTo complete this project, you should apply the principles presented in your textbook.

For your project, you’ll first complete some basic researchfrom suggested websites. Then you’ll prepare a memorandumto your supervisor describing which form of business organi-zation you feel would be best for your client. You’ll also makesome suggestions about what the client’s independent contrac-tor agreement needs to contain to be legally enforceable. Yoursupervisor for this project is the law partner in a small lawfirm representing a new client.

ProcedureYou’re going to prepare a written memorandum to yoursupervisor to assist him in preparing a presentation for anew business client. In addition to the information providedbelow, refer to the general information on business organiza-tions and employer-independent contractor relationships inyour textbook. You’ll also need to do some Internet research.Then write your memorandum.

GoalYour goal for this project is to complete a well-written memo-randum to your supervisor to address two legal issues:

� The appropriate form of business organization for yourclient’s business

� Requirements for your client’s independent contractoragreement, to make sure it’s a legally enforceable inde-pendent contractor agreement and not viewed as anemployment agreement

Remember not to use too much legalese in your memo.

Graded Project68

You’re writing it to your supervisor, and you would expect himor her to have some knowledge of the subject matter. However,you must completely explain what the law is for each type ofbusiness organization you’re considering and the reasons you’veselected one type of business organization as best for your client.The same complete explanation is required when discussing theissue of your client’s independent contractor agreement.

Writing GuidelinesUse the writing guidelines to prepare your answers in well-organized paragraphs.

1. Type your submission, double-spaced, in a standard printfont, size 12. Use a standard document format with one-inch margins. (Don’t use any fancy or cursive fonts.)

2. Include the following information at the top of your sub-mission: Name and address, student number, course titleand number, and project number.

3. Read the assignment carefully and address the issues sug-gested.

4. Be specific. Limit your submission to the topics raised.

5. Include a reference page that lists Web sites, journals, orany other references used in preparing the submission.Remember, if you use someone’s words or ideas, you mustcite them directly in your memo.

6. Proofread your work carefully. Check for correct spelling,grammar, punctuation, and capitalization.

For this project, please use the following format for your legalmemorandum:

To:From:Re:Date:Summary of Applicable Facts:Issues:Law:Analysis:

Graded Project 69

Submitting Your AssignmentUse the following instructions to submit your project online:

1. Go to http://www.pennfoster.edu, and log in as a student.

2. Go to your student portal.

3. Click on Take Exam next to the graded project number06048500.

4. Enter your e-mail address in the box provided. (Note:This information is required for online submission.)

5. Attach your file or files as follows:

a. Click on the Browse box.

b. Locate the file you wish to attach.

c. Double-click on the file.

d. Click on Upload File.

6. Click on Submit Files.

Grading CriteriaThe following is a breakdown of how your project will be graded:

Content 70%Written Communication 25% Format 5%

Here’s a brief explanation of each of these criteria.

ContentThe student provides a clear discussion of the assigned topic orissue; addresses the subject in complete sentences; supportshis or her opinion by citing specific information from the text,assigned websites, and other sources; stays focused on theassigned issues; writes in his or her own words; and usesquotation marks to indicate direct quotations.

Graded Project70

Written CommunicationThe student includes an introduction, analysis, and conclusion supporting his or her positions; uses correctgrammar, spelling, punctuation, and sentence structure; provides clear organization; and makes sure the paper contains no typographical errors.

FormatThe student has double-spaced and typed the paper in fontsize 12, used the correct memorandum format provided in theinstructions, and includes his or her name, address, studentnumber, course title and number, and assignment number.

The ProjectMEMORANDUM

To: Student

From: Supervisor

Re: New Client, Career Institute of America, Inc. (CIA)

Date: December 6, 20—

FACTS: We have just met a new client, the CEO of CareerInstitute of America, Inc. (CIA). Although the business wasformed a year ago as a nonprofit corporation, they’re not sure they’re happy being a nonprofit.

CIA is a classroom and online education organization thatspecializes in training students in the United States autoindustry, one of this country’s largest industries. Theirfounder, who also serves as the CEO of CIA, would like toretain most of the ownership and control of the company,since it is really his enterprise. He also has some concernsabout the independent contractor agreement their instructorsmust sign when they agree to work for the company. Hewants to be sure they’re not construed as employees of thecompany and are viewed as true independent contractors.

Graded Project 71

Note that most of the company’s income is from online trainingcourses. You should also know that they received a U.S.Department of Labor retraining grant for the instruction they’recurrently providing and that this type of grant is awarded onlyto nonprofit educational organizations. Even though CIA wasable to obtain this grant as a nonprofit institution, they realizeit was a one-time grant. They must make their income fromtuition for online courses and in the two small classrooms inwhich they teach traditional courses. This is why they’re notnecessarily opposed to changing their form of business from anonprofit organization to a for-profit business.

You should further know that the employment contract theyprovide to their instructors looks as if it was designed by anamateur and may not comply with the legal requirementsfor a valid independent contractor agreement.

RESEARCH ASSIGNMENT: Research two areas of law andprepare a memorandum addressing each area, so the clientcan be properly advised how to proceed. First, determine thelimitations of a nonprofit corporation in the state ofDelaware, the state in which CIA was formed and is doingbusiness. You should also review the law for nonprofit andfor-profit corporations, as well as limited liability companies,to determine the best form of business for the client.

Consult the listing of Delaware statutes on the Delaware statewebsite at http://www.corp.delaware.gov/DElaw.shtml toassist you in your research.

For more general information concerning nonprofit corpora-tions, for-profit corporations, and limited liability companies,the following are additional websites that can assist you:

http://www.law.cornell.eduhttp://www.freeadvice.comhttp://www.findlaw.comhttp://www.nolo.com/legal-encyclopediahttp://www.hg.org

Combine this information with what you know about busi-ness organizations and what the client wants, so you canrecommend the best form of business organization for CIA at this time.

Graded Project72

The second issue concerns the contract that CIA has its instruc-tors sign. (The instructors teach the programs and grade thestudent’s papers.) You’ll need to review the law dealing withemployment and independent contractor agreements to determine what the contract needs to include to be properlyviewed as an independent contractor agreement and not an employment agreement.

Research employment and independent contractor agreementsonline. A general search using these terms in the websiteslisted above or even on Google, Bing, or any other searchengine should assist you in finding the law dealing with thesetypes of agreements. Since the agreements will be signed byour client’s instructors located in each state we want to usethe general law dealing with such agreements. In your memo-randum, please be sure to identify each of the key elementsnecessary for the agreement to be viewed as an independentcontractor agreement and not an employment agreement, aswell as any other suggestions you might have for the client in connection with their instructor contracts.

Here are some helpful hints:

Remember that the project requires that you use the memoformat provided and that you research both issues requested:the most appropriate form of business organization to meetthe client’s needs and the requirements for an agent to bedeemed an independent contrator and not an employee. Youshould first locate the law for each of the two issues. Then,you need to analyze the information you found and apply itto the needs of the client. Both your research and youranalysis should then be summarized and included in yourmemo. Good luck with your project!

73

An

sw

er

sA

ns

we

rs

Self-Check 1 1. Tangible personal property consists of goods, such as

furniture, appliances, books clothing, vehicles, and soon. Intangible personal property consists of things suchas stocks and bonds.

2. When personal property is owned solely by one person, it is said to be owned in severalty. When it is owned bymore than one person, it is said to be held in cotenancy.The types of cotenancies discussed here are tenancy incommon, joint tenancy, and community property. Whentwo or more people own personal property as tenants incommon, each cotenant’s share of the property passes to his or her heirs upon death. In contrast, when two or more people own personal property as joint tenants(sometimes referred to as joint tenants with the right of survivorship), each cotenant’s share of the propertypasses to the surviving joint tenants upon death. Somestates recognize community property, which is property(except a gift or inheritance) that is acquired by the personal efforts of either spouse during marriage andthat, by law, belongs to both spouses equally.

3. Someone who finds lost property may claim ownership of it after a reasonable effort is made to find the ownerwithout success. Property found on the counter of astore, or on a table at a restaurant is misplaced becauseit is reasonable to assume that the owner will rememberwhere it is and return to claim it. Abandoned property is property that has clearly been discarded by the owner.If an abandoned shipwreck is found in the submergedland of any state of the United States, the AbandonedShipwreck Act of 1987 applies rather than the law offinds or the law of salvage.

4. For a gift to be completed, the donor must intend tomake a gift, the gift must be delivered to the donee, and the donee must accept the gift.

73

Self-Check Answers74

5. A thief acquires no title to goods that are stolen and, therefore, cannot convey a good title to anyone, even an innocent person.

6. A bailment occurs whenever someone transfers posses-sion and control of personal property to another with the intent that the same property will be returned later.

7. A bailment for the sole benefit of the bailor results whenpossession of personal property is transferred to anotherfor purposes that will benefit only the bailor. An exampleof this type of bailment is asking a friend to take yourclothes to the cleaners for you as a favor. A bailment for the sole benefit of the bailee occurs when possessionof personal property is transferred to the bailee for purposes that will benefit only the bailee. Borrowing a neighbor’s lawn mower to mow one’s lawn is an exam-ple of this type of bailment. When personal property istransferred to a bailee with the intent that both partieswill benefit, a mutual-benefit bailment results. Deliveringa television set to a service center for repairs is an example of a mutual-benefit bailment.

8. Former law required the bailee to use great care in abailment for the sole benefit of the bailee, slight care in a bailment for the sole benefit of the bailor, and ordinarycare in a mutual-benefit bailment. The standard of careadopted by many courts today does away with thedegrees of care. Instead, all bailees are required to use reasonable care. Under today’s law, when items inthe possession of a bailee are damaged, the burden ofproof is shifted to the one who is in the best position toknow what happened; that is, the bailee. The burden ison the bailee to prove that he or she wasn’t negligent.

9. An innkeeper has an obligation to accept all guests.People may be turned away when all rooms are occupiedor reserved. In addition, innkeepers may refuse toaccommodate people whose presence might imperil thehealth, welfare, or safety of other guests.

Self-Check Answers 75

10. Innkeepers have a greater duty of care toward theirguests’ property than is imposed in a usual mutual-benefit bailment. With exceptions, innkeepers are held by law to be insurers of their guests’ property. Theinsured property includes all personal property broughtinto the hotel for the convenience and purpose of theguests’ stay. In the event of loss, the hotelkeeper may be held liable, regardless of the amount of care exercisedin the protection of the guests’ property. Innkeepersaren’t liable as insurers in four situations: (1) Lossescaused by a guest’s own negligence. (2) Losses to theguest’s property due to acts of God or acts of the publicenemy. (3) Losses of property due to accidental fire inwhich no negligence may be attributed to the hotel-keeper. This exception also includes fires caused byother guests staying at the hotel at the same time. Suchpersons, even though on other floors, are called fellowguests. (4) Losses arising out of characteristics of theproperty that cause its own deterioration. In most states,innkeepers are further protected by laws limiting theamount of claim any guest may make for a single loss.The limit is usually $500 or less, depending on the statein which the hotel is located. These laws also give theinnkeeper the right to provide a safe or vault for the better protection of the guests’ valuables. A guest whodoesn’t use the safe provided for valuables will be personally responsible for losses and may not seek recovery from the innkeeper.

Self-Check 2 1. Real property is the ground and everything permanently

attached to it, including the airspace above the surfaceas high as the owner can use and the ground under thesurface.


2. Most of the estates that were passed on to the nobility inmedieval England could last infinitely because the nobleswho held them were empowered to pass them on to theirheirs. These estates were called. freehold estates. Anyonewith a freehold estate may transfer that interest toanother by sale, gift, will, or by dying without a will.Freehold estates are either estates in fee simple or lifeestates. A leasehold estate creates an ownership right in a tenant

3. Often only one person owns a tract of real estate. Thistype of ownership is referred to as ownership in sever-alty. It is also very common, however, for two or morepeople to own the same tract of land. This type of owner-ship is referred to as concurrent ownership, although themore common term is co-ownership. Real property maybe owned individually or by two or more persons knownas cotenants. Cotenant relationships include: tenancy in common, joint tenancy, community property, and tenancy by the entirety.

4. Title to real property may be acquired by sale or gift, will or descent, or by neglect.

5. All ownership of private property is subject to the government’s superior rights if property is needed for a public purpose. Eminent domain, also called condemnation, is the right of federal, state, and localgovernments, or other public bodies, to take privatelands, with compensation to their owners, for a publicpurpose. In deciding whether or not an item is a fixture,the courts ask the following questions: Has there been a temporary or permanent installation of the personalproperty? Has the personal property been adapted to theintended use of the real property? What was the intent of the party at the time the personal property wasattached to the real property?

6. The five elements that are necessary for the creation of the landlord-tenant relationship are consent of thelandlord to the occupancy by the tenant, transfer of possession and control of the property to the tenant inan inferior position to the rights of the landlord, the right of the landlord to the return of the property, the

creation of an estate in the tenant known as a leaseholdestate, and either an express or implied contract betweenthe parties.

7 . The essential requirements of a lease are a definiteagreement as to the extent and bounds of the leasedproperty, a definite and agreed term, and a definite andagreed price of rental and manner of payment.

8. Some large communities have passed rent control lawsto keep rents within an affordable range. These lawslimit what landlords can charge for rental property andoften contain procedures that must be followed beforetenants may be evicted. In a number of areas, rent con-trol laws have caused landlords to turn their apartmentsinto condominiums, leading to shortages in rental apart-ments. Such laws differ from place to place. Some states,including Massachusetts, have done away with rent control laws altogether. In addition to the first month’srent, landlords often require either a security deposit orthe last month’s rent, or both, to be paid at the begin-ning of a tenancy. The deposit protects landlords againstdamages to their property as well as nonpayment of rent.Due to abuses of such deposits by landlords, state legis-latures have passed laws regulating security deposits on residential property. Such laws spell out the rights of tenants and make it easier for tenants to prevail incourt. Although these laws differ from state to state, the following characteristics are commonly found: Moststates limit security deposits to one, one and one-half,two, or two and one-half months’ rent, and most statesrequire that security deposits be placed in interest-bear-ing accounts. The interest is either paid to tenants on anannual basis or accrued in their favor. Security depositsmay not be commingled with other money belonging tothe landlord. Also, the landlord is given a specific period,usually 30 days after the lease ends, to account for thesecurity deposit and return the balance due to a tenant.Many states have now “put teeth” into the law, providingfor double or triple damages, court costs, and attorney’sfees for tenants whose security deposits are wrongfullywithheld.



9. A landlord’s duties under a lease include the duty torefrain from discrimination, the duty to maintain thepremises, and the duty to deliver peaceful possession.The landlord may not commingle security deposits andmust return the balance of any security deposits to thetenant at the end of the lease. A tenant’s duties under alease include the duty to pay rent, the duty to observethe valid restrictions in the lease, the duty to turn all fixtures over to the landlord upon termination of thelease, and the duty to refrain from committing waste.

10. If they are negligent, landlords are responsible forinjuries to others caused by defects in the common areas and tenants are responsible for injuries caused by defects in the portion of the premises over which tenants have control.

Self-Check 3 1. Each state has its own laws passed by its legislature,

different from other states, governing the writing of willsand the settling of estates. For this reason, it is neces-sary to check one’s own state law to ascertain the rulesfor writing a will and to determine how property passeswhen someone dies. Because probate matters deal withthe handling of people’s estates, and because all busi-nesses are owned by people in one way or another, the subject of probate law is relevant to all forms of business entities.

2. Any person who has reached the age of adulthood (18 years) and is of sound mind may make a will. When making the will, did the testator know, in a general way, the nature and extent of the property he or she owned? Did the testator know who would be the most natural recipients of his or her estate? Was the testator free from delusions that might influence the disposition of the property? Did the testator knowthat he or she was making a will?

3. A will must be in writing, signed by the testator, andattested to in the testator’s presence by the number of witnesses established by state law.


4. Some devices that are designed to give protection to family members when a spouse dies are a familyallowance, the homestead exemption, exempt property,dower and curtesy, and the right of a surviving spouse to choose an elective share of the estate.

5. With variations from state to state, a will may be revoked(canceled) in any of the following ways: (1) burning, tear-ing, canceling, or obliterating the will with the intent torevoke it; (2) executing a new will; and (3) in some states,the subsequent marriage of the testator. In most states,the divorce or annulment of a marriage revokes all giftsmade under a will to the former spouse and revokes theappointment of the former spouse as executor of the will.Sometimes testators wish to make slight changes in awill. They may do so by executing a new will or executinga codicil, which is a formal document used to supple-ment or change an existing will. A codicil must beexecuted with the same formalities as a will. It must besigned by the testator and properly witnessed. In addi-tion, it must refer to the existing will to which it applies.

6. Only persons who would inherit under an earlier madewill or under the law of intestacy are allowed to contest a will. A will may be contested on any of three grounds: improper execution, unsound mind, and undue influence.

7. Under a typical state statute, if a person dies intestate,the rights of the surviving spouse are as follows: If thedeceased is survived by issue (children, grandchildren,great-grandchildren), the surviving spouse is entitled toone-half of the estate. If the deceased is survived by noissue but by blood relatives, the surviving spouse is enti-tled to $200,000 plus one-half of the remainder of theestate. If the deceased is survived by no issue and noblood relatives, the surviving spouse is entitled to theentire estate. Keep in mind that this particular formulawill differ from state to state. Under the same typicalstate statute, if a person dies intestate, the property willpass, subject to the rights of the surviving spouse, as follows: If the deceased is survived by issue, the propertypasses in equal shares to the deceased’s children, withthe issue of any deceased child taking that child’s share.


If the deceased is survived by no issue, the propertypasses in equal shares to the deceased’s father andmother or the survivor of them. If the deceased is sur-vived by no issue and no father or mother, the propertypasses to the deceased’s brothers and sisters, with theissue of any deceased brother or sister taking thatbrother’s or sister’s share. If the deceased is survived byno issue and no father, mother, brother, or sister, orissue of any deceased brother or sister, the propertypasses to the deceased’s next of kin (those who are most nearly related by blood).

8. When people die owning assets, their estates must beprobated, that is, settled under the supervision of thecourt. The court that supervises the procedure is called aprobate court in some states and a surrogate court, ororphan’s court, in others. The first step in probating anestate is to determine whether the deceased left a will. Ifa will exists, it usually names a personal representativecalled an executor (male) or executrix (female) who is theperson named in the will to carry out its terms. If thereis no will, or if the executor named in the will fails toperform, someone must petition the court to settle theestate. That person, if appointed, is called an administra-tor (male) or administratrix (female). In states that haveadopted the Uniform Probate Code, executors andadministrators are called personal representatives.Before an executor or administrator is appointed, noticeof the petition for appointment is published in a newspa-per and sent to all heirs, legatees, and devisees. Anyonewith grounds to object may do so. Witnesses are some-times asked to testify or sign affidavits about theirknowledge of the execution of the will. Testimony is notnecessary when all heirs and next of kin assent to thewill and no one contests it.

9. Advance directives are written statements in which peo-ple give instructions for their future medical care if theybecome unable to do so themselves. The most commontype of advance directive is the living will, which is awritten expression of a person’s wishes to be allowed to die a natural death and not kept alive by heroic orartificial methods. Another vehicle that is used for this

Self-Check Answers

purpose is the health care proxy—a written statementauthorizing an agent to make medical treatment deci-sions for another in the event of incapacity.

10. There are two types of trusts. The first kind of trust is aliving trust, or inter vivos trust. It comes into existencewhile the settlor is alive. The second kind is a testamen-tary trust. It comes into existence upon the death of thetestator.

Self-Check 4 1. Goods are tangible items that are moveable and valuable

to someone and a sale is the transfer of goods from one party to another in exchange for money or othervaluable goods.

2. Article 2 of the Uniform Commercial Code applies to any contact that involves a sale of goods.

3. Under Article 2-201 of the UCC, a contract for the sale of goods valued in excess of must be in writing to beenforceable. There are exceptions to this rule, however.They include (1) the written confirmation between merchants sent by one merchant to the other and notobjected to in writing by the other party within 10 days;(2) specially manufactured goods; (3) part performance,and (4) admissions under oath to the existence andterms of a contract.

4. Congress passed the E-Sign act to deal with problemsassociated with Cyber-contracts and cyber-signatures.The Uniform Electronic Transactions act was created bythe NCCUSL to deal with the same problems. Both actspromise parity between cyber-contracts and contractscreated in the traditional way.

5. In an auction with reserve, the auctioneer may withdrawthe goods at any time until he or she announces comple-tion of the sale. In an auction without reserve, after theauctioneer calls for bids on an article or lot, that articleor lot cannot be withdrawn unless no bid is made withina reasonable time. An auction sale is with reserve unlessthe goods are explicitly put up for auction withoutreserve.

81


6. Void title is no title at all. Voidable title means that titlemay be voided if one of the parties elects to do so.

7. In a shipment contract, title passes to the buyer whenthe goods are given to the carrier. In a destination con-tract, title passes to the buyer when the seller tendersthe goods at the place of destination. When the contractcalls for the buyer to pick up the goods, title passes tothe buyer when the contract is made.

8. Risk of loss, on the other hand, passes at different timesdepending on whether the seller is a merchant. If theseller is a merchant, the risk of loss passes when thebuyer receives the goods. If the seller is not a merchant,the risk of loss passes to the buyer when the seller tenders the goods to the buyer. When a document of titleis used, both title and risk of loss pass to the buyerwhen the document is delivered to the buyer.

9. Sales that allow goods to be returned even though theyconform to the contract are sales on approval when thegoods are primarily for the buyer’s use and sales orreturns when the goods are delivered primarily for resale.On a sale on approval, title and risk of loss do not passuntil the buyer gives approval of the goods on trial. On asale or return, title passes at the time of the sale. Also,the goods must be returned at the buyer’s risk andexpense.

10. Buyers may place insurance on goods when a contract ismade and the goods are identified. It is then that buyersreceive an insurable interest.

Self-Check 5 1. Tender of performance means that each party to a con-

tract must show that he or she is ready to perform aspromised under the terms of the original agreement.Tender of performance is necessary in order to test theother party’s ability and willingness to perform his or herpart of the bargain. If tender is not made and the otherparty fails to perform, the one not making tender cannotbring suit.


2. The seller is obligated to turn over the goods to thebuyer, and the buyer is obligated to accept and to payfor them, each in accordance with the terms of the contract. In addition, all parties must act in good faith,which means that they must act honestly. The court willnot enforce a contract or part of a contract that it findsto be unconscionable.

3. Anticipatory repudiation occurs when one of the partiesannounces that he or she is not going to perform aspromised before the performance is due. (For example,“Hey, you know that delivery that we promised for nextweek? Well, forget it!”) This statement permits the otherparty to treat that repudiation an immediate breach andto bring an immediate suit without having to wait to seeif the other party really does not perform. The only timethat anticipatory repudiation does not work is when thepromise repudiated is promise to pay money. The otherparty must wait to see if the payment is really beingwithheld or is forthcoming when due.

4. When a buyer breaches a contract for sale, the sellermay (1) withhold delivery of any goods not yet delivered;(2) stop any goods that are in transit if the buyer isinsolvent or stop delivery of a carload, truckload, plane-load, or larger shipments of express or freight when the buyer repudiates or fails to make a payment that isdue before delivery or otherwise breaches the contract;(3) resell the goods or the undelivered balance of them—in the case of unfinished manufactured goods, a sellermay either complete the manufacture and resell the finished goods or cease manufacture and resell theunfinished goods for scrap or salvage value; (4) retain the merchandise and sue the buyer for either the differ-ence between the contract price and the market price atthe time the buyer breached the agreement or the profitthat the seller would have made had the contract beenperformed; (5) sue the buyer for the price of any goodsthat the buyer has accepted; or (6) cancel the contract.When a seller breaches a contract for sale, the buyermay (1) cover the sale, that is, buy similar goods fromsomeone else and sue the seller for the differencebetween the agreed price and the cost of the purchase;


(2) deduct all or any part of the damages resulting frombreach of contract from any price still due and, in addi-tion, sue the seller for damages for nondelivery—damages sought would be the difference between thecontract price and the price of the same goods in themarketplace on the date of the breach; (3) when thegoods are unique, ask the court to order the seller toturn the goods over to the buyer in an action for specificperformance of the contract; or (4) bring an action toreplevy goods that have been identified to the contract if, after a reasonable effort, the buyer is unable to buythe goods elsewhere.

5. A statute of limitations is a law that places a set periodof time in which an injured party can act to bring law-suit. Once that time period has lapsed, the injured party loses his or her right to bring a legal action.

6. Express warranties may arise by an affirmation of fact or promise, by a description of the goods, and by a sample or model.

7. When a written warranty is given to a consumer underthe Magnuson-Moss Warranty Act, it must be madeavailable before the consumer decides to buy the prod-uct, the writing must express the terms and conditionsof the warranty in simple/readily understood language,and must disclose whether it is a full or a limited warranty.

8. The implied warranty of fitness for a particular purposearises whenever a seller knows the particular purpose for which the buyer will use the goods and knows thatthe buyer is relying on the seller’s skill and judgment to select the product. The implied warranty of mer-chantability is given whenever a merchant sells goods,unless the warranty is specifically excluded by the merchant.

9. Whenever goods are sold, the seller warrants that thetitle being conveyed is good and that the transfer isrightful.

10. To exclude the implied warranty of merchantability, theword merchantability must be used in the disclaimer. Ifthe exclusion is in writing, it must be in large, bold typeso that it is conspicuous. To exclude the implied war-ranty of fitness for a particular purpose, the exclusionmust be in writing and be conspicuous also. The use ofsuch expression as as is, with all faults, and the like isanother way to exclude implied warranties. Implied war-ranties may also be excluded under the UCC by havingbuyers examine the goods. When the buyer has exam-ined the goods or the sample or model as fully as he orshe desires (or has refused to examine them when giventhe opportunity), there is no implied warranty as todefects that an examination would have revealed.

Self-Check 6 1. Many legal professionals including judges, executives,

legislators, law professors, and general practitioners usethe law for social engineering purposes. Thus, judgesrule that certain activities are inherently dangerous toensure that those people and institutions that engage in such activities are liable when someone is injured orproperty is damaged. Executives, such as the president,push through legislation that will reshape the healthcare industry in this country. Similarly, governors initiate legislation to try to eliminate public employeeunions, as occurred in Wisconsin, Michigan, and Ohio.Legislators place a “sin tax” on such things as tobaccoand alcohol to attempt to discourage their use. Law professors suggest that the law is a balancing act in their lectures, conference presentations, articles, andtextbooks, and promote revolutionary ideas such as the science court, again in lectures, articles, conferencepresentations, and text books. Finally, general practition-ers blaze the trail with new legal theories to reshape the direction of the law, which is what has happenedrecently in employment law, labor law, and the law of product liability.



2. Public interest is a program, a law, an activity, or somesimilar situation that somehow promotes public safety,health, and welfare. Public policy is the means for creating or enforcing some activity, program or institution that is running or should be running in the public interest.

3. A lawsuit based on negligence requires the plaintiff to prove the four elements of negligence: (1) duty, (2) breach of duty, (3) proximate cause, and (4) actualharm. In strict liability case, the plaintiff needs to prove only that (1) the defendant was engaged in thedangerous activity and that (2) the plaintiff was injured as a result.

4. The purpose of the Consumer Product Safety Act is toprotect the consumer from unreasonable risk of injuryfrom hazardous products.

5. The Federal Trade Commission establishes trade regulation rules to govern the activities of interstatebusinesses.

6. Some unfair tactics include sending unordered merchan-dise, making fraudulent misrepresentations, engaging inbait and switch schemes, and tampering with odometers.

7. The rules used to protect consumers include the negativeoption rule, the cooling-off period rule, the used car rule,the mail and telephone order rule, telemarketing salesrules, and the rules related to 900 numbers.

8. The purpose of the Truth in Lending Act is to make certain that consumers know the true nature of financecharges and annual percentage rates.

9. Amendments to the Truth-in-Lending Act include theEqual Credit Opportunity Act and the Fair CreditReporting Act among others.

10. The Consumer Leasing Act requires leasing companies toinform consumers of all the terms of a lease of personalproperty.

Self-Check Answers

Self-Check 7 1. Under the UCC, a negotiable instrument is a written

document signed by the maker that contains an uncon-ditional promise or order to pay a fixed amount of moneyon demand or at a definite time to the bearer or to order.

2. A note (often called a promissory note) is a written promise by one party, called the maker, to pay money to the order of another party, called the payee.

3. Drafts and checks are orders to pay money.

4. The different kinds of drafts include sight drafts, timedrafts, domestic bills of exchange, and international billsof exchange. The different types of checks and moneyorders include personal checks, certified checks, bankdrafts, cashier’s checks, traveler’s checks, and moneyorders.

5. Negotiable instruments must (1) be in writing, (2) besigned by the maker or the drawer, (3) contain an unconditional promise or order to pay, (4) be made out for a fixed amount of money, (5) be payable ondemand or at a definite time, and (6) except for checks, be payable to order or bearer.

6. A negotiable instrument is assigned when a personwhose indorsement is required on an instrument trans-fers it without indorsing it or when it is transferred toanother person and does not meet the requirements ofnegotiability. A negotiation, on the other hand, is thetransfer of an instrument in such form that the trans-feree becomes a holder.

7. The four kinds of endorsement are (1) blank, (2) special ,(3) restrictive, and (4) qualified.

8. An endorser who receives consideration warrants that heor she has good title to the instrument, that all signa-tures are genuine or authorized, that the instrument hasnot been materially altered, that no defense of any partyis good against him or her (a qualified endorser only warrants that he or she has no knowledge of such adefense), and that he or she has no knowledge of anybankruptcy of the maker, acceptor, or drawer of anunaccepted instrument.

87


9. Unless an endorsement states otherwise, every endorseragrees to pay any subsequent holder the face amount ofthe instrument if it is dishonored.

10. A forged instrument has no legal effect whatsoever.

Self-Check 8 1. A holder in due course is a holder who takes the instru-

ment for value, in good faith, and without notice that itis overdue or has been dishonored or notice of anydefenses against or claim to it on the part of any person.

2. People who are holders in due course can receive even more rights than those who held the instrumentsbefore them.

3. To be a holder means that the instrument must havebeen issued or endorsed to that person, to that person’sorder, or to bearer.

4. A holder who receives an instrument from a holder indue course acquires the rights of the holder in duecourse, even though he or she does not qualify as aholder in due course. This stipulation is called the shelter provision.

5. The six personal defenses are breach of contract, failureof consideration, lack of consideration, fraud in theinducement, lack of delivery of a negotiable instrument,and payment of a negotiable instrument.

6. Holders of consumer credit contracts who are holders indue course are subject to all the claims and defensesthat the buyer could use against the seller, including thepersonal consumer. This is the holder in due course rulethat was adopted by the FTC in 1976.

7. Real defenses may be used against everyone, including aholder in due course. Real defenses are infancy andmental incompetence, illegality and duress, fraud as tothe essential nature of the transaction, bankruptcy,unauthorized signature, and alteration.

8. Primary liability means that a party is obligated to payan instrument without reservations of any kind. Thoseprimarily liable include (1) the maker of a note; (2) theissuer of a cashier’s check or other draft in which thedrawer and the drawee are the same person.

9. Those drawers and endorsers who have limitations on their obligations to pay on an instrument are said to have secondary liability.

10. To hold a secondary party liable the following conditionsmust be met (1) the instrument must be properly presented to the drawee or party obligated to pay theinstrument, and payment must be demanded; (2) theinstrument must be dishonored, that is, the paymentrefused; and (3) notice of the dishonor must be given tothe secondary party within the time and in the mannerprescribed by the UCC. If all three of these obligationsare not met, drawers of drafts and indorsers are discharged from their obligations.

Self-Check 9 1. All banks owe a duty to their depositors to honor orders

and to protect all of the funds that are placed in thebank.

2. Bank depositors owe a duty to any bank in which theyhave checking accounts to have sufficient funds ondeposit to cover checks that they write. They must alsoexamine their bank statements and canceled checkspromptly and with reasonable care and notify the bankquickly of any discrepancies that they detect.

3. Drawers may order a bank to stop payment on any itemthat might be payable from their account(s). The stoppayment order must be received in time and in such amanner as to afford the bank a reasonable opportunityto act on it. An oral order is binding upon a bank for 14days only, unless confirmed in writing within that period.A written order is binding for only six months, unlessrenewed in writing.



4. The FDIC insures deposits in banks as well as in savingsand loan associations. The basic insurance coverage protects individual bank accounts up to $100,000 and joint accounts for up to an additional $100,000.Revocable trusts and payable-on-death bank accountsare protected up to $100,000 for each beneficiary who isa close relative and is named in the account records.

5. During the bank collection process, banks are describedby different terms, depending on their particular functionin a transaction. Sometimes a bank takes a check fordeposit. At other times, it pays a check as a drawee. At still other times, it takes a check for collection only.The different terms that are used to describe banks aredepositary, payor, intermediary, collecting, presenting,and remitting.

6. The depository bank acts as its customer’s agent to collect the money from the payor bank. The check is sent (sometimes through an intermediary bank) to a collecting bank that presents the check to the payorbank for payment. If it is honored by the payor bank, the amount will be deducted from the drawer’s account,and the check will be returned to the drawer with thenext bank statement. If the check is dishonored for anyreason, it will be returned to the payee via the sameroute that it was sent, and all credits given for the item will be revoked.

7. Electronic banking (also called electronic fund transfersor EFTs) uses computers and electronic technology as asubstitute for checks and other banking methods. Peoplecan go to automatic teller machines (ATMs) 24 hours aday to make bank deposits and withdrawals. They canpay bills by phone, have deposits made directly to theirbank accounts, and pay for retail purchases directlyfrom their bank accounts. Some banks have arrange-ments for payment by cyber-check, e-check (sometimescalled electronic check conversion), which is a system in which funds are electronically transferred from a customer’s checking account, eliminating the need toprocess a paper check. Under one system, the customerwrites out an ordinary check and gives it to a merchantwhen making a purchase. After obtaining the customer’s

written authorization, the merchant passes the checkthrough an instrument that reads the information on thecheck and converts the payment from a paper check toan electronic funds transfer. The merchant then voidsthe check and returns it to the customer with a receipt.Payment by cyber-check or e-check is faster and lessexpensive, thus saving time and money for everyoneinvolved.

8. The Check 21 Act brings the check-clearing method intothe modern age by the use of electronic check process-ing. Such processing could not be done prior to this2004 law, because of the legal requirement that originalchecks be presented to the drawee bank for payment.Under this law, a new negotiable instrument called asubstitute check is used. A substitute check (also calledan image replacement document or IRD) is a paperreproduction of both sides of an original check that canbe processed just like the original check. Under the newlaw, banks are not required to use substitute checks,but when they do so for consideration, they make the fol-lowing warranties: (1) the substitute check contains anaccurate image of the front and back of the originalcheck; (2) it is the legal equivalent of the original check;and (3) no drawer, drawee, indorser, or depositary bankwill be asked to pay a check that already has paid.

9. To protect consumers from losses related to substitutechecks, the Check 21 Act includes a consumer’s right to claim an expedited credit. This right exists if the consumer asserts in good faith the following four facts:(1) The bank charged the consumer’s account for a substitute check that was given to the consumer. (2) Either the check was not properly charged to the consumer’s account, or the consumer has a warrantyclaim with respect to the substitute check. (3) The con-sumer suffered a resulting loss. (4) The production of theoriginal check or a better copy of the original check isnecessary to determine the validity of any claim. If theconsumer makes a claim within 45 days after receivingthe bank statement or substitute check, the bank mustinvestigate it and make any necessary recredit to theconsumer’s account. If the bank needs more than 10



days to investigate and resolve the complaint, it must recredit the consumer’s account for an amount up to $2,500 while it completes its investigation. The bank must re-credit any remaining balance greater than $2,500 no later than 45 days after the consumersubmits the claim.

10. Consumers who use ATMs are entitled to receive a written receipt whenever they use a machine. In addi-tion, the transaction must appear on the periodicstatement sent to the consumer. Banks must promptlyinvestigate errors pointed out by consumers. A con-sumer’s liability for the unauthorized use of an ATM card is limited to $50 if notice of the loss or theft of acard is given the issuer within two business days. Theconsumer’s liability increases to $500 when notice iswithheld beyond two business days. It becomes unlim-ited when notice is not given within 60 days. Businessesthat deal with large sums of money need to be able tomake quick transfers to avoid a loss of interest, amongother reasons. EFTs help to meet this need.

Self-Check 10 1. Risk management is the process by which businesses

try to identify, analyze, control, and communicate risksof all kinds, from making a clerical error to having acompany’s entire computerized communication systemcompromised. Insurance is a transfer of the risk of economic loss from the insured to the insurance company based on the payment of a money to cover the cost of the risk.

2. Insurance policies require mutual assent, capacity, consideration, and legality.

3. A person is said to have an insurable interest in a givensubject matter if he or she might suffer financial loss orliability through its damage, destruction, or loss.

Self-Check Answers

4. The principal types of life insurance are straight life, limited-payment life, term, and endowment insurance.Straight life insurance (also known as ordinary life insur-ance, or whole life insurance, is a kind of insurance thatrequires the payment of premiums throughout the life of the insured and which pays the beneficiary the facevalue of the policy upon the insured’s death. Limited-payment life insurance is a kind of insurance thatprovides that the payment of premiums will stop after a stated length of time—usually 10, 20, or 30 years. The amount of the policy will be paid to the beneficiaryupon the death of the insured, whether the death occursduring the payment period or after. Term insurance isinsurance that is issued for a particular period, usually5 or 10 years and provides protection only, having nocash value. Endowment insurance is a type of protectionthat combines life insurance and investment so that ifthe insured outlives the time-period of the policy, theface value is paid to the insured. If the insured doesn’toutlive the time-period of the policy, the face value ispaid to the beneficiary.

5. In property insurance, there must be a continuing insur-able interest in the property that is to be insured, fromthe time of application for the insurance up until thetime of a claim. In life insurance, the insurable interestmust exist only when the policy is issued.

6. Coinsurance is an insurance policy provision underwhich the insurer and the insured share costs, after thedeductible is met, according to a specific formula.

7. Under most fire insurance policies, claims may also bemade for losses from water used to fight the fire; scorch-ing; smoke damage to goods; deliberate destruction ofproperty as a means of controlling a spreading fire; light-ning, even if there is no resultant fire; riot or explosion, if a fire does result; and losses through theft or exposureof goods removed from a burning building. A home-owner’s policy gives protection for losses from fire,windstorm, burglary, vandalism, and injuries suffered by other persons while on the property. An ocean marineinsurance policy covers ships at sea. Inland marineinsurance covers good that are moved by land carriers

93


such as rail, truck, and airplane. Renter’s insurance pro-tects tenants against loss of personal property, liabilityfor a visitor’s injury, and liability for negligent destruc-tion of the rented premises. Flood insurance coversagainst damage caused by heavy rains, melting snow,inadequate drainage, and failed protective devise such as levees and dams, tropical storms, and hurricanes.

8. Seven types of automobile insurance are bodily injuryliability, property damage liability, collision, comprehen-sive coverage, medical payments, uninsured motorist,and no-fault. Bodily injury liability insurance covers theliability of the insured for bodily injury to pedestriansand other motorists. Property damage liability insurancecovers damage to the property of others. Collision insur-ance provides against loss arising from damage to theinsured’s automobile caused by accidental collision withanother object, any part of the roadbed, or by an upset.Comprehensive insurance provides protection againstloss or damage to the motor vehicle insured if caused byfire, lightning, flood, hail, windstorm, riots, breakage ofglass, theft, or pilferage. Medical payments insurancepays for medical expenses resulting from bodily injuriesto anyone occupying the policyholder’s car at the time ofan accident. Uninsured-motorist insurance provides pro-tection when the insured is injured in an automobileaccident caused by another driver who has no bodilyinjury liability insurance to cover the loss to the injuredparty. No-fault insurance provides that car owners maycollect damages and medical expenses from their owninsurance carriers regardless of responsibility.

9. Health insurance policies often include the following benefits: physician care, prescription drugs, inpatientand outpatient hospital care, surgery, dental and visioncare, and long-term care for the elderly. Medicare is afederally funded health insurance program for people 65 and over who are covered by Social Security.Medicaid is a health care plan for low-income people.State governments administer Medicaid, which is funded by both state and federal funds.


10. The first step in obtaining an insurance policy is filling in an application. A binder provides temporary insurancecoverage between the time of the application and thetime the policy goes into effect. When the policy goes into effect in order to keep it active, the insured mustcontinue to pay the premiums. Premiums differ from one person to another because the amount is determinedby the nature and character of the risk involved and byits likelihood of occurring. The premium increases as thechance of loss increases. When the insured stops payingpremiums, an insurance policy is said to lapse. Thisdoes not mean an automatic termination, as most policies allow a grace period of 30 or 31 days duringwhich the insured can save the policy by making a premium payment.

Self-Check 11 1. A secured loan is one in which creditors have something

of value, usually called collateral, from which they canbe paid if the debtor doesn’t pay. An unsecured loan has no such protection for the lender.

2. There are many different types of real property mort-gages. Some of the most common mortgages areconventional, variable-rate, graduated-payment, balloon-payment, reverse, participation loan, construction loan, deed of trust, and subprime.

3. Recording a mortgage notifies any third party who maybe interested in purchasing the property or in lendingmoney to the owner that the mortgagee has an interestin the property covered by the mortgage.

4. By law and by agreement, the mortgagor has certainrights and duties in conjunction with the mortgage.First, the mortgagor has the right to possess the prop-erty. Second, the mortgagor has the right to any incomeproduced by the property. For instance, the mortgagorwould be entitled to any rent proceeds gained from leas-ing all or part of the property. The mortgagor could,however, assign this right to the mortgagee, which is

sometimes done as a condition of executing the originalmortgage agreement. Third, the mortgagor has the rightto use the property for a second or third mortgage.Fourth, the mortgagor has the equity of redemption, thatis, the right to pay off the mortgage in full, includinginterest, and thus discharge the debt in total. In additionto these rights, the mortgagor has certain duties. Chiefamong these duties is to make payments on time.Mortgagors must preserve and maintain the mortgagedproperty for the benefit of the mortgagee’s interest andsecurity. Similarly, the mortgagor is often required toinsure the property to the benefit of the mortgagee forthe amount of the mortgaged debt. The mortgagor alsomust pay all taxes and assessments that may be leviedagainst the property. Frequently, the mortgagor will easethe burden of these obligations by paying a percentage ofthe insurance premium and taxes each month along withthe mortgage payment. The mortgagee holds the moneyin an escrow account. An escrow account is a specialaccount into which money is deposited before the pay-ment of the insurance or taxes is due. The money staysin the account until the time comes to pay the insuranceor tax. The mortgagee then takes the money out of theaccount and makes the payments. The mortgagee hasthe unrestricted right to sell, assign, or transfer themortgage to a third party. Whatever rights the mortgageehad in the mortgage are then the rights of the assignee.Mortgagees have the right to receive each installmentpayment as it falls due. Frequently, mortgagees willinclude a term in the mortgage agreement allowing anacceleration of the debt if the mortgagor fails to meet aninstallment payment. This term means that a default onone installment payment will make the entire balancedue immediately, giving the mortgagee the right to collectthe full amount. In general, a clause allowing accelera-tion must be executed in good faith. In other words,before invoking the acceleration clause, the mortgageemust genuinely believe that the mortgagor will not beable to make good on the debt and that the mortgagee’ssecurity interest is therefore threatened. If the matterends up in court, the mortgagor will have the burden of



proving that the mortgagee did not act in good faith. Ifthe mortgagor has defaulted or has failed to performsome other agreement in the mortgage, the mortgageehas the right to apply to a court to have the propertysold. This right is called foreclosure. It takes priorityeven when the mortgagor files for bankruptcy. Because,in a majority of jurisdictions, a mortgage is a lien on theland, a foreclosure is an equitable action. The mortgagordoes not have a right to a jury trial in a foreclosureaction. A mortgage is foreclosed when the mortgageeproves the amount of the unpaid debt (including interestand other charges) and the property is sold by and underthe direction of a court. The proceeds from the sale arethen applied to the payment of the debt. Any moneyremaining after the claims of the mortgagee have beensatisfied goes to the mortgagor or to the second and sub-sequent mortgagees. The mortgagee’s financial interest inmortgaged property gives rise to certain constitutionalrights. Under Amendment 14 to the U.S. Constitution,mortgagees cannot lose their interest in property withoutdue process of law. Mortgagees also have certain dutiesimposed by law. Both state and federal legislation pro-hibits lenders from discriminating against borrowersbecause of race, creed, color, sex, or ethnic background.Such legislation imposes a duty to use nondiscriminatorycriteria in approving and disapproving mortgage applica-tions. For example, a lender may not refuse a mortgageto a prospective borrower simply because that borroweris a woman. Similarly, a lender could not refuse a mort-gage to a borrower because that borrower is Hispanic.The mortgagee also has the duty to respect all rightsproperly claimed by the mortgagor.

5. Securitization is a process that involves multiple mort-gages bundled together. The process works like this. A financial institution like a bank lends money to a borrower. The borrower usually pays gradually over time. The lender makes money by charging interest.Securitization kicks in when a lender bundles severalmortgages together and sells them as mortgage-backedsecurities to a big investor like pension fund. The biginvestor gets interest payments multiplied by the number


of loans purchased in that bundle over a long period oftime. The original lender gets a big payment up front,allowing it to bundle more and more mortgages more and more rapidly. This contributed to the financial crisisbecause the original lenders started to lend money topeople who could not afford it because the originallenders knew that they would be selling the loans anyway, and did not have to be concerned whether the borrowers would actually pay off the debt.

6. Liar loans are those that deliberately misstate the qualifications of a borrower to push a loan through theapproval process. A NINJA loan is one that has beennegotiated by a borrower with “no income, no job, and no assets.”

7. The Federal National Mortgage Association (Fannie Mae)is government chartered entity that purchases loans that were made following standards established by theFederal Housing Association (FHA) and the VeteransAdministration (VA). The Government National MortgageAssociation (Ginnie Mae), was established by the govern-ment to assume much of Fannie’s debt. This let Fanniebuy mortgages insured by the government. The FederalHome Loan Mortgage Corporation (Freddie Mac), isanother government-sponsored enterprise that helpssupport the mortgage market.

8. A security agreement must be in writing, it must be signed by the debtor, and it must describe the collateral used for security.

9. A security interest is effective only between the debtorand creditor when it attaches. To be effective as to otherswho might claim the collateral, such as other creditors or people who buy the collateral from the debtor, thesecurity interest must be perfected. There are three ways to perfect a security interest: by attachment only(in limited situations), by possession of the collateral(called a pledge), and by filing a financing statement in a public office.


10. The UCC follows these rules to determine who prevailsover whom when secured and unsecured parties layclaim to the same collateral: (a) A perfected purchasemoney security interest in inventory has priority over a conflicting security interest in the same inventory. (b) A purchase money security interest in collateral otherthan inventory has priority over a conflicting securityinterest in the same collateral if it is perfected within 10 days after the debtor receives possession of the collateral. (c) Buyers of goods in the ordinary course ofbusiness (except farm products) prevail over securityinterests in the seller’s inventory. (d) Buyers of farmproducts in the ordinary course of business, to theextent that they pay for and receive collateral withoutknowledge of the security interest, take precedence overnonperfected security interests. (e) Buyers of consumergoods take free of perfected security interests of whichthey have no knowledge. (f) In all other cases, a perfectedsecurity interest prevails over an unperfected securityinterest. (g) Conflicting security interests rank accordingto priority in time of filing or perfection. (h) When two ormore parties have unperfected security interests in thesame collateral, the first to attach prevails over the otherparties.

Self-Check 12 1. Early bankruptcy laws always favored creditors. In addi-

tion to losing all of their property, debtors were often putin debtors’ prison and sometimes, though not in theUnited States, put to death. The first federal bankruptcylaw in the United States was enacted in 1800. Underthat law, only creditors could begin a bankruptcy pro-ceeding, and only merchants could qualify as debtors.That law lasted only three years before Congressrepealed it. In 1840, debtors’ prisons were abolished inthe United States, and a year later, Congress passed abankruptcy law that lasted only two years. Following theturmoil of the Civil War, Congress enacted a third bank-ruptcy law in 1867 that lasted eleven years. It wasn’tuntil 1898 that permanent bankruptcy legislation came


about in the United States, with a law that gave busi-nesses protection from creditors and lasted, withmodifications during the Great Depression, for eightyyears. The Bankruptcy Reform Act of 1978 again broughtmajor changes, making it easier for businesses and indi-viduals to obtain bankruptcy relief. It was in 1978 thatChapters 11 and 13 of the Bankruptcy Code (discussedsubsequently) were created, allowing businesses andindividuals to reorganize and keep going. In addition,debtors were allowed to keep more of their assets, givingthem a better chance to make a fresh start with theiractivities. The 1994 Bankruptcy Reform Act continuedhoning the law and created the National BankruptcyCommission to study the subject and make recommen-dations. In 2005, following a period of easy credit withmany people spending far above their means, Congressmade it more difficult to declare bankruptcy by enactingfar-reaching changes to the Bankruptcy Code.

2. The more time that passes after a discharge in bank-ruptcy, the more likely it is for a person to regain his orher credit reputation. Some people shift from credit todebit cards. This helps. Others get secured credit cardsfrom their banks. This also helps. People who are ableto make a down payment and have a steady income maybe eligible for a mortgage loan as soon as two years fol-lowing a discharge in bankruptcy.

3. To qualify, debtors must (a) satisfy the means test, (b) meet with an approved nonprofit credit counselorbefore filing for bankruptcy, (c) provide a federal incometax return for the most recent tax year, and (d) take a course in financial management after filing for bankruptcy.

4. The means test is made up of three steps, the passing ofany one of which allows the debtor to file for Chapter 7bankruptcy. The first step is to compare the debtor’saverage income over the previous six months with themedian income for a family of that size in the debtor’sstate. If the debtor’s income is less than the state’smedian income, the debtor is eligible to file for Chapter 7bankruptcy. Step two requires debtors to determinewhether they have enough income to pay off some of


their unsecured debts. This is done by subtracting cer-tain deductions, which vary according to where they live,and arriving at a figure called disposable income. If theirdisposable income is less than $110 a month ($1,320 peryear), they pass the means test and will be allowed to filefor Chapter 7 bankruptcy. If it is over $183 a month(2200 per year), however, they fail the means test. Understep three, if a debtor’s monthly disposable income isbetween $110 and $183 ($1320 and $2200 per year) butis not enough to pay more than 25 percent of outstand-ing unsecured debts over a five-year period, the debtorpasses the means test and will be allowed to file forChapter 7 bankruptcy. Debtors who do not pass any of the three tests must switch to another bankruptcychapter to file bankruptcy.

5. To institute a voluntary bankruptcy proceeding a debtorwould go to the nearest federal district court and file abankruptcy petition. The debtor would then fill in a formthat asks him or her to name all creditors and to indi-cate how much money is owed to each. The form alsorequires a listing of the debtor’s property, a statement ofincome and expenses, and an identification of exemptproperty. Involuntary bankruptcy proceedings can bestarted if the debtor continuously fails to pay bills asthey become due. Also, three creditors must file if thedebtor has twelve or more creditors, and the combineddebt owed the three must exceed $10,000. One creditorowed a debt of more than $10,000 can file if the debtorhas less than 12 creditors.

6. After a petition for bankruptcy is filed, the automaticstay goes into effect. This means that the debtor’s credi-tors can make no further move to collect debts or file a lawsuit against the debtor. Automatic stay protectscreditors by placing them on equal footing, thus prevent-ing one creditor from taking advantage of the others. It is fair to debtors because it gives them more control overtheir situation. An order for relief is the court’s commandthat the liquidation begin.


7. A debtor’s possible exemptions under Bankruptcy Codeprovisions fall into three categories: exemptions forhomestead and for household items, exemptions fornecessities, and exemptions for benefits and supportpayments.

8. Once a debtor’s property has been sold and reduced tocash, creditors are paid off in the following order:secured creditors; support obligations owed to a spouseor child; expenses of administering the bankruptcyprocess; unsecured debts incurred after the petition wasfiled but before the relief order was issued; wages andemployee benefit plans; workers in the fishing and farm-ing industries; certain deposits and advances; taxes;certain unsecured claims; claims for death or injurycaused by intoxicated driver; other unsecured debts.Debts that can’t be discharged under a bankruptcy proceeding belong in three categories: debts created by misconduct (including debts that arise by fraud or bywillful, malicious conduct, and those that the debtor didnot reveal at the outset of the proceeding); government-enforced debts (including back taxes, student loans,fines, penalties, court-enforced debts such as alimony,support payments, and debts that were not dischargedunder a previous bankruptcy); and debts created byexcessive spending (including debts for luxury items thattop $500 if purchased within ninety days of the relieforder and a cash advance beyond $750 if obtainedwithin 70 days of the relief order).

9. Chapter 11 bankruptcy allows debtors to free themselvesfrom a devastating financial situation without having tosell most of their property. Instead, debtors draw up areorganization plan to alter repayment schedules. A reor-ganization plan under Chapter 11 must be approved byone-half of the creditors in each class before it will gointo effect. The one exception involves creditors whosestandard legal rights have not been altered. These credi-tors, called unimpaired creditors or members of anunimpaired class, have no approval power, since theircollection rights are the same as they would have beenwithout the plan.

10. Only family farming or fishing businesses may file forChapter 12 bankruptcy. To be eligible, the operationmust receive 50 percent of its total income from farmingor fishing. Also, 50 percent of a farmer’s debt must resultfrom farm expenses, and 80 percent of a fishing busi-ness’s debt must relate to either farming or fishing.Chapter 12 is voluntary—only the debtor may file a petition for this type of bankruptcy. Chapter 13 of theBankruptcy Code permits an individual debtor to put inplace a repayment plan. Upon completion of paymentsunder the plan, they receive a discharge from mostremaining debt. Only individual debtors, including sole proprietors and self-employed people can takeadvantage of Chapter 13. The petition won’t be allowed if the debtor received a bankruptcy discharge underChapters 7, 11, or 12 within the previous four years or a dicharge under Chapter 13 within the previous twoyears. To qualifty for Chapter 13, a debtor must meetwith an approved non-profit credit counselor. Theirunsecured debt and their secured loans must not passthe stautory maximim for each. The debtor must alsohave a steady income stream.

Self-Check 13 1. The purpose of criminal law is to protect the public at

large, to preserve order and stability within society, andto discourage future disruptive conduct.

2. Under common law, crimes were dealt with in the order of their seriousness: treason, felonies, and misdemeanors. Most states now divide offenses intofelonies and misdemeanors. A felony is a crime punish-able by death or imprisonment in a federal or stateprison for a term exceeding one year. A misdemeanor is a less serious crime that is generally punishable by a prison sentence for not more than one year.


Self-Check Answers

3. A crime can’t be committed unless some overt act hasoccurred. An individual cannot be accused of a crime for merely “thinking” of the criminal act in question.Sometimes the failure to act, an omission, or the outright refusal to act may be considered criminal.Generally, however, an omission must be coupled with a legally imposed duty. Many states specifically excludeinvoluntary movement and behavior from their generaldefinition of a criminal act. Convulsions, reflexes, move-ments during sleep or unconsciousness, or behaviorduring a seizure are all considered involuntary move-ment or behavior falling outside the limits of criminalliability. However, the mere fact that someone is uncon-scious during a seizure may not absolve that individualof criminal liability if that person knew that he or shemight suffer the seizure yet took no precautions to avoidharming people or property.

4. The four mental states that can be found in the criminalcode are purpose or intent, knowledge, recklessness, andnegligence. Purpose or intent means that a person actswith the goal of causing the result that does, in fact,occur. Knowledge means that a person acted under-standing that a particular result would probably occur.Recklessness means that a person acted with a perversedisregard of a known risk of negative consequences.Negligence means that a person acted failing to see thepossible negative consequences of his or her actions.

5. Motive in criminal law is the wrongdoer’s reason for com-mitting the crime. One common misconception aboutcriminal law, which is promoted and perpetuated bycountless novels, plays, television programs, and theatri-cal motion pictures, is that motive is an element ofcriminal liability. Such is not the case. Establishingmotive may help the prosecution convince the jury thatthe accused is guilty, but proving an evil motive is notnecessary for a criminal conviction.

6. Crimes against the people, most often referred to as felonies, include homicide, assault, battery, kidnap-ping, and hate speech. Homicide is any killing of onehuman by another. Criminal homicide is murder ormanslaughter. Battery is the unlawful touching of a person. Assault is an attempt to commit a battery.

104

Self-Check Answers

Kidnapping is the unlawful abduction of an individualagainst that person’s will. Hate speech is the use of certain symbols, writings, and speech intended to provoke outrage or fear in others.

7. There are two theories to the sentencing of convictedcriminals: those consequences (1) designed to protect the public at large and (2) tailored to fit the individualoffense or the individual offender.

8. What are the various ways that the the federal government has dealt with cyber-crime? The federal government has attempted to deal with the issue bypassing a number of anti-e-crime statutes. The federalstatutes that deal with cyber-crimes include: theComputer Fraud and Abuse Act; the Wiretap Act, the Unlawful Access to Stored Communications Act, the Identity Theft Act, the Access Device Fraud Act, and the CAN SPAM Act.

9. The oldest test of insanity is the M’Naughten Rule. Underthis rule, defendants can be found NGRI, if at the timethe criminal act was committed they were suffering froma mental disease that was so serious that they did notknow the nature of the act or did not know that act waswrong. Another test of insanity is the irresistible impulsetest. This test holds that criminal defendants can befound NGRI, if at the time of the offense, they werestricken with a mental disease which prevented themfrom knowing right from wrong or compelled them tocommit the crime. A more modern insanity test has beendeveloped by the American Law Institute (ALI). Under theALI test, a person is not responsible if “as a result ofmental disease or defect he lacks substantial capacityeither to appreciate the criminality of his conduct or toconform his conduct to the requirements of law.”

10. If a law enforcement officer induces a law-abiding citizento commit a crime, entrapment may be used as adefense. The person using the defense must show thatthe crime wouldn’t have been committed had it not beenfor the inducement of the officer. The defense of entrap-ment isn’t available to a defendant who would havecommitted the crime even without the involvement of the officer.

105

Self-Check 14 1. The primary purpose of tort law is to compensate the

innocent party by making up for any loss suffered bythat victim. Another objective is to protect potential victims by deterring future torts. In contrast, criminallaw involves a public wrong rather than a private wrong,that is, a wrong that affects the entire society. Sincecriminal law is concerned with protecting the public, its focus differs from that of tort law. When a crime iscommitted, government authorities begin legal actionsdesigned to remove the offender from society. It is possible, however, for a single act to be both a tort and a crime.

2. Respondeat superior is the legal doctrine that permits an injured plaintiff to hold an employer liable for thetorts of the employer’s employee.

3. Duty is best understood in relation to rights. Legal dutiesarise because one of the objectives of the law is to pro-mote justice. Justice demands that people be allowed toenjoy their health, their property, their reputation, theirbusiness relationships, and their privacy without theunjust interference of others. Since another object of thelaw is to promote harmony, a duty corresponding to eachright also rises within each member of our society. Forinstance, because each member of society has a right toengage in business without unjust interference, everyoneelse has the duty not to wrongfully interfere with thatright. Some rights and their corresponding duties areuniversal. For example, all persons have the right toenjoy their property without the unwarranted intrusionof others. Those who take or destroy property violate thatright. In contrast, some special rights arise because ofchanging circumstances. When patients enter a healthcare facility, they have the right to expect professionalcare that meets the appropriate standard of competence.Therefore, all health care providers who treat patients inhealth care facilities have a duty to perform according toa professional standard of care.


4. Under American tort law, the principal intentional torts include assault, battery, false imprisonment,defamation, disparagement, fraud, invasion of privacy,intentional infliction of emotional distress, and malicious prosecution.

5. The elements of negligence are duty, breach of duty,proximate cause, and actual harm.

6. Contributory negligence and comparative negligence both measure the plaintiff’s relative negligence in relationto the harm suffered by that plaintiff and reduces his or her damage award accordingly. Under contributorynegligence, the damage award is eliminated entirely.Under comparative negligence, it is reduced by a percentage determined by the jury. Assumption of risk is a defense to negligence which says that the plaintiffentered the situation in question realizing that there was a possibility that he or she mighty suffer harm.

7. Strict liability, or liability without fault, arises when thedefendant was engaged in an ultrahazardous activity like keeping wild animals or using explosives.

8. Cybertorts are peculiar in that they always involve infor-mation. A cybertort involves the invasion, distortion,theft, falsification, misuse, destruction, or financialexploitation of information stored in or related to an electronic device including but not limited to desktopPC’s, laptops, mobile phones, mainframes, phonecams,personal digital assistants (PDAs), and home computersthat stand alone or are part of a network. Cybertortsrarely, if ever, involve any harm to a party’s physicalwell-being. Instead, the victim’s reputation has been hurt because a false statement has been posted on theInternet; the victim’s emotional state has been disturbedbecause his or her privacy has been invaded; or the victim has suffered monetary harm because his or her identity has been tampered with.



9. The remedies available in tort law are damages andinjunctive relief.

10. Survival statutes allow a lawsuit to be brought even ifboth the plaintiff and the defendant are deceased. Manystates also have survival statutes that preserve the rightto bring a lawsuit for personal injuries. Most states alsoallow such suits if the tort involves damage to personalor real property. Survival suits are brought or defendedby the lawful representative of the estate of the deceased.Wrongful death statutes preserve the right of familymembers of a deceased to bring a lawsuit if the deathresults from the negligence or the intentional conduct ofthe person who caused the death. Family membersinclude husbands, wives, children, and parents. Underwrongful death statutes, creditors, business partners,and the like have no right to bring a lawsuit.

Date post:	27-May-2018
Category:	Documents
Upload:	phungquynh
View:	213 times
Download:	0 times

Study Guide Business Law 2 - f01.justanswer.com and discussion, and cases for analysis. ......

Documents